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Growth is the new economic god that India worships now and the International Monetary Fund believes that the devotion would pay off with a consistent growth at 6% plus rates over the next five years. However, in the same breath, the multi-lateral funding agency has red-flagged the country’s debt concerns saying that the sum of Union and state government debt could exceed 100% of the country’s GDP.

The mixed report on the shape of the country’s economy in the next few years was published in a consultation report by the IMF.

“India’s economy showed robust growth over the past year. Headline inflation has, on average, moderated although it remains volatile. Employment has surpassed the pre-pandemic level and, while the informal sector continues to dominate, formalisation has progressed. The financial sector has been resilient – strongest in several years and largely unaffected by global financial stress in early 2023,” stated the IMF report.

In a report unveiled on December 19, the IMF clearly pointed out the drivers of the growth curve. These were strong investment, rising private consumption and productivity gains that was substantially driven by the digitalisation drive in the country even amid global economic uncertainty.

On the debt front, however, the IMF also did not conceal its apprehensions. “Long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets and improve resilience to climate stresses and natural disasters. This suggests that new and preferably concessional sources of financing are needed, as well as greater private sector investment and carbon pricing or equivalent mechanism,” the IMF said in its annual Article IV consultation report. Incidentally, it constitutes a part of the surveillance function under the Articles of Agreement with member countries of the IMF.

New Delhi disagreed with the debt concerns of the IMF and argued that the risks from sovereign debt are limited since it is mainly denominated in domestic currency and does not constitute external risks.

Listing out the ratio of debt/GDP, the IMF mentioned how it has moved over the past three years. In FY20, it stood at 75% and rose to 88.5% in FY21 (the year of the pandemic) but further eased to 83.8% in FY22 and inched down to 81.0% in FY23. In FY24 and FY25, the ratio is projected to move to 82.0% and 82.4% respectively.

The share of external debt to GDP from FY20 to FY25 are 19.7%, 21.5%, 19.7%, 18.4%, 18.7% and 18.5%, the last two years being projections.

The Centre has also countered the IMF’s apprehensions on inflation and developments in the financial sector. While the multi-lateral funding agency has said that high inflation or structural reforms might fuel social discontent, New Delhi has argued that there is no evidence to warrant this apprehension.

The government has also pointed out that the country’s banking industry is in the best shape in more than a decade when IMF said that external or domestic shocks could lead to credit stress.

The IMF also seemed to be concerned with the rise of unsecured retail loans that, it felt, could put debt servicing capacity under stress and trigger balance sheet risks. The government has said that the runaway credit growth was due to digitisation and credit risks are being mitigated.

Overall, the country’s growth story seems to be coasting smoothly with several multilateral agencies, economists and brokerages increasing the growth projections on the back of mainly strong domestic demand.

The country’s central bank, too, revised the growth projection of FY24 from an earlier 6.5% to 7% following the better-than-expected rise of the GDP in Q2.