Finance Secy Somanathan says debt-to-GDP ratio of 40% a relic, needs re-examination

According to Somanathan, the debt-to-GDP ratio must be looked at in the correct context.

The target to reduce the central government's debt-to-GDP ratio to 40 percent of the GDP is a "historical relic" and needs a to be re-looked, Finance Secretary TV Somanathan has said.

"That was a figure that was set before COVID. Its relevance today is something that has to be looked at completely afresh," Somanathan said on February 1 at the post-Budget media briefing.

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The Fiscal Responsibility and Budget Management (FRBM) Review Committee, in its January 2017 report, had recommended the central government reduce its debt-to-GDP ratio to 40 percent by 2022-23. The government amended the FRBM law to say that this target should be achieved by the end of 2024-25.

However, the COVID pandemic sent public debt soaring across the world, including in India, as governments borrowed heavily to support their economies amid crashing tax collections and activity coming to a standstill. As a result, the Centre's debt-to-GDP ratio stood at 61.57 percent of GDP as at the end of 2020-21, as per the Comptroller and Auditor General of India.

Commenting further on February 1, Somanathan said Finance Minister Nirmala Sitharaman had, in 2021-22, set out a new, post-COVID, fiscal consolidation glide-path. As per this path, the Centre will reduce its fiscal deficit to 4.5 percent of GDP by 2025-26.

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"I would only point out that today India's debt-to-GDP ratio is one of the lowest in the G20, apart from other countries. So we have to look at things in today's context, not based on a historical relic of a report which was prepared long ago before COVID happened," Somanathan said.

India's debt levels have been a sticking point for global ratings agencies as well as multilateral organisations. For ratings agencies, the high debt level as a percentage of GDP is seen as an obstacle to upgrading India's sovereign rating which is currently at the lowest investment grade level.

Meanwhile, in December 2023, the International Monetary Fund said in its Article IV consultations staff report that India needs an "ambitious fiscal consolidation path" to re-build its buffers and reduce debt in a sustainable manner, warning that given the shocks India has had to face recently, the general government – Centre plus states – debt-to-GDP ratio could exceed 100 percent in the medium term.

However, the Indian government has rejected this scenario, calling it an extreme scenario.