Plan to link fiscal glide path to lower debt-to-GDP a message in advance to ratings agencies: DEA secretary

Economic Affairs Secretary Ajay Seth

Economic Affairs Secretary Ajay Seth expects global ratings agencies to welcome India's move to link its medium-term fiscal consolidation path to a reduction in the debt-to-GDP ratio and termed it as a message in advance to all market players.

“The Budget should talk about fiscal policy of a current year, but the finance minister went two steps ahead and spoke about a path even beyond FY27 to bring down debt to sustainable levels. This is an advance information to market players, including ratings agencies, private sector, as well as to us within the government to start working on those lines,” Seth told Moneycontrol in an interview.

Finance Minister Nirmala Sitharaman in her Budget speech on July 23 not only reiterated the Centre’s commitment to scale down the fiscal deficit target to below 4.5 percent of the GDP by 2025-26, but added that from 2026-27, the endeavour will be to keep the deficit such that debt as a percentage of GDP will be on a declining path.

On whether the move to deploy higher focus on lower debt-to-GDP ratio, instead of merely targeting a narrower fiscal deficit target could lead to a ratings upgrade for India, Seth said the strength of the Indian economy, including its public finances, deserves a much better rating.

“As far as upgrade is concerned, the strength of the Indian economy, including its public finance, deserves a much better rating. It is our attempt to convince the rating agencies and now they will do their part of making out a case that their assessment of risks in economy justify the rating they have given,” the economic affairs secretary said.

Seth attributed the recent positive outlook update from S&P Global to constructive dialogue between the finance ministry and ratings agencies.

In May, S&P Global sparked hopes for a sovereign ratings upgrade for India going ahead, as it raised India's outlook to positive from stable after 14 years.

S&P's applause for the Indian economy carried a message that cautious fiscal and monetary policy that diminishes the government's elevated debt and interest burden while bolstering economic resilience could lead to a higher rating for the country in the next 24 months.

Seth said Budget 2024 sets the path to address the primary goal of sustainable level of debt.

“As long as we are in a position to bring it down year after year given all else remains normal, we are moving towards serving the goal of sustainability of debt. That is really the purpose. We have seen debt-to-GDP ratio coming down to 56 percent from 61 percent. So, chip it away to a lower level every year - that is the attempt. The finance minister has set out directions, we will work on those directions on how to operationalise it into reality.”

One of the ways to fulfil this goal could be to outline a glide path on the debt-to-GDP ratio, Seth said.

The central government's debt, based on the Fiscal Responsibility and Budget Management Act, 2003 (FRBM) definition, was estimated to be at 58.1 percent of the GDP in RE 2023-24.

Seth said having a fixed fiscal deficit target of 3 percent or so right away is not desirable for an economy that is growing at a much faster pace “and which has the requirement of more investment not just by the government but even by the private sector will have a different debt to GDP dynamic than an economy that is growing at 2 percent.”

He was referring to the FRBM Act that mandates the Centre to limit the fiscal deficit up to 3 percent of the GDP by March 31, 2021, and to curtail general government debt to 60 percent of the GDP and the Centre's to 40 percent by March 31, 2025.

But, following the economic ramifications of the pandemic when the fiscal deficit ballooned to 9.2 percent of the GDP, the Centre outlined a fresh path of fiscal consolidation in the FY22 Budget to attain fiscal deficit lower than 4.5 percent of the GDP by 2025-26.

The Centre has lowered the fiscal deficit gap to 5.6 percent in FY24 and is now aiming for 4.9 percent in FY25.