CEA Nageswaran says cutting public debt best stimulus govt can give

CEA V Anantha Nageswaran (Illustration: Moneycontrol)

The best stimulus the Indian government can provide to the economy is by reducing its debt through the proceeds of its asset sales, Chief Economic Adviser V Anantha Nageswaran has said.

Speaking at a panel discussion on the International Monetary Fund's (IMF) latest regional economic outlook for Asia-Pacific, the government's top economist argued that a reduction in public debt could help improve India's credit profile and lower interest rates.

“…given the higher debt load that we carry, if we can use asset monetisation receipts from the Union and state governments to whittle down the stock of debt and in the process if we improve our credit rating and bring down the cost of capital, that will be the best stimulus we can provide to the economy via fiscal policy,” Nageswaran said on October 31.

The government last year launched its National Monetisation Pipeline, under which it hoped to raise around Rs 6 lakh crore by FY25.

The coronavirus pandemic has resulted in the ballooning of India’s public debt ratios in FY21, although the high nominal GDP growth in FY22 and FY23 – largely thanks to a favourable base effect and high inflation – has helped bring it down somewhat. In June, Fitch Ratings had estimated the government debt-to-GDP ratio would drop to 83 percent in FY23 from 87.6 percent in FY21. However, according to Fitch, the ratio “remains high” compared to India’s peers and the agency expects the ratio to be around 84 percent by FY27.

India is currently rated at BBB- with a stable outlook by Fitch and S&P Global Ratings, with Moody’s Investors Service Baa3, also with a stable outlook. All three rating agencies have repeatedly said India’s stock of public debt is high compared to other countries of similar rating and is a weakness from the sovereign rating.

In his remarks today, the chief economic adviser admitted India entered the pandemic with weak government finances.

“Towards the end of the last decade, we did have situations where nominal GDP growth trailed the cost of capital. Therefore, going into the pandemic, the fiscal situation wasn’t particularly starting from a position of advantage. So the sense of vulnerability was there and the pandemic compounded it. But debt sustainability is not an issue, in my view,” he said.

Nageswaran pointed at India’s high nominal GDP growth and current government bond yields and argued that they compared favourably with the higher-rated Philippines and Indonesia.

“If you look at 10-12 percent nominal GDP growth on average for the coming decade and cost of capital…currently 10-year G-Sec yield is around 7.4 percent, just a whisker higher than the 10-year bond yield of the Philippines which has two notches better rating than India, and 10 basis points lower than that of Indonesia which has 1 notch better credit rating than India. So, in that sense, the advantage of a higher nominal GDP growth well exceeding the cost of borrowing for the government puts the sustainability issue not in doubt,” Nageswaran said.

However, Poonam Gupta, director general of the National Council of Applied Economic Research and a member of the Prime Minister’s Economic Advisory Council was more pessimistic about how quickly India’s public debt would fall.

“For the next decade, I would say under reasonable assumptions it’s hard to see how the debt-to-GDP ratio will come down to pre-COVID levels,” Gupta, also a panellist in the discussion, said.

According to Gupta, bond yields, nominal GDP growth, and the primary deficit will determine the part of public debt from here on. While bond yields may be stable at the moment and may not add or detract from fiscal consolidation, the primary deficit will be “very hard to squeeze”.