Covid-19 pandemic and the subsequent nationwide lockdown starting March 2020-end cast its shadow on the economy with most experts projecting a contraction. Increased borrowing by the government given these developments is likely to push up India’s debt further to around Rs 170 trillion, or 87.6 per cent of the gross domestic product (GDP) in the current financial year 2020-21 (FY21), suggests the July 20 ‘Ecowrap’ report by State Bank of India (SBI), authored by Dr. Soumya Kanti Ghosh, their group chief economic adviser.

“Together with declining GDP growth, debt to GDP ratio has also been adversely affected in all countries. A higher level of borrowing this fiscal are likely to increase gross debt further to around Rs 170 trillion, or 87.6 per cent of GDP. Within this, external debt is estimated to increase to Rs 6.8 trillion (3.5 per cent of GDP). Of the remaining domestic debt, component of State’s debt is expected at 27 per cent of GDP. Interestingly, the GDP collapse is pushing up the debt to GDP ratio by at least 4 per cent, implying that growth rather than continued fiscal conservatism is the only mantra to get us back on track,” Ghosh said.

In simple terms, the debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product. A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.

Over the past few years, India’s debt to GDP ratio has increased gradually from Rs 58.8 trillion (67.4 per cent of GDP) in the financial year 2011-12 (FY12) to Rs 146.9 trillion (72.2 per cent of GDP) in FY20, data show.

Despite the gradual rise, Ghosh believes the debt levels still remain sustainable. The current level of foreign exchange reserves, he says, are sufficient to meet any external debt obligations. “On the internal debt, since most of the debt is domestically owned, the debt servicing of the same is not an issue,” Ghosh said.

According to Madan Sabnavis, chief economist at CARE Ratings, the Central Government has raised Rs 34,000 crore on July 17, 2020 which is higher than the notified amount each week. Total borrowings thus far in July, according to him, have been to the tune of Rs 1.02 trillion, which is Rs 12,000 crore higher than the notified amount.

“The aggregate amount raised by the central government so far during the current fiscal is Rs 4.5 trillion, 66 per cent higher than the corresponding period last year. This is around 37 per cent of the revised central government market borrowing limit of Rs 12 trillion for the year and 64 per cent of the amount to be raised in the H1-FY21 (around Rs 7 trillion),” Sabnavis said.

FRBM target

This rise in debt amount will also lead to shifting of the Fiscal Responsibility and Budget Management (FRBM) target of combined debt to 60 per cent of GDP by FY23 by seven years, with the target now seem achievable only in FY30, the SBI report says.

The FRBM committee recommended a glide path to reach the combined debt to 60 per cent of GDP by FY23. However, fiscal projections, according to SBI, have gone awry owing to the Covid-19 pandemic.

“For Centre, FRBM committee has given scenario for relaxations where even deep relaxations shift the target by three years to FY26. However, under the given scenario the timeline to reach the target of 60 per cent of GDP is likely to get extended by seven years, with 60 per cent to be reached by FY30 only, as GDP has also been affected severely owing to lockdown affecting economic activity,” Ghosh wrote.