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Motilal Oswal Report
During the past six years, fiscal spending (consumption plus investments) has been one of the key drivers of economic activity. While real gross domestic product growth averaged at 6.8% between FY14 and FY20, real fiscal spending grew at an average of 9% during the period.
In FY20, while real GDP growth weakened to 4.2%, fiscal spending is estimated to have contributed 1.1 percentage point or 27% to annual real GDP growth. During the past three years, government spending has contributed almost a quarter to annual real GDP growth.
The Covid-19 pandemic, however, has hurt the government’s ability to continue to do so over the next decade. Our estimates suggest India’s general government (center and states) debt rose to 75% of GDP in FY20 from 70% in FY18.
It is likely to reach 91% of GDP in FY21 (the highest level since 1980 – since the availability of data) and stay at more than 90% of GDP up to FY23.
This surge in India’s government debt-to-GDP ratio would restrict its ability to grow its spending significantly and support economic activity in the 2020s decade, as it has done in the past few years.
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