Economic Survey 2021: High Growth Will Ensure Debt Sustainability 
Workers at the National Highway 24 road widening and bypass project, in Ghaziabad, Uttar Pradesh, India, on May 11, 2020. (Photographer: T. Narayan/Bloomberg)

Economic Survey 2021: High Growth Will Ensure Debt Sustainability 

Higher growth will ensure debt sustainability in India, argues the Economic Survey for 2020-21 released ahead of the Union Budget due to be presented on Feb.1, 2021.

The budget will likely point to a sharp jump in India’s general government debt-to-GDP ratio, taking it to nearly 85%. The higher debt-to-GDP ratio, particularly in relation to a 60% target suggested by a previous Fiscal Responsibility and Budget Management Act Review committee, has raised concerns about the government’s ability to continue supporting the economy.

The survey argues that over the last two-and-a-half decades, higher GDP growth causes the ratio of debt-to-GDP to decline in the case of India. The reverse, however, is not true, the survey says, suggesting that a lower debt-to-GDP ratio does not aid growth.

Debt sustainability depends on the difference between the interest rate and the growth rate in an economy, the Survey said. In case of India, the interest rate on debt paid by the government has been less than the country’s growth rate by norm, it added.

Simulations undertaken till 2030 highlight that, given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios, the Survey said.

The Survey went on to call for more active fiscal policy, which recognises that fiscal multipliers are disproportionately higher during economic crises than during economic booms and can help offset any negative shock to the economy. According to the Survey, fiscal policy should turn countercyclical when growth slows by 350 basis points compared to average GDP growth of the previous 20 quarters.

Given the sustainability of India’s debt, even at higher levels, the Survey argued for a stronger sovereign credit rating for India. Other macro economic factors also justify a better rating, the Survey said.

Within its sovereign credit ratings category, India is a clear outlier on several parameters including GDP growth rate, inflation, general government debt, to name a few, according to the survey.

India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history, it added.

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