Debt debate – India’s Debt Situation and IMF’s Article IV Consultations | 26 December 2023 | UPSC Daily Editorial Analysis

What's the article about?

• It talks about the IMF's assessment of India's debt scenario and Finance Ministry's clarification on it.

Relevance:

• GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment; Government Budgeting

Context:

• The Finance Ministry recently issued a statement titled “Factual position vis-à-vis IMF's Article IV consultations with India”.
• This statement came in response to the IMF's latest consultation details, which included projections for India's debt situation.
• The statement aimed to clarify and refute certain assumptions made in the IMF's report.

Analysis:

• IMF's Article IV Consultations:
  • The International Monetary Fund (IMF) conducts bilateral discussions with its members under its Articles of Agreement, usually held every year.
  • These discussions involve collecting economic and financial information and discussing policies with top officials before preparing a report for the IMF's executive board.
• Debt Projections and Controversies:
  • The IMF's report projected that India's general government debt could reach or exceed 100% of GDP in the medium-term (by 2027-28).
  • The Finance Ministry, however, refuted this projection, stating that it was only a worst-case scenario and not a fait accompli.
  • The Ministry also pointed out that other IMF country reports show much higher extreme 'worst-case' scenarios, such as 160%, 140%, and 200% of GDP for the U.S., the U.K., and China, respectively.
• India's Debt Situation:
• The combined debt of central and state governments in India stood at 81% of GDP in 2022-23, down from 88% in 2020-21.
• The IMF projects that this could further decrease to 70% by 2027-28 under favorable circumstances.
• The Finance Ministry emphasized that India's debt situation is not as dire as the IMF's worst-case scenario suggests and that the country's fiscal position has improved over the past year.
• IMF's Perception of India's Fiscal Position:
  • The IMF's staff's perceptions of India's fiscal position have improved over the past year. In 2022, they argued that India's fiscal space was at risk, but now they believe that sovereign stress risks are moderate.
  • This improvement is partly due to the Center's ability to meet fiscal deficit targets in recent times.
  • Reducing debt and spending to stay the course on its commitment to bring the deficit to 4.5% of GDP by 2025-26, from an estimated 5.9% this year, is critical.

Way Forward:

• The Finance Ministry's statement aimed to clarify and refute the IMF's debt projections for India, emphasizing that the country's fiscal position is not as dire as the worst-case scenario suggests and that India's debt situation has improved over the past year. While some may argue that the statement is confrontational, it is essential for India to ensure that the IMF's perceptions of its fiscal position accurately reflect the country's reality.
• The Finance Ministry stressed that actions speak louder than words and that the government's commitment to deficit reduction will be key to improving India's fiscal position.