Is India’s Debt situation really scary?

Updated: May 12, 2012, 16:16 PM IST

Nimish Varma and Rohit Joshi/ZRG

The International Monetary Fund (IMF) survey of global macro economy has found that India’s debt management policy is not the most efficient amongst the BRIC (Brazil, Russia, India, and China) member countries. This view, however, has few takers in India.

The survey depicts India’s poor situation on government debt. In comparison to emerging economies, presently India’s government debt stands highest at 67.57 per cent of its GDP, closely followed by the Brazilian government debt at 65.09 per cent. On the other hand, debt levels in Russia and China are comfortably poised at 8.37 per cent and 22.03 per cent respectively.

In harmony with the IMF Survey, DK Joshi, Chief Economist at CRISIL, said, “The bad news is that the government debt is high but the good news is that it has been reducing consistently.”

Contrary to this school of thought, Indranil Pan, Chief Economist at Kotak Mahindra Bank, talks of a brighter situation, “The situation of government debt is not that severe.”

An analysis of the IMF Outlook in the BRIC pack further shows the IMF not to be all that confident of India’s ability to reduce the debt level quickly enough in the next five years. This prediction comes close on the heels of the recent S&P downgrade of the outlook of the Indian economy to negative. At a time when the danger of rising fiscal deficit is looming large on the economy, debt is a cause of concern for the Indian government.

Emerging economies like China aim to reduce their government debt by almost 12 per cent of the GDP in the next five years. Brazil too is expected to cut down the debt by 8.5 per cent while India looks laggard to overcome only 3 per cent in the same period, shows an analysis of IMF data.

Pan at Kotak Mahindra averred, “With a nominal growth rate of about 13 per cent, the government’s ability to pay its debt seems pretty comfortable.”

The situation on the bilateral debt front, however, does not seem too bright. According to the Status Report on External Debt released by the Finance Ministry in December 2011, the bilateral debts have increased from the previous year. Bilateral debt over India has largely been credited by Japan contributing to 77.41 per cent of India’s total bilateral debts.

Reasoning out India’s high debt from Japan, Jyotinder Kaur, Senior Economist at HDFC Bank, said, “The low interest rate in Japan encourages investors to lend debt to the Indian government. We have had FDI from Japan which is proving to be prosperous for the economy. In all, Japan’s relation with India is making good business sense.”

Referring to the future outlook on government debt, Ajay Shah, Senior Fellow at National Institute of Public Finance and Policy, asserted, “Two economic factors play a key role in reducing government debt, namely primary surplus and higher GDP growth. As of now India’s picture looks gloomy on both these fronts. Henceforth, it seems a remote possibility of government reducing its debt in the near future.”