India’s Debt Situation Compared to China: IMF Insights.

In a recent interview, the International Monetary Fund (IMF) shed light on India’s debt situation in comparison to China’s and provided guidance on fiscal consolidation. While India’s debt-to-GDP ratio stands at 81.9%, closely resembling China’s 83%, the IMF suggests that India’s risks associated with this debt are more manageable.

India’s Debt and Fiscal Deficit:

India’s current debt-to-GDP ratio is notably high, and it’s projected at 81.9%. This figure has risen compared to the pre-pandemic levels of 2019 when it was 75%. Furthermore, India faces a fiscal deficit of 8.8% in 2023, largely attributed to significant interest expenditures. Approximately 5.4% of India’s GDP is spent on interest payments, and the primary deficit accounts for 3.4% of this total, contributing to the overall 8.8% deficit.

Comparatively, the IMF states that India’s debt is not projected to increase as significantly as China’s. Instead, it is expected to decrease slightly by 1.5%, reaching 80.4% in 2028. This projection is influenced by India’s higher economic growth, a significant factor in managing the debt-to-GDP ratio. Additionally, certain factors moderate the risks associated with India’s debt.

Managing Debt in India:

Factors that help mitigate debt risks in India include the longer maturities of debt, reducing the need for frequent renewals. Furthermore, a substantial portion of India’s debt is domestically held and denominated in local currency, which helps reduce risks.

READ MORE: Finance Minister Nirmala Sitharaman Emphasizes Domestic Consumption And Investment For India’s Growth

However, the IMF highlights state-level risks in India, as some states have high debts, significant financing needs, and a heavy interest burden.

The IMF’s policy advice for India in the medium term involves pursuing an ambitious fiscal consolidation plan. This plan should focus on reducing deficits, especially primary deficits, through various measures, including revenue enhancements, spending adjustments, and improved fiscal management. Prioritizing public investments, especially in infrastructure, education, and healthcare, is recommended. Efforts to improve spending efficiency and reduce waste are also crucial.

The IMF emphasizes the importance of strengthening India’s tech system and suggests opportunities for optimizing the general sales tax, personal income tax, and corporate income tax systems. Additionally, measures like reversing fuel tax cuts and better targeting subsidies can contribute to fiscal consolidation.

In conclusion, the management of fiscal policies in India can benefit from increased transparency and the establishment of a strong fiscal framework. This framework may include an independent institution to advise on fiscal policy and clear fiscal rules to commit the government to specific objectives. Such measures have proven effective in achieving fiscal goals in various countries.

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