India's debt-to-GDP ratio may jump by end of current fiscal

India’s gross domestic product (GDP) is likely to contract due to which, we might witness a surge in the debt-to-GDP up to 87.6 per cent. However, the bright side could be the falling yields on the state as well as the central government bonds, as this would further reduce the government's debt servicing costs.

According to a report of SBI's research desk, India’s GDP growth is likely to contract sharply and would further thrust up the debt-to-GDP ratio at least by four per cent in the financial year (FY) 2020-21. Due to the impact of economic contraction and COVID-19 associated expenditure and stimulus, leading fiscal estimates of all economies across the globe, went askew.

We have seen a gradual increase in India’s debt-to-GDP ratio from Rs 58.8 lakh crore (67.4 per cent of GDP) in FY 2011-12 to Rs 146.9 lakh crore (72.2 per cent of GDP) in FY 2019-20.

The high borrowing in the current fiscal is likely to further increase the gross debt to around Rs 170 lakh crore (87.6 per cent of GDP). Out of this, around 3.5 per cent of the GDP is estimated to be external debt and about 27 per cent of the GDP would be from state governments and the remaining 69.5 per cent will be from the central government.

Having said that, the current forex reserves level is adequate to meet any external debt obligations and on the internal debt front, as most of the debt is owned domestically, the debt servicing of the same would not be an issue.

On the positive side, the yields are declining. The weighted average cut-off yield for state governments has been significantly reduced from 7.23 per cent in FY 2019-20 to 6.49 per cent in FY 2020-21. As far as the central government is concerned, the rate has descended from 6.85 per cent in FY 2019-20 to 4.53 per cent in FY 2020-21. Further, this might help India to significantly lower the interest costs.

Therefore, to manage a higher government debt, India should adopt a combination of open market operations (OMO) by RBI and monetisation of fiscal deficit via options like COVID perpetual bonds. With this, the government can take advantage to issue longer-term papers at lower interest rates.