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The International Monetary Fund (IMF) warned on Tuesday that India’s general government debt (comprising both central and state government debt) could exceed 100 per cent of gross domestic product (GDP) in the medium term.
It also cautioned that long-term debt sustainability risks are high due to the significant investment required to meet India’s climate change mitigation targets.
The Indian government, however, disagreed, arguing that risks from sovereign debt are extremely limited as it is predominantly denominated in domestic currency.
“Long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets and improve resilience to climate stresses and natural disasters.
"This suggests that new and preferably concessional sources of financing are needed, as well as greater private sector investment and carbon pricing or equivalent mechanism,” the IMF said in its annual Article IV consultation report, which is part of the its surveillance function under the Articles of Agreement with member countries.
KV Subramanian, India’s executive director at the IMF, on the other hand, said the IMF’s assertion that the baseline carries the risk that debt would exceed 100 per cent of GDP in the medium term in the event of shocks which India has experienced historically sounds extreme.
“The same can be said of the IMF staff prognosis that debt sustainability risks are high in the long term.
"The risks from sovereign debt are very limited as it is predominantly denominated in domestic currency.
"Despite the multitude of shocks, the global economy has faced in the past two decades, India’s public debt-to-GDP ratio at the general government level has barely increased from 81 per cent in 2005-06 to 84 per cent in 2021-22, and back to 81 per cent in 2022-23,” he said in a statement, which is part of the report.
The IMF noted the rupee-US dollar exchange rate moved within a narrow range during December 2022-October 2023, suggesting that foreign exchange intervention (FXI) by the central bank likely exceeded levels necessary to address disorderly market conditions.
The Fund reclassified India’s de facto exchange rate regime to “stabilised arrangement” from “floating” for the said period and argued that a flexible exchange rate should act as the first line of defence in absorbing external shocks.
The Indian side denounced the reclassification, terming it “unjustified” and pointing out the subjective selection of the period by the IMF in their analysis.
“There was a significant divergence of views on the exchange rate and FXI assessments. The authorities highlighted that FXI is only used to curb excessive exchange rate volatility.
"The RBI (Reserve Bank of India) strongly disagreed with the IMF’s assessment that FXI likely exceeded levels necessary to address disorderly market conditions and has contributed to the rupee-USD moving within a narrow range since December 2022.
The RBI strongly believes that such a view is incorrect as, in their view, it uses data selectively,” the report noted.
Subramanian argued that the movement in the rupee-US dollar exchange rate exceeds the stipulated margin if the analysis period is extended, implying a subjective selection of the period by the IMF staff in their analysis.
He stated, “Given the foregoing, (the IMF) staff characterisation of India’s exchange rate as a ‘stabilised arrangement’ is incorrect and inconsistent with reality.
As in the past, exchange rate flexibility would continue to be the first line of defence in absorbing external shocks, with interventions limited to addressing disorderly market conditions.”
A government official said: “The IMF doesn't understand India's domestic compulsions.
"Since imported inflation is a crucial element of India’s overall inflation that impacts 1.4 billion people, the central bank has to actively manage the rupee volatility.”
The Fund said risks to India’s economic growth outlook are balanced, while raising the medium-term potential growth rate at 6.3 per cent, from 6 per cent estimated earlier, citing larger-than-expected capital spending and higher employment.
However, the Indian government communicated to the IMF that it is more optimistic with a potential growth estimate of 7-8 per cent.
“A sharp global growth slowdown in the near term would affect India through trade and financial channels.
"Further global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures for India.
"Domestically, weather shocks could reignite inflationary pressures and prompt further food export restrictions.
"On the upside, stronger than expected consumer demand and private investment would raise growth,” the Fund said.
The multilateral lending institution said India did not experience a significant spike in the inflation rate when most economies suffered from elevated commodity prices in 2022, reflecting extensive government interventions, such as restrictions on wheat, sugar, and rice exports, removal of tax on import of lentils, and reversal of earlier increases in excise duties on petrol and diesel.
Subramanian, however, emphasised that India’s lower inflation rate was not due to “extensive government intervention”, but due to India’s “sui generis economic policy” during the Covid-19 pandemic that anticipated that the pandemic also presented a significant supply-side shock, which led to India implementing a judicious mix of demand-side and supply-side measures.
Contrary to the IMF perception, he said there are no lingering vulnerabilities in NBFCs and the weaker tail of NBFCs vulnerable to liquidity risks are not systemically important.
“(The IMF) staff scenario that a sudden increase in sovereign risk premia could weigh on balance sheets and bank lending appetite appears far-fetched, given the strong macro fundamentals.
"The forthcoming inclusion in emerging government bond indices will broaden the investor base and diversify risks,” he added.
