By FY30, government debt is expected to peak at 80% of GDP

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According to the Motilal Oswal Financial Services report, the Government debt grew from 70% in the year-end to 75% of GDP in the FY20 and is projected at 91% in the year-end of FY21

It will stay at more than 90% up to FY23 before moderating slowly to 80% by FY30. The spike in the government’s debt to GDP ratio would hinder the country’s capacity to substantially raise its spending and encourage economic growth in the 2020’s decade.

The report states that the government’s incapability to increase its expenditures (capital expenditure) at the same pace as in the past decade is obvious, although primary expenditure rise is 7.3 percent from 11.3 percent over the last decade.

Considering the fixed or non-discretionary nature of much of net interest income-expenditure (e.g. defense, salaries, pensions), there is a good probability that financial investment will rise more at a lower rate in the 2020s.

“Either the government would have to rationalize its spending, or the vision of decently-public investment in the 2020s is a distant dream,” said the report.

While real GDP growth between FY14 and FY20 averaged 6.8 percent, the average real fiscal expenditures increased over the period by 9 percent. In FY20, although real GDP growth weakened to 4.2%, fiscal spending is expected to be 1.1% or 27% of GDP growth per year.

The growth-interest difference (2 percent) is, therefore, the highest for the last five decades, and the lowest for the last two decades is less than half a four to five percentage point. This means that the primary surplus needed to reduce the debt to GDP ratio more rapidly would increase.

 As India’s nominal GDP growth is expected to average 9% in the next decade, there is no fear of indebtedness higher than the average effective interest rate of 6.9%.

This could further damage real GDP growth, creating a vicious circle that would make it harder in time to reduce the debt / GDP ratio as scheduled.  

The problems reported do not imply that financial support should not be provided. Only vulnerable sections affected must be stimulated by the Government, and the government will not cost more than 2 percent of GDP.

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