India's debt-to-GDP ratio will shoot up to 87.6 percent at the end of this financial year from 72.2 percent in 2019-20, on the back of extra borrowing by the government due to the COVID-19 pandemic, said economists at SBI on Monday.
Over four percent of the increase in the debt-to-GDP ratio is attributable to the fall in economic growth, which will result in GDP contraction during the year, they said, insisting on measures to address growth rather than adopting fiscal conservatism.
The higher debt amount will also lead to the shifting of the FRBM (Fiscal Responsibility and Budget Management) Act, 2003, target of combined debt to 60 percent of the GDP by seven years to the financial year 2029-30, they said in the note.
It said the moot point is whether the debt is sustainable, and added that over $500 billion in forex reserves can take care of the external debt while servicing the internal one is also not an issue.
"In the current situation our nominal GDP growth is likely to contract significantly and based on this our interest-growth differential will turn positive in FY21, thus raising serious questions on debt sustainability," it added.
As for the positive aspects of their observations, the decline in yields on borrowings will lower the interest costs for both the Centre and also the states.
The economists pitched for direct monetization of the deficit by the RBI amid the coronavirus crisis.
"We strongly emphasize that direct monetization is both a mathematical and a preferred policy option that could facilitate borrowing at a lower cost and anchor inflationary expectations at least for now as it will be liquidity substitution in lieu of deficient government revenue," it said.
Further, they contended that banks will have to bring down their excess statutory liquidity ratio (SLR) holdings, which stand at 28.5 percent at present, if the RBI depends on only open market operations. In such a scenario, credit growth will have to pick up by 6 percent, which is a 'seemingly difficult proposition'.
"We believe in the Indian context, if we properly execute monetization of government deficit through options like COVID perpetual bonds, the government can take advantage of issuing longer-term papers at lower rates now as rates will come down further," it said.
With inputs from PTI