IMF raises concerns over India's rising debt - Recession on cards?

The International Monetary Fund (IMF) has issued a cautionary warning, expressing concerns that India's general government debt could surpass 100% of its gross domestic product (GDP) in the medium term. The IMF emphasized the high long-term risks associated with the need for substantial investment to enhance India's resilience to climate stresses and natural disasters.

In its annual Article IV consultation report, the IMF suggested the requirement for new and preferably concessional sources of financing, greater private sector investment, and the implementation of carbon pricing or equivalent mechanisms. However, the Indian government countered the warning, asserting that sovereign debt risks are limited, primarily denominated in domestic currency.

K.V. Subramanian, India's executive director at the IMF, contested the IMF's assertion, stating that the baseline carrying the risk of debt exceeding 100% of GDP in the medium term sounds extreme. He highlighted the limited risks from sovereign debt, predominantly denominated in domestic currency.

The IMF's report also reclassified India's exchange rate regime to a "stabilized arrangement," a designation disputed by India, which underscores the importance of exchange rate flexibility. Despite these warnings, the IMF provided a relatively optimistic outlook for India's economy, suggesting the potential for faster growth if the government undertakes key structural reforms.

In October 2023, Finance Minister Nirmala Sitharaman had expressed the government's commitment to reducing debt and monitoring debt reduction measures taken by emerging market economies. India faces challenges in enhancing its credit ratings due to elevated debt levels and associated servicing costs. Global rating agencies have cited weak fiscal performance, burdensome debt stock, and low GDP per capita as factors undermining India's stronger fundamentals.

While India's per capita income has doubled since 2014-15, uneven income distribution remains a challenge, exacerbated by the 'K-shaped' growth phenomenon following the Covid-19 pandemic. Experts argue that the quality of government expenditure improvement should be considered by rating agencies to positively impact economic growth.