India's general government debt-to-GDP ratio is set to surge, with a World Bank report projecting the ratio at rising to its peak of 89 per cent in the financial year 2022-23, before gradually declining.
The report titled 'India Development Update' for July 2020, noted that with the revenue outlook seriously dented, and new expenditure imperatives, the fiscal deficit and debt of the central and state governments are likely to increase sharply over the next two years.
"India's debt-to-GDP ratio is projected to increase significantly in the short term, reflecting the expected contraction in GDP growth and increase in the primary deficit. While there is a significant level of uncertainty around the projections, the general government debt-to-GDP ratio is projected to peak at around 89 per cent in FY22/23 before gradually declining thereafter," it said.
General government debt refers to the overall liabilities of both the Union government and states.
It, however, noted that the country's public debt is expected to remain sustainable because it is mostly denominated in domestic currency, of long or medium-term maturity, and is predominantly held by residents.
In a baseline scenario, which takes into account revised growth projections, lower-than-expected divestment proceeds, and new expenditure commitments, the fiscal deficit of the central government is projected to increase to 6.6 per cent of GDP in FY 2020-21 and remain at a high of 5.5 per cent in the following year.
"Assuming that, the states' deficit is contained within 3.5-4.5 per cent of GDP, the deficit of the general government may rise to around 11 per cent in FY 2020-21," it said.
Further, the report also said that the World Bank may project a steeper contraction of the Indian economy for the current financial year, revised from the previous estimate of 3.2 per cent.
It said that amid rapidly evolving conditions, projections made in May are likely to be revised as new information is incorporated, especially as the daily number of cases continues to increase resulting in several states and districts re-imposing lockdowns, and available high frequency indicators show that the economy has not yet reverted to baseline.
In May, the World Bank had projected the Indian economy to contract by 3.2 per cent in FY 2020-21, and predicted rebound slowly in the next fiscal.
According to the report, India needs to continue to implement critical reforms in key areas such as health, labour, land, skills and finance to come out stronger from the impact of the COVID-19 pandemic.
These reforms should aim at enhancing productivity of the Indian economy and spur private investments and exports, it said.