India's debt to gross domestic product (GDP) ratio could climb to 87.6 per cent this fiscal, up from 72.2 per cent last year, due to a collapsing GDP and consequently higher borrowings, according to a research note by SBI Ecowrap released on Monday.

The country's gross debt is likely to be around Rs 170 lakh crore in FY21 as compared to Rs 146.9 lakh crore in FY20, said the research publication of State Bank of India (SBI).

"Interestingly, the GDP collapse is pushing up the debt to GDP ratio by at least 4 per cent, implying that growth rather than continued fiscal conservatism is the only mantra to get us back on track." The report warned that the higher debt amount will also lead to shifting of the Fiscal Responsibility and Budget Management (FRBM) target of combined debt (of the Centre and states) to 60 per cent of GDP by FY23 by seven years. The target is now expected to be achievable only in FY30.

Fiscal estimates have gone awry across the globe amid higher pandemic-related expenditures. Together with declining GDP growth, the debt-to-GDP ratio has also been adversely affected in all countries.

"We again reiterate that the current thinking of rating downgrade in policy circles is a false negative as India's rating is likely to face a litmus test of a downgrade in FY21, depending on what we have done to bring growth back to track," said Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI.

The report said that the current level of foreign exchange reserves is sufficient to meet any external debt obligations. On the internal debt, since most of the debt is domestically owned, the debt servicing of the same is 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." In the current situation in India, said the report, both the key interest rate and GDP are expected to fall further. Our nominal GDP growth is likely to contract and based on this, our interest-growth differential may turn positive also.

Further, if interest rates are higher than expected, then the cost of rolling over a given debt increases.

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