High public debt in fiscal year 21 is a matter of concern: report
MUMBAI: As the country’s budget situation worsens due to the pandemic, there are concerns over high public debt and also a higher budget deficit at 11.8% in 2020-2021, brokerage UBS Securities India mentionned.
A report of UBS also warned of a risk of downgrading sovereign ratings by any of the three rating agencies over the next 12 to 18 months.
This despite the reduction of direct and indirect taxes which crosses the revised estimates for the year.
While the clean-up of the net direct tax stood at Rs 9.45 lakh crore in 2020-2021, almost 5% more than the revised estimate, the collection of indirect taxes jumped by more than 12% to Rs 10.71 lakh crore, even as a tax on cleaning goods and services decreased by 8 percent.
“The fiscal situation deteriorated after the pandemic and we now estimate that the budget deficit widened to 11.8% of GDP in FY21, from 7.8% in FY20,” said the chief economist of ‘UBS Securities India Tanvee Gupta Jain in the report.
She attributed this to pandemic-related relief measures, credible and transparent accounting for subsidies (for example, the food subsidy was transferred to the budget of the Food companybalance sheet), and a significant shortfall.
However, the report expects the budget deficit to narrow in the future but remain high at 10 percent (Central 6.5 percent, States 3.5 percent), helped by a recovery cyclical economy and the decline in relief measures.
She noted that the high budget deficit has also led to historically high levels of public debt, signaling concerns about the sharp rise in public debt in 2020-2021.
As a percentage of GDP, the same percentage has increased from 72% in 2019-20 to 89% in 2020-2021, she said, adding that nominal GDP must grow by at least 10% per year to help stabilize public debt levels at current high levels before reducing them.
The rise in the primary deficit, which is the budget deficit minus interest payments, and the deterioration in the growth gap in interest rates have raised concerns about debt sustainability.
UBS estimates indicate that even if the spread between the two series (interest rate and growth) turned positive for a brief period in 2020-2021, it will normalize in 2021-2022.
A better measure of debt sustainability is the ratio of interest expenditure to GDP. “If the central bank can keep policy rates lower for longer, we believe that the increase in public sector debt could become associated with stable debt service costs, as maturing debt is refinanced at rates still historically low, ”UBS said.
According to UBS, among emerging markets, India will have the third highest government debt-to-GDP ratio, after Argentina and Brazil, in 2021. The key to debt sustainability is the capacity and speed with which the government can keep its fiscal promises, especially with regards to aggressive divestments and higher public investments to help support nominal GDP growth, Gupta Jain said.
She also said that in the medium term, the government will need to focus on following the path of fiscal consolidation at a pace in line with the pace of growth rather than sticking to a more relaxed path, such as indicated in the budget.
On whether the rising budget deficit and public debt pose a threat to sovereign ratings, UBS said that compared to other heavily indebted emerging markets, India’s public debt is largely funded by national funds and a significant share is held by local banks and the central bank, reduce the risk of distress.
However, the large budget deficit leaves little room to absorb further adverse shocks without compromising credit ratings, increases the risk of crowding out the private sector and slows portfolio debt flows from abroad, has t -she warned.
She added that India was no exception in this regard and any delay in executing policies and implementing growth support reforms to spur sustainable growth could lead to widening risks. macroeconomic stability.
“We see a risk of a downgrade of the sovereign rating by one of the three rating agencies in the next 12 to 18 months,” the report warns.
A report of UBS also warned of a risk of downgrading sovereign ratings by any of the three rating agencies over the next 12 to 18 months.
This despite the reduction of direct and indirect taxes which crosses the revised estimates for the year.
While the clean-up of the net direct tax stood at Rs 9.45 lakh crore in 2020-2021, almost 5% more than the revised estimate, the collection of indirect taxes jumped by more than 12% to Rs 10.71 lakh crore, even as a tax on cleaning goods and services decreased by 8 percent.
“The fiscal situation deteriorated after the pandemic and we now estimate that the budget deficit widened to 11.8% of GDP in FY21, from 7.8% in FY20,” said the chief economist of ‘UBS Securities India Tanvee Gupta Jain in the report.
She attributed this to pandemic-related relief measures, credible and transparent accounting for subsidies (for example, the food subsidy was transferred to the budget of the Food companybalance sheet), and a significant shortfall.
However, the report expects the budget deficit to narrow in the future but remain high at 10 percent (Central 6.5 percent, States 3.5 percent), helped by a recovery cyclical economy and the decline in relief measures.
She noted that the high budget deficit has also led to historically high levels of public debt, signaling concerns about the sharp rise in public debt in 2020-2021.
As a percentage of GDP, the same percentage has increased from 72% in 2019-20 to 89% in 2020-2021, she said, adding that nominal GDP must grow by at least 10% per year to help stabilize public debt levels at current high levels before reducing them.
The rise in the primary deficit, which is the budget deficit minus interest payments, and the deterioration in the growth gap in interest rates have raised concerns about debt sustainability.
UBS estimates indicate that even if the spread between the two series (interest rate and growth) turned positive for a brief period in 2020-2021, it will normalize in 2021-2022.
A better measure of debt sustainability is the ratio of interest expenditure to GDP. “If the central bank can keep policy rates lower for longer, we believe that the increase in public sector debt could become associated with stable debt service costs, as maturing debt is refinanced at rates still historically low, ”UBS said.
According to UBS, among emerging markets, India will have the third highest government debt-to-GDP ratio, after Argentina and Brazil, in 2021. The key to debt sustainability is the capacity and speed with which the government can keep its fiscal promises, especially with regards to aggressive divestments and higher public investments to help support nominal GDP growth, Gupta Jain said.
She also said that in the medium term, the government will need to focus on following the path of fiscal consolidation at a pace in line with the pace of growth rather than sticking to a more relaxed path, such as indicated in the budget.
On whether the rising budget deficit and public debt pose a threat to sovereign ratings, UBS said that compared to other heavily indebted emerging markets, India’s public debt is largely funded by national funds and a significant share is held by local banks and the central bank, reduce the risk of distress.
However, the large budget deficit leaves little room to absorb further adverse shocks without compromising credit ratings, increases the risk of crowding out the private sector and slows portfolio debt flows from abroad, has t -she warned.
She added that India was no exception in this regard and any delay in executing policies and implementing growth support reforms to spur sustainable growth could lead to widening risks. macroeconomic stability.
“We see a risk of a downgrade of the sovereign rating by one of the three rating agencies in the next 12 to 18 months,” the report warns.