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Indian central bank officials rejected the International Monetary Fund’s view that government debt could exceed the size of the economy, predicting a more rapid easing in the debt ratio than the Washington-based lender estimates. 

General government debt — which is the combined borrowing of the central government and the states — can be reduced to 73.4% of gross domestic product by 2030-31, nearly 5 percentage points below the IMF’s projected trajectory of 78.2% for the period, central bank officials led by Deputy Governor Michael Patra wrote in a paper. The IMF estimates the debt ratio is about 82% now.

“We reject the IMF’s contention that if historical shocks materialize, India’s general government debt would exceed 100% of GDP in the medium-term and hence further fiscal tightening is needed,” the authors wrote in the paper, which was released with the central bank’s monthly bulletin Tuesday. 

The IMF said in its Article IV country report in December that India’s history of fiscal slippages and the shocks the economy has been subjected to in the past suggest government debt could exceed 100% of GDP. The lender said India needs to pursue an ambitious fiscal consolidation path to “replenish buffers and sustainably lower debt, while supporting inclusive growth.” 

Indian officials had previously criticized the IMF for its views about the Reserve Bank of India’s currency intervention strategy in the same Article IV report. The fund said in the December report that the RBI intervened excessively in the currency market during a specific period, implying it may have tried to influence the level of the rupee during that time. 

The RBI said the findings were “unjustified,” and Governor Shaktikanta Das subsequently defended the intervention strategy in speeches, calling the rupee a “freely floating currency” and market determined.   

The Washington-based multilateral lender said India must meet its fiscal deficit target of 4.5% of the GDP by fiscal 2025-26, and narrow it further to build buffers that could help safeguard against shocks and create space for growth-supporting expenditure, such as on infrastructure, health, and climate mitigation.

READ: Modi Shuns Populist Budget as Focus Stays on Infrastructure

Arguing against the IMF, Patra and his colleagues said the deficit can be reduced sharply by adjusting expenditure instead.

“Targeting productive employment-generating sectors, embracing energy efficient transition and investing in digitalization could lead to a substantial decline in general government debt,” the authors wrote. Creating social and physical infrastructure and skilling the labor force can “yield long-lasting growth dividends,” they said. 

The authors also pointed out that there’s limited exchange rate risk from India’s borrowing since 95% of the government debt is issued in the local currency and held by domestic financial institutions and households. 

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