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Slowing growth can drag government revenue
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V RAJU
The IMF’s Fiscal Monitor and Financial Stability Report released recently has expressed grave apprehensions over the impact of Trump’s trade policies. This comes on top of repeated IMF warnings in the past on elevated global debt. The US, India and other countries have been taking steps to bring their respective debts down in the post-Covid years.
But the ongoing geo-economic turbulence, which can disrupt investments, supply chains, finance, labour and technology flows, are set to deliver a setback to such efforts. The IMF projects public debt to increase by about 4 per cent of GDP in advanced economies and by 6 per cent of GDP in emerging economies over the medium term. The Centre needs to take note of the fiscal monitor’s prognosis that public expenditure typically increases in turbulent phases, with governments having to provide fiscal support. Simultaneously, slowing growth can drag government revenue, expanding deficits. The fiscal prudence shown by the Centre in recent years puts India on a better footing than its peers. But the Centre cannot rest easy, given the large outstanding debt of ₹196.7 lakh crore in FY26, which pegs the debt-to-GDP ratio of the Centre at 56.1 per cent. This ratio is not expected to come close to the target of 40 per cent even by 2030-31.
Prudent spending by both the Centre and the States, along with reforms in taxation, can make a difference. It is to be noted that although the decline in government security yields over the past year brings down the interest burden on fresh issuances, the cost of borrowing for the outstanding stock of debt has not moved much. Weighted average yield on fresh G-sec issues have come down from 7.14 per cent in the first quarter of FY25 to 6.88 per cent by third quarter. But the weighted average coupon rate on outstanding stock of government debt has stayed at around 7.3 per cent in this period. The IMF’s FSR flags areas of concern for India’s market regulators.
One, despite the deep correction in global equity and bond markets since April, valuations remain elevated in some key segments of equity and corporate bond markets. So, the correction phase could be prolonged. Two, if central banks of emerging economies, including India, ease interest rates further, interest rate differential between the US and the EM economies will decrease, increasing the prospects of outflow from EM bond markets. Three, the highly leveraged position of some global hedge funds and asset management companies poses systemic issues, in the event of an increase in bank lending to them. In an obvious reference to the Trump administration’s preferences, the FSR flags the perils of widespread adoption of crypto assets. The report moots “unambiguous tax treatment of crypto assets”. It all but expresses fears of a contagion, calling for multilateral surveillance and a global financial safety net. This is surely a grim take on the situation.
Published on April 29, 2025
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