India's fiscal future remains tied to moderating its elevated public debt, according to Ajay Seth, the Economic Affairs Secretary. Speaking at the ISAAC Centre for Public Policy Conference, Seth emphasized the importance of controlling the country’s growing debt to manage its interest outgo and improve fiscal health. He highlighted that India’s current level of public debt is resulting in a high interest burden, a key concern for credit rating agencies.

“One of the main reasons why credit rating agencies are cautious about India is its elevated debt levels. The interest outgo as a proportion of tax revenues is relatively high compared to countries like Indonesia,” Seth remarked.

This is a critical challenge for India, especially in light of its aspirations to receive a rating upgrade from global credit agencies. Seth noted that a path to fiscal consolidation—achieved through controlling public debt—would be a key strategy in securing a better credit rating. He further pointed out that this strategy would also improve India’s resilience in the event of another crisis, like the COVID-19 pandemic.

Public Debt and India’s Global Standing

India’s debt-to-GDP ratio continues to be a point of concern. While the country has made strides in its economic development, managing the balance between growth and fiscal responsibility is crucial. Seth stressed the necessity of reducing India’s reliance on debt to fund essential public services, arguing that moderating debt levels would allow India to reduce its interest outgo, a significant part of its fiscal budget.

"India cannot remain fixated on a particular approach in the midst of the uncertainties we face globally. We must be agile," said Seth. With India approaching a USD 4 trillion economy, the country’s resilience and ability to adapt to global economic shifts are paramount. However, the need to keep public debt in check remains one of the central themes for long-term economic success.

India’s Tax-to-GDP Ratio and Fiscal Reforms

Seth also touched on India’s tax-to-GDP ratio, which has risen from 16.5% a decade ago to approximately 18% today. This marks significant progress, but Seth believes the country should aim for a 20% tax-to-GDP ratio over the next 5-6 years. Achieving this target will require improving tax compliance and broadening the tax base, both critical steps in supporting government expenditure without escalating debt.

On the expenditure side, Seth noted that India is increasingly rebalancing its spending toward capital expenditure, which is essential for long-term infrastructure development and sustainable economic growth. At the same time, there is a need to control the rise of current expenditure, which poses challenges for fiscal consolidation.

State Government Debt Ratings and Market Discipline

Seth also called for greater uniformity in the rating of state government debt papers. He observed that, currently, there is little differentiation in the yields of state government debt papers, regardless of the state's Gross State Domestic Product (GSDP) ratio. He proposed that introducing market signals and discipline in the debt ratings of state governments could help better differentiate risk and improve fiscal management at the state level.

“Just like external rating agencies rate India’s sovereign debt, state development loans should also be rated, which will help send important signals to the market,” Seth explained. This move could play a vital role in promoting responsible borrowing by states, with a clearer understanding of the risks associated with their financial decisions.

Global Trade Architecture and Energy Transition

Looking beyond fiscal matters, Seth also commented on global trade dynamics. He acknowledged that a global rebalancing of economic power is required. While there are differences in opinion about the specific mechanisms and pace of this rebalancing, Seth noted that multilateral institutions, such as the World Bank and International Monetary Fund (IMF), need to become more focused on the changing global economic landscape.

On the subject of energy transition, Seth highlighted a shift in focus from energy transition goals to energy security, a theme that gained prominence at the recent World Bank-IMF Spring Meeting. He stated that the emphasis on energy security had risen significantly in light of geopolitical developments and changing global priorities.

Conclusion

In conclusion, Ajay Seth’s remarks underscore the importance of fiscal discipline and the need for India to take proactive steps to manage its public debt. A moderated debt level would not only reduce the burden of interest payments but also support India’s efforts to secure a credit rating upgrade from global agencies. As India moves towards achieving a USD 4 trillion economy, focusing on tax reforms, capital expenditure, and market discipline in state debt ratings will be essential for ensuring long-term fiscal health and sustaining economic growth.

With global trade dynamics shifting and energy security taking precedence, India’s ability to adapt to these changing realities will determine its path forward in the global economic landscape.

The Upcoming IPOs in this week and coming weeks are Srigee DLM, Manoj Jewellers.

The Current active IPO are Wagons Learning, Kenrik Industries.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst.