We Go Tip-Tapering Again

Context: As an emerging market the need for India to prepare for a replay of the taper tantrum of 2013.

Fiscal challenges before India

• Debt and deficit as shares of GDP are high by global standards: India’s debt-to-GDP ratio in the last decade (68%) and fiscal deficit-to-GDP ratio (7%) are high among comparators.
• Stagnant or low rising tax revenues as a share of GDP: Direct tax collection has been particularly low.
• It has been below the average of other countries at similar income levels.
• Low capital infrastructure funding: only about 3.5% of GDP. Recurrent expenditure accounts for most general government expenditure.
• Covid worries: Further widened the budget deficit and elevated the debt as 12.3% and 89.6% of GDP, respectively, in 2020-21.
• International Monetary Fund (IMF) projects debt-to-GDP ratio and fiscal deficit-to-GDP ratio to moderate slightly, to 10% and 86.6%, as GDP recovers this fiscal year. 

Way Forward

• Sticking to a manageable primary deficit:  India can run a primary deficit of 4.5% of GDP without seeing its debt-GDP ratio move higher.
• Stabilise debt-GDP ratio: Since elasticity with respect to US rates approaches unity, stronger measures have to adopted if US yields goes up.
• Yields on India’s 10-year securities seem to move with US10-year treasury yields.
• Primary deficit as a share of GDP should fall back: IMF proposes that it will fall back to its lower 2012-19 average of 2.4% by 2026.
• IMF projects general government revenue as a share of GDP to rise very slightly from 19.2% this year to 19.8% in 2022-26 and to make a dent in the deficit will require spending restraint.
• IMF imagines that general government expenditure as a share of GDP will fall from 30.4% this year to 27.9% by 2026, basically to pre-crisis levels.
• Restructure or inflate the economy as required: Cut food, fertiliser and fuel subsidies or cutting public spending has been infeasible, government has to adopt either of one.

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