‘Ill-founded’: India hits back at IMF’s criticism of debt, forex management

Sandeep Dikshit

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New Delhi, December 23

The government has strongly pushed back at the International Monetary Fund (IMF) for cautioning it about a high debt overhang. Earlier, the RBI opposed the IMF for reclassifying India’s “de facto” exchange rate regime to a “stabilised arrangement” from “floating” because the “RBI likely exceeded levels necessary to address disorderly market conditions and has contributed to the rupee-dollar moving within a narrow range since December 2022”.

International credit rating

• Analysts have said that IMF’s adverse observations could be a prelude to a downgrade of India’s sovereign credit rating by international credit rating agencies
• Any downgrade will complicate the Centre’s plans to borrow liberally at low interest rates from the overseas markets from next year to finance its expenditure
• Even if the debt were to touch this level, the IMF’s ‘worst-case’ scenarios for the US, the UK and China are about 160, 140, and 200 per cent, respectively, which is far worse compared to 100 per cent for India

The two salvos from the IMF came after “Article IV” discussions with the RBI and the Finance Ministry that usually takes place every year. The observations came from the IMF’s executive board on a report submitted by its staff after a visit to the country.

A section of analysts has suggested that IMF’s adverse observations could be a prelude to a downgrade of India’s sovereign credit rating by international credit rating agencies. Any possible downgrade will complicate the Centre’s already advanced plans to borrow liberally at low interest

rates from the overseas markets from next year to finance its expenditure.

In September, a momentous development took place when JP Morgan announced that it will include Indian Government bonds into its benchmark Emerging Market index. This would help India borrow $21 billion (Rs 1.7 lakh crore) from the next fiscal at low interest rates. A credit downgrade could increase the interest rates, thus nullifying the advantage of borrowing from abroad.

Reacting to the IMF’s observations on “elevated public debt levels and contingent liability risks”, the government has pointed out that the general government debt in India is overwhelmingly rupee-denominated. External borrowings contribute a minimal amount. Very little of the domestically issued debt is short-term and hence the rollover risk is low. The exposure to volatility in exchange rates also tends to be on the lower end.

An official news release said IMF’s fears of debt reaching 100 per cent of the GDP were ill-founded and based on a worst case scenario. Even if the debt were to touch this level, the IMF’s ‘worst-case’ scenarios for the US, the UK and China are about 160, 140, and 200 per cent, respectively, which is far worse compared to 100 per cent for India.