Page 91 - ES 2020-21_Volume-1-2 [28-01-21]

74 Economic Survey 2020-21 Volume 1

2.39 Note that while estimating the expected interest rates going forward using the forward rates,
the endogenous role of monetary policy is not being accounted for. Specifically, since monetary
policy is endogenous, low growth is likely to be accompanied by expansionary monetary policy
and lower financing costs. Thus, in the forward-looking analysis, the beneficial impact of monetary
policy on IRGD must be factored in. As a result, even in the worst-case scenario where growth
is anaemic over the medium-term, its impact on debt sustainably gets moderated by supportive
monetary policy. Thus, even in the extremely worst case scenarios, IRGD is expected to remain
negative for India, thereby ensuring sustainability of debt. We therefore do the scenario analysis
factoring in the highly likely negative IRGD in the steady state (Figure 26).

Box 7: Assumptions for Debt simulations

The debt simulations for worst-case debt analysis are based on the following assumptions:
(i) Real growth rate for FY21 is taken as -7.7 per cent (MoSPI) and real growth rate for FY22
is assumed as 11.5 per cent based on IMF estimates.
(ii) General Government debt for FY20 is taken as 73.8 per cent of GDP (Revised Estimates
from RBI) 4
(iii) The primary deficit (Centre + States) for FY21 is assumed to be 6.8 per cent of GDP. This
equals 1.3 per cent of GDP as baseline PD (0.4 per cent Centre + 0.9 per cent States) +
5.5 per cent of GDP increase both due to revenue shortfalls and the Atmanirbhar Bharat
Package. Primary deficit for FY22 is assumed to be 2.5 per cent of GDP. The declining
trajectory of primary deficit is assumed to reach 1.5 per cent of GDP (0.2 per cent Centre PD
+ 0.5 per cent States PD + 0.8 per cent EBR) by FY24, and it is assumed to stay at 1.5 per
cent thereafter. This is inclusive of EBR.
(iv) Nominal interest rate is assumed to be 6 per cent. As on 26 January 2021, we estimate the
weighted average cost of borrowing using the weights of General Government borrowing
across maturities to be 6 per cent.
(v) Inflation is taken as 5 per cent, i.e. mid-point of the range of 4 per cent – 6 per cent.

Figure 26: Simulations of the worst case Debt Dynamics
26a. Debt-to-GDP is sustainable in 26b. Maximum primary deficit from FY22
worst case in FY29 below which debt remains sustainable

4 Revised Estimate of General Government liabilities is taken as per cent of Provisional Estimate of GDP for FY 2019-20.