Page 88 - ES 2020-21_Volume-1-2 [28-01-21]

Does Growth Lead to Debt Sustainability? Yes, But Not Vice-Versa! 71

Figure 19: Composition of General Figure 20: Composition of Central Govt. debt
Government public debt

Figure 21: Maturity Profile of dated Central Figure 22: Total floating rate debt of Central
Government securities (per cent of total) Government as a per cent of Public debt

4.4

3.8 3.8
3.7
3.3 3.3
3.1 3.1

2.6

2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Quarterly Report on Public Debt Management and Status Paper on Government Debt, Department of
Economic Affairs, Ministry of Finance.

SCENARiO ANALYSiS: iS iNDiA’S CuRRENT DEBT SuSTAiNABLE?

2.35 We evaluate the sustainability of India’s debt in this section through macroeconomic
scenario-based simulations (to account for various worst case scenarios). To ensure debt
sustainability, i.e. d <d , we use the identity for debt dynamics explained in Box 3. By denoting
t-1
t
negative primary balances as primary deficit (pd), we get:
.
d < d t-1 ⇔ pd < (γ – i ) d /(1 + γ )
t
t-1
t
t
t t
2.36 Thus, as long as the primary deficit is less than a maximum threshold, debt would remain
sustainable. Note that the above inequality does not capture the fact that the primary deficit itself
decreases with higher growth rate as seen in Figure 23. This is understandable as tax revenues
increase with higher growth and thereby bring down the primary deficit. The decline in the
primary deficit with growth increases the likelihood that the above inequality gets satisfied. This
is because the right-hand-side of the inequality increases with growth and the left-hand-side of
the inequality (pd) decreases with growth.