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72 Economic Survey 2020-21 Volume 1

Figure 23: Primary deficit-to-GDP declines with higher nominal growth

Source: RBI, MoSPI.

2.37 Before undertaking the scenario analysis, it is important to examine the drivers for the
nominal interest rate. If crowding out of private sector investment were the key phenomenon
at play, an increase in the general government debt-to-GDP would increase the interest rate.
However, Figure 24 below shows that an increase in the general government debt-to-GDP
correlates with lower (not higher) nominal interest rates. This is, in fact, consistent with the
evidence against the presence of crowding out demonstrated in Section V above.

Figure 24: A higher debt-to-GDP ratio correlates with lower (not higher) nominal interest rates
3

Source: RBI

2.38 As discussed in the previous sections of this Chapter, negative IRGD plays a pivotal role in
ensuring debt sustainability. To project the IRGD forward, we first have to estimate the interest
rate that are expected to prevail going forward. In the last three decades, we observe a strong
negative correlation between debt-to-GDP ratio and nominal interest rates in India (Figure
24). Further, as Figure 25 clearly shows, the 5-year forward interest rates for all maturities (1
year, 5 years, 10 years, 20 years and 30 years) have been trending down sharply over the last
decade. Even the 10-year rate give years forward, which is the maximum among all the 5-year

3 Nominal interest rate used is the annual weighted average interest rate on Central Government securities (published by RBI)