## Path of India’s General Government Debt: Scenarios

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### Introduction and key motivations
- India adopted a rules-based fiscal framework in 2003: the Fiscal Responsibility and Budget Management Act (FRBMA).
- Implementation of the FRBMA coincided with a decline in India’s central government fiscal deficit by about 1.8 percent of GDP between its introduction and 2007/08.
- Fiscal consolidation was later reversed because of: spending measures introduced prior to the global crisis, a soaring subsidy bill, fiscal stimulus packages in response to the crisis, and a cyclical downturn in tax revenue.
- India’s public debt was 78 percent of GDP in 2008/09 versus an emerging-market average of 45 percent of GDP.
- Cross-country analysis and simulations in the chapter suggest a prudent medium-term public debt target in the range of 60-65 percent of GDP for India.
- Simulation endpoints:
  - No-reform scenario: public debt could decline only marginally to 74 percent of GDP by 2015/16.
  - Combined subsidy reform, revenue reforms and partial privatization: public debt could be brought to below 60 percent of GDP by 2015/16.

### Theoretical considerations and empirical evidence on debt ceilings
- Theoretical views:
  - Barro-Ricardian: optimal level of debt is indeterminate (present value of taxes vs. debt).
  - Keynesian: increased debt can be welfare-enhancing when consumers are liquidity constrained.
  - Neoclassical: debt reduction can raise investment by lowering interest rates and crowding out.
  - Calibrated models produce a wide range of optimal public debt: from 2/3 of GDP (Aiyagari et al. 1998) to 5 percent of GDP (Desbonnet and Kankanamge 2007).
- Empirical findings and policy-relevant thresholds:
  - No single rule for sustainability; common practical criterion is a stable debt/GDP ratio.
  - IMF (2003) average “benchmark” debt-to-GDP among emerging markets is 25 percent of GDP.
  - Countries with more variable tax revenue, less expenditure flexibility, and larger (real interest rate − real growth rate) are able to sustain lower public debt ratios.
  - IMF (2008): smaller effectiveness of fiscal policy in countries with high public debt defined as above 75 percent of GDP in industrial countries and 25 percent of GDP for emerging markets.
  - IMF (2009): impact of government consumption on recovery becomes negative for debt levels that exceed about 60 percent of GDP (with a very wide confidence interval).
  - External-debt thresholds: Pattillo et al. (2002) find negative growth effects at about 35-40 percent of GDP; Cohen (1997) and Manasse, Roubini, Schimmelpfennig (2003) estimate thresholds around 50 percent of GDP.
  - Empirical evidence on contingent liabilities: cost to governments of systemic banking crises over the past three decades averaged 16 percent of GDP.
  - IMF (2009c) estimates that a 1 percent of GDP increase in debt raises government bond yields by 5-10 bps.
- Country practice: many regional frameworks adopt ceilings around 60 percent (EMU) or 40 percent (UK, Ecuador, Panama); ceilings are framed as prudent/sustainable levels under expected growth trajectories rather than “optimal” values.

### What is an appropriate debt target/ceiling for India?
- Approaches used:
  - Derive maximum debt level consistent with intertemporal solvency under alternative assumptions for primary balance, real growth and the interest rate.
  - Estimate thresholds of debt intolerance using sovereign ratings (Institutional Investor rating, IIR) and club regressions.
  - Compare India’s debt levels to other emerging markets.
- Benchmark solvency example:
  - Using PDV = p / (r − g) logic, if India’s primary balance stabilizes at about 0.6 percent of GDP and the long-run growth rate is about one percentage point less than the real interest rate (i.e., r − g = 1 percent), India could maintain a debt-to-GDP ratio of 60 percent.
- Debt-intolerance / rating analysis:
  - Institutional Investor rating (IIR) average for India over 1991-2008 is 48.
  - India’s IIR stood at 62.7 as of March 2008.
  - Regression-based prediction:
    - Full sample: India would need to reduce its debt ratio to about 70-75 percent of GDP to graduate to a less debt-intolerant club.
    - Smaller, higher-rated-country sample: threshold substantially lower at 40-45 percent of GDP.
  - Disparity reflects sensitivity to country sample and an observed “India premium” in ratings in the full sample.
- Cross-country comparisons:
  - Emerging-market average general government gross debt fell from 63 percent of GDP in 2003 to 47 percent of GDP in 2008 (sample average reported).
  - India’s general government gross debt series (selected highlights 2003–2008): 87.4 (2003), 86.5 (2004), 84.0 (2005), 80.8 (2006), 78.3 (2007), 78.2 (2008). Average 2003-2008 reported as 78; change 2003-2008 = -9.2 (table shows series).
  - Median country with a Fitch A sovereign rating has debt-to-GDP of 45 percent; India’s debt-to-GDP is substantially higher than peers with BBB-.

### Feasible debt target and simulation framework
- Recommended medium-term anchor: a credible signal of commitment to fiscal discipline would require a debt target/ceiling of at most 60-65 percent of GDP.
- Rationale: a 60-65 percent debt ceiling provides room for countercyclical fiscal policy and contingent liabilities and signals a clear break with the past.
- Simulation setup (2009/10–2015/16):
  - Scenarios: baseline (no change in current policy), subsidy reform, sustained revenue improvements, partial privatization of government stakes in public companies, and a combined scenario (subsidy reform + revenue improvements + privatization).
  - Macro assumptions held constant across scenarios:
    - Real GDP growth gradually returns to potential rate of 8 percent by 2013/14.
    - GDP deflator stabilizes at 4 percent per annum.
    - Real effective interest rate on government debt remains close to its historical average at 4 percent.
  - Note on automatic dynamics: the interest-growth differential under these macro assumptions contributes about an average of 3-percentage points of GDP reduction in debt per annum.
  - Simulations are stylized partial-equilibrium exercises that abstract from second-round macro effects (for example, introduction of GST could raise GDP growth by 1.4 percentage points per Kelkar 2009, which is not internalized in the baseline macro assumptions).
- Historical perspective:
  - Between 1991 and 2009, India’s public debt ranged between 68 to 87 percent of GDP, with an average of 78 percent of GDP.
  - Lowest point: 68 percent of GDP in 1996/97; peak: 87 percent of GDP in 2004/05.
  - Two consolidation episodes: early 1990s (79 → 68 percent) and after FRBMA (87 → 81 percent by 2007/08); consolidations were later reversed.
  - “Break from the past” rules of thumb:
    - Mean minus one standard deviation: mean 78 percent − standard deviation 6 percent = 72 percent of GDP implies a debt ceiling of at most 72 percent of GDP.
    - More stringent criterion: at most 68 percent of GDP (the recent historical low).

### Scenarios described
- Baseline scenario:
  - Moderate revenue gains in the medium term owing to continued administrative improvements and recovery to pre-crisis levels.
  - Subsidy system assumed unreformed; recent one-off expenditure measures dissipate and fiscal stimulus measures are gradually withdrawn.
  - Government expected to continue issuing subsidy-related bonds covering two-thirds of the under recoveries of oil marketing companies.
- Subsidy reform (Scenario 2):
  - Fuel subsidy system reformed in 2009/10 to reflect market prices for fuel (excluding kerosene), reducing need to issue subsidy bonds.
  - Better targeting of food and fertilizer subsidies expected to yield savings.
  - Revenue gains as in the baseline scenario.
- Revenue reform (Scenario 3):
  - Flanagan (2006) suggests reforms amounting to 4 percent of GDP; in this scenario revenues increase by an additional 1 percentage point of GDP relative to the baseline over the simulation period.
  - Subsidy system unreformed as in the baseline scenario.
- Privatization (Scenario 4):
  - Selling part of government stakes in public companies could net some Rs 3,900 billion, or 5.8 percent of 2010/11 GDP if stakes in publicly listed enterprises are brought to 51 percent; assumption that government realizes half of these gains.
- Combined reform (Scenario 5):
  - Includes subsidy reform (Scenario 2), revenue reform (Scenario 3), and privatization (Scenario 4).

### Simulation results — headline outcomes
- Baseline scenario:
  - Overall deficit improves to 6.5 percent of GDP at end of simulation period in 2015/16.
  - Debt level declines by 7.3 percentage points from 81.2 to 74 percent of GDP (described elsewhere as 73.9 percent in table).
  - Public debt remains elevated and vulnerable to shocks per IMF Debt Sustainability Analysis (DSA).
- Subsidy reform:
  - Overall general government deficit improves by 6.4 percentage points of GDP to 4.4 percent.
  - Debt declines 15.3 percentage points to 66 percent of GDP between 2009/10 and 2015/16 (table shows 65.9 percent in 2015/16).
- Revenue reform:
  - Public debt level brought down to 70.6 percent of GDP, a decline of 10.6 percentage points.
  - General government deficit is 5.3 percent of GDP by 2015/16 (table shows -5.3 overall balance).
- Privatization:
  - Divestment of Rs 2,000 billion can help bring debt-to-GDP ratio to 71.5 percent of GDP.
  - Speed of adjustment of public debt is the slowest after the baseline scenario.
- Combined scenario (subsidy + revenue + privatization):
  - Overall debt declines by close to 22 percentage points to 59.5 percent of GDP.
  - General government deficit narrows to 3 percent of GDP.
  - Reduction of the deficit by 7.8 percentage points driven by a decline in expenditure of 4 percentage points of GDP and an increase in total government revenue by 3.8 percentage points of GDP.
  - Public debt ratio declines steadily after 2009/10; resilient to a number of shocks but could be unsustainable under further shocks to the primary balance (e.g., half a standard deviation shock).

### Key numeric paths from Table 6 (selected series, in percent of GDP)
- Scenario 1: Baseline (Change 2015/16 - 2009/10)
  - Total revenue and grants: 21.0 → 23.9 (change 2.8)
  - Total expenditure and net lending: 31.4 → 29.0 (change -2.4)
  - Subsidy Related Bonds: 0.8 → 1.4 (change 0.6)
  - Overall Balance: -11.1 → -6.5 (change 4.6)
  - General Government Debt: 81.2 → 73.9 (change -7.3)
- Scenario 2: Subsidy Reform (Change 2015/16 - 2009/10)
  - Total revenue and grants: 21.0 → 23.9 (change 2.8)
  - Total expenditure and net lending: 31.4 → 28.0 (change -3.4)
  - Subsidy Related Bonds: 0.4 → 0.3 (change -0.1)
  - Overall Balance: -10.7 → -4.4 (change 6.4)
  - General Government Debt: 81.2 → 65.9 (change -15.3)
- Scenario 3: Revenue Reform (Change 2015/16 - 2009/10)
  - Total revenue and grants: 21.0 → 24.9 (change 3.8)
  - Total expenditure and net lending: 31.4 → 28.8 (change -2.6)
  - Subsidy Related Bonds: 0.8 → 1.4 (change 0.6)
  - Overall Balance: -11.1 → -5.3 (change 5.8)
  - General Government Debt: 81.2 → 70.6 (change -10.6)
- Scenario 4: Privatization (Change 2015/16 - 2009/10)
  - Overall Balance: -11.1 → -6.3 (change 4.8)
  - General Government Debt: 81.2 → 71.5 (change -9.7)
- Scenario 5: Subsidy, Revenue Reform, Privatization (Change 2015/16 - 2009/10)
  - Total revenue and grants: 21.0 → 24.9 (change 3.8)
  - Total expenditure and net lending: 31.4 → 27.6 (change -3.8)
  - Subsidy Related Bonds: 0.4 → 0.3 (change -0.1)
  - Overall Balance: -10.7 → -3.0 (change 7.8)
  - General Government Debt: 81.2 → 59.5 (change -21.7)

### Revenue reform measures (Potential Yield, in percent of GDP; Source: Flanagan (2006))
- Goods and Services Taxation: 1.3
- Broaden service tax base: 1.0
- Eliminate exemptions: 0.3
- Compliance improvement: large
- Personal income taxation: 2.3
- Tax agriculture: 0.3
- Tighten treatment of charities: 0.2
- Mortgage interest deduction: 0.2
- Interest exemptions: 0.3
- Raise income threshold: 1.4
- Corporate income taxation: 0.5
- Eliminate exemptions: 0.5
- Total revenue measures: 4.0

### Debt sustainability and shocks (summary of DSA findings)
- Under the baseline, public debt dynamics are vulnerable to shocks (primary balance, growth) and could become unsustainable.
- Individual stress tests use permanent one-half standard deviation shocks; combined tests use permanent 1/4 standard deviation shocks to real interest rate, growth rate, and primary balance.
- A one-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009 in some tests.
- Combined scenario improves resilience: baseline and combined scenario box averages reported in the DSA figures (e.g., Baseline: 7.9, Shock: 6.8, Historical: 7.1 for one variable; Combined: 7.9, Shock: 6.8, Historical: 7.1 in comparable boxes).

### Conclusion and policy implications
- Over the next 5-6 years, India’s public debt outcomes could vary widely depending on reforms undertaken.
- Subsidy reform alone can yield significant fiscal dividends; enhanced revenue performance and disinvestment proceeds can further reduce deficits and debt.
- No single reform is sufficient on its own; a combination of subsidy reform, revenue reform (including tax base widening and administration improvements), and privatization receipts is likely needed to make a clear break with the past and achieve substantial debt reduction.
- The paper suggests a prudent medium-term public debt ceiling anchor for India could be on the order of 60-65 percent of GDP.
  - A 60-65 percent of GDP debt ceiling would allow substantial countercyclical fiscal response and headroom for contingent liabilities.
  - Achieving a 60-65 percent debt ceiling by 2015/16 would require substantial efforts: subsidy reform, continued tax administration improvements and tax base widening, and disinvestment of public assets.

*Source: Fund staff estimates.*

### References .............................................................................................................

### _wp1007 - References .............................................................................................................

### Figures
- 1. Baseline Scenario: Public Debt Sustainability Bound Tests........................................24
- 2. Combined Scenario: Public Debt Sustainability Bound Tests .....................................25

### Text Tables
- 1. Examples of Debt Ceilings ............................................................................................9
- 2. Selected Emerging Countries: Average Growth-Interest Differential .........................11
- 3. Benchmark Public Debt-to-GDP Ratio: Sensitivity to Primary Surplus and Interest-
Growth Rate Differential .......................................................................................12
- 4a. Country Ratings, Public Debt Ratios and Clubs ..........................................................13
- 4b. Predicted Debt Thresholds for India ............................................................................13
- 5. General Government Debt Ratios Among Sample of Emerging Countries ................15

*Source: _wp1007 - References*

### 6. Path of India’s General Government Debt: Scenarios .................................................23

### Path of India’s General Government Debt: Scenarios

### Introduction and key motivations
- India adopted a rules-based fiscal framework in 2003: the Fiscal Responsibility and Budget Management Act (FRBMA).
- Implementation of the FRBMA coincided with a decline in India’s central government fiscal deficit by about 1.8 percent of GDP between its introduction and 2007/08.
- Fiscal consolidation was later reversed because of: spending measures introduced prior to the global crisis, a soaring subsidy bill, fiscal stimulus packages in response to the crisis, and a cyclical downturn in tax revenue.
- India’s public debt was 78 percent of GDP in 2008/09 versus an emerging-market average of 45 percent of GDP.
- Cross-country analysis and simulations in the chapter suggest a prudent medium-term public debt target in the range of 60-65 percent of GDP for India.
- Simulation endpoints: under a no-reform scenario public debt could decline only marginally to 74 percent of GDP by 2015/16; a combination of subsidy reform, revenue reforms and partial privatization of public enterprises could bring public debt to below 60 percent of GDP by 2015/16.

### Theoretical considerations and empirical evidence on debt ceilings
- Theoretical views:
  - Barro-Ricardian: optimal level of debt is indeterminate (present value of taxes vs. debt).
  - Keynesian: increased debt can be welfare-enhancing when consumers are liquidity constrained.
  - Neoclassical: debt reduction can raise investment by lowering interest rates and crowding out.
  - Calibrated models produce a wide range of optimal public debt: from 2/3 of GDP (Aiyagari et al. 1998) to 5 percent of GDP (Desbonnet and Kankanamge 2007) depending on assumptions.
- Empirical findings and policy-relevant thresholds:
  - No single rule for sustainability; common practical criterion is a stable debt/GDP ratio.
  - IMF (2003) average “benchmark” debt-to-GDP among emerging markets is 25 percent of GDP (present discounted value of primary surpluses), and many emerging markets have debt 2.5 times larger than that benchmark.
  - Countries with more variable tax revenue, less expenditure flexibility, and larger (real interest rate − real growth rate) are able to sustain lower public debt ratios.
  - IMF (2008) finds smaller effectiveness of fiscal policy in countries with high public debt: defined as above 75 percent of GDP in industrial countries and 25 percent of GDP for emerging markets.
  - IMF (2009) documents that the impact of government consumption on recovery becomes negative for debt levels that exceed about 60 percent of GDP (with a very wide confidence interval around that threshold).
  - Studies on external-debt thresholds: Pattillo et al. (2002) find negative growth effects at about 35-40 percent of GDP; Cohen (1997) and Manasse, Roubini, Schimmelpfennig (2003) estimate thresholds around 50 percent of GDP.
  - Empirical evidence on contingent liabilities: the cost to governments of systemic banking crises over the past three decades averaged 16 percent of GDP.
  - IMF (2009c) estimates that a 1 percent of GDP increase in debt raises government bond yields by 5-10 bps.
- Country practice: many regional frameworks adopt ceilings around 60 percent (EMU) or 40 percent (UK, Ecuador, Panama); ceilings are framed as prudent/sustainable levels under expected growth trajectories rather than “optimal” values.

### What is an appropriate debt target/ceiling for India?
- Approaches used in the chapter:
  - Derive maximum debt level consistent with intertemporal solvency under alternative assumptions for primary balance, real growth and the interest rate.
  - Estimate thresholds of debt intolerance using sovereign ratings (Institutional Investor rating, IIR) and club regressions.
  - Compare India’s debt levels to other emerging markets.
- Benchmark solvency example:
  - Using PDV = p / (r − g) logic, if India’s primary balance stabilizes at about 0.6 percent of GDP and the long-run growth rate is about one percentage point less than the real interest rate (i.e., r − g = 1 percent), India could maintain a debt-to-GDP ratio of 60 percent.
- Debt-intolerance / rating analysis:
  - Institutional Investor rating (IIR) average for India over 1991-2008 is 48.
  - India’s IIR stood at 62.7 as of March 2008.
  - Regression-based prediction: using the full sample, India would need to reduce its debt ratio to about 70-75 percent of GDP to graduate to a less debt-intolerant club; using a smaller, higher-rated-country sample, the threshold is substantially lower at 40-45 percent of GDP.
  - The disparity in thresholds reflects sensitivity to the country sample and an observed “India premium” in ratings in the full sample.
- Cross-country comparisons:
  - Emerging-market average general government gross debt fell from 63 percent of GDP in 2003 to 47 percent of GDP in 2008 (sample average reported).
  - India’s general government gross debt series (selected highlights 2003–2008): India 87.4 (2003), 86.5 (2004), 84.0 (2005), 80.8 (2006), 78.3 (2007), 78.2 (2008). Average 2003-2008 reported as 78, change 2003-2008 = -9.2 (table shows series).
  - Median country with a Fitch A sovereign rating has debt-to-GDP of 45 percent; India’s debt-to-GDP is substantially higher than peers with BBB-.

### Feasible debt target and simulation framework
- Recommended medium-term anchor: a credible signal of commitment to fiscal discipline would require a debt target/ceiling of at most 60-65 percent of GDP.
- Rationale: a 60-65 percent debt ceiling, while still above the average for emerging markets, provides room for countercyclical fiscal policy and contingent liabilities and signals a clear break with the past.
- Simulation setup (2009/10–2015/16):
  - Scenarios: baseline (no change in current policy), subsidy reform, sustained revenue improvements, partial privatization of government stakes in public companies, and a combined scenario (subsidy reform + revenue improvements + privatization).
  - Macro assumptions held constant across scenarios: real GDP growth gradually returns to potential rate of 8 percent by 2013/14; GDP deflator stabilizes at 4 percent per annum; real effective interest rate on government debt remains close to its historical average at 4 percent.
  - Note on automatic dynamics: the interest-growth differential under these macro assumptions contributes about an average of 3-percentage points of GDP reduction in debt per annum.
  - Simulations are stylized partial-equilibrium exercises that abstract from second-round macro effects (for example, introduction of GST could raise GDP growth by 1.4 percentage points per Kelkar 2009, which is not internalized in the baseline macro assumptions).
- Historical perspective informing feasible targets:
  - Between 1991 and 2009, India’s public debt ranged between 68 to 87 percent of GDP, with an average of 78 percent of GDP.
  - Lowest point: 68 percent of GDP in 1996/97; peak: 87 percent of GDP in 2004/05.
  - Two consolidation episodes: early 1990s (79 → 68 percent) and after FRBMA (87 → 81 percent by 2007/08); consolidations were later reversed.
  - Using “break from the past” rules of thumb:
    - Mean minus one standard deviation: mean 78 percent − standard deviation 6 percent = 72 percent of GDP implies a debt ceiling of at most 72 percent of GDP.
    - More stringent criterion: at most 68 percent of GDP (the recent historical low).
- Simulation results (high-level outcomes reported in chapter):
  - No-reform (baseline): public debt could decline only marginally to 74 percent of GDP by 2015/16.
  - Combined reforms (subsidy reform + revenue reforms + partial privatization): public debt could be brought to below 60 percent of GDP by 2015/16.
  - Conclusion from simulations: if India gradually returns to potential GDP growth of 8 percent, a 60-65 percent of GDP medium-term debt target can be achieved by 2015/16 through a combination of expenditure and revenue reforms and a front-loaded divestment of government assets.

*IMF Working Paper chapter: "Path of India’s General Government Debt: Scenarios" (excerpt provided).*

### 1.         Baseline scenario. Under the baseline scenario, moderate revenue gains in the

### _wp1007 - 1.         Baseline scenario. Under the baseline scenario, moderate revenue gains in the

### Scenarios described
- Baseline scenario
  - Moderate revenue gains in the medium term owing to continued administrative improvements and recovery to pre-crisis levels.
  - Subsidy system assumed unreformed; recent one-off expenditure measures dissipate and fiscal stimulus measures are gradually withdrawn.
  - Government expected to continue issuing subsidy-related bonds covering two-thirds of the under recoveries of oil marketing companies.
- Subsidy reform (Scenario 2)
  - Fuel subsidy system reformed in 2009/10 to reflect market prices for fuel (excluding kerosene), reducing need to issue subsidy bonds.
  - Better targeting of food and fertilizer subsidies expected to yield savings.
  - Revenue gains as in the baseline scenario.
- Revenue reform (Scenario 3)
  - Flanagan (2006) suggests reforms amounting to 4 percent of GDP; in this scenario revenues increase by an additional 1 percentage point of GDP relative to the baseline over the simulation period.
  - Subsidy system unreformed as in the baseline scenario.
- Privatization (Scenario 4)
  - Selling part of government stakes in public companies could net some Rs 3,900 billion, or 5.8 percent of 2010/11 GDP if stakes in publicly listed enterprises are brought to 51 percent; assumption that government realizes half of these gains.
- Combined reform (Scenario 5)
  - Includes subsidy reform (Scenario 2), revenue reform (Scenario 3), and privatization (Scenario 4).

### Simulation results — headline outcomes
- Baseline scenario
  - Overall deficit improves to 6.5 percent of GDP at end of simulation period in 2015/16.
  - Debt level declines by 7.3 percentage points from 81.2 to 74 percent of GDP (described elsewhere as 73.9 percent in table).
  - Public debt remains elevated and vulnerable to shocks per IMF Debt Sustainability Analysis (DSA).
- Subsidy reform
  - Overall general government deficit improves by 6.4 percentage points of GDP to 4.4 percent.
  - Debt declines 15.3 percentage points to 66 percent of GDP between 2009/10 and 2015/16 (table shows 65.9 percent in 2015/16).
- Revenue reform
  - Public debt level brought down to 70.6 percent of GDP, a decline of 10.6 percentage points.
  - General government deficit is 5.3 percent of GDP by 2015/16 (table shows -5.3 overall balance).
- Privatization
  - Divestment of Rs 2,000 billion can help bring debt-to-GDP ratio to 71.5 percent of GDP.
  - Speed of adjustment of public debt is the slowest after the baseline scenario.
- Combined scenario (subsidy + revenue + privatization)
  - Overall debt declines by close to 22 percentage points to 59.5 percent of GDP.
  - General government deficit narrows to 3 percent of GDP.
  - Reduction of the deficit by 7.8 percentage points driven by a decline in expenditure of 4 percentage points of GDP and an increase in total government revenue by 3.8 percentage points of GDP.
  - Public debt ratio declines steadily after 2009/10; resilient to a number of shocks but could be unsustainable under further shocks to the primary balance (e.g., half a standard deviation shock).

### Key numeric paths from Table 6 (selected series, in percent of GDP)
- Scenario 1: Baseline (Change 2015/16 - 2009/10)
  - Total revenue and grants: 21.0 → 23.9 (change 2.8)
  - Total expenditure and net lending: 31.4 → 29.0 (change -2.4)
  - Subsidy Related Bonds: 0.8 → 1.4 (change 0.6)
  - Overall Balance: -11.1 → -6.5 (change 4.6)
  - General Government Debt: 81.2 → 73.9 (change -7.3)
- Scenario 2: Subsidy Reform (Change 2015/16 - 2009/10)
  - Total revenue and grants: 21.0 → 23.9 (change 2.8)
  - Total expenditure and net lending: 31.4 → 28.0 (change -3.4)
  - Subsidy Related Bonds: 0.4 → 0.3 (change -0.1)
  - Overall Balance: -10.7 → -4.4 (change 6.4)
  - General Government Debt: 81.2 → 65.9 (change -15.3)
- Scenario 3: Revenue Reform (Change 2015/16 - 2009/10)
  - Total revenue and grants: 21.0 → 24.9 (change 3.8)
  - Total expenditure and net lending: 31.4 → 28.8 (change -2.6)
  - Subsidy Related Bonds: 0.8 → 1.4 (change 0.6)
  - Overall Balance: -11.1 → -5.3 (change 5.8)
  - General Government Debt: 81.2 → 70.6 (change -10.6)
- Scenario 4: Privatization (Change 2015/16 - 2009/10)
  - Overall Balance: -11.1 → -6.3 (change 4.8)
  - General Government Debt: 81.2 → 71.5 (change -9.7)
- Scenario 5: Subsidy, Revenue Reform, Privatization (Change 2015/16 - 2009/10)
  - Total revenue and grants: 21.0 → 24.9 (change 3.8)
  - Total expenditure and net lending: 31.4 → 27.6 (change -3.8)
  - Subsidy Related Bonds: 0.4 → 0.3 (change -0.1)
  - Overall Balance: -10.7 → -3.0 (change 7.8)
  - General Government Debt: 81.2 → 59.5 (change -21.7)

### Revenue reform measures (Potential Yield, in percent of GDP; Source: Flanagan (2006))
- Goods and Services Taxation: 1.3
- Broaden service tax base: 1.0
- Eliminate exemptions: 0.3
- Compliance improvement: large
- Personal income taxation: 2.3
- Tax agriculture: 0.3
- Tighten treatment of charities: 0.2
- Mortgage interest deduction: 0.2
- Interest exemptions: 0.3
- Raise income threshold: 1.4
- Corporate income taxation: 0.5
- Eliminate exemptions: 0.5
- Total revenue measures: 4.0

### Debt sustainability and shocks (summary of DSA findings)
- Under the baseline, public debt dynamics are vulnerable to shocks (primary balance, growth) and could become unsustainable.
- Individual stress tests use permanent one-half standard deviation shocks; combined tests use permanent 1/4 standard deviation shocks to real interest rate, growth rate, and primary balance.
- A one-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009 in some tests.
- Combined scenario improves resilience: baseline and combined scenario box averages reported in the DSA figures (e.g., Baseline: 7.9, Shock: 6.8, Historical: 7.1 for one variable; Combined: 7.9, Shock: 6.8, Historical: 7.1 in comparable boxes).

### Conclusion and policy implications
- Over the next 5-6 years, India’s public debt outcomes could vary widely depending on reforms undertaken.
- Subsidy reform alone can yield significant fiscal dividends; enhanced revenue performance and disinvestment proceeds can further reduce deficits and debt.
- No single reform is sufficient on its own; a combination of subsidy reform, revenue reform (including tax base widening and administration improvements), and privatization receipts is likely needed to make a clear break with the past and achieve substantial debt reduction.
- The paper suggests a prudent medium-term public debt ceiling anchor for India could be on the order of 60-65 percent of GDP.
  - A 60-65 percent of GDP debt ceiling would allow substantial countercyclical fiscal response and headroom for contingent liabilities.
  - Achieving a 60-65 percent debt ceiling by 2015/16 would require substantial efforts: subsidy reform, continued tax administration improvements and tax base widening, and disinvestment of public assets.

*Source: Fund staff estimates.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp1007.pdf_