In an exclusive interview with Firstpost, Krishnamurthy Subramanian, Executive Director of the International Monetary Fund (IMF), addressed the issue of debt accumulation and its implications for economic stability. He emphasized that not all debt is inherently bad, and the key distinction lies in the purpose for which it is taken.
Subramanian pointed out that debt incurred for economically unproductive purposes, such as freebies or revenue expenditure, can lead to a debt trap. Conversely, debt taken for capital expenditure, such as infrastructure development, is beneficial as it contributes to asset creation and fosters economic growth.
He further elaborated that governance plays a significant role in debt management. Countries that rely on debt for unproductive purposes are more susceptible to falling into a debt trap, highlighting the importance of responsible fiscal policies.
Subramanian’s remarks come at a time when neighboring countries like Pakistan and Sri Lanka are facing severe economic challenges and relying on IMF bailouts to stay afloat. Both countries have been forced to implement austerity measures, which have sparked public dissatisfaction.
In comparison to its neighbors, India’s debt situation is considered more sustainable due to its focus on productive spending. Subramanian explained that India’s debt to GDP ratio increased during the COVID-19 pandemic but remains manageable because the borrowed funds were primarily directed towards capital expenditure. He stressed that investing in asset creation, such as infrastructure, is essential for long-term economic prosperity.
Subramanian drew a clear distinction between debt for productive purposes and debt for unproductive expenditure. He argued that while debt can be a valuable tool for economic development, it should not be used to fund subsidies or expensive programs that do not generate value.
When discussing the often-unpopular measures imposed by the IMF as part of bailout packages, Subramanian acknowledged the need for difficult choices. He likened these measures to taking medicine, even if it tastes unpleasant, to address underlying economic ailments. He emphasized that these measures are not arbitrary but necessary to rectify past economic mistakes and stabilize the situation.
He stressed that the IMF should not be held responsible for the hardships caused by these measures, as they are a direct consequence of the country’s own economic policies. He used the analogy of a doctor prescribing medicine, explaining that patients shouldn’t blame the doctor for the taste of the medication but rather appreciate the diagnosis and treatment provided.
Subramanian concluded by emphasizing the importance of responsible debt management. He warned that countries should avoid taking debt for unproductive expenditure, as it can lead to long-term economic instability. He highlighted the need for countries to focus on productive spending and prioritize investments that foster sustainable economic growth.
