Motilal Oswal Financial Services

COPE

The Economy Observer

25 August 2020

India’s government debt likely to stand at 80% of GDP by FY30

Fiscal support to GDP growth to be lower in 2020s decade



During the past six years, fiscal spending (consumption + investments) has been one of the key drivers of economic

activity. While real GDP growth averaged at 6.8% between FY14 and FY20, real fiscal spending grew at an average of 9%

during the period. In FY20, while real GDP growth weakened to 4.2%, fiscal spending is estimated to have contributed 1.1

percentage point (pp) or 27% to annual real GDP growth. During the past three years, government spending has

contributed almost a quarter to annual real GDP growth.

The COVID-19 pandemic, however, has hurt the government’s ability to continue to do so over the next decade. Our

estimates suggest India’s general government (center + states) debt rose to 75% of GDP in FY20 from 70% in FY18. It is

likely to reach 91% of GDP in FY21 (the highest level since 1980 – since the availability of data) and stay at >90% of GDP

up to FY23. This surge in India’s government debt-to-GDP ratio would restrict its ability to grow its spending significantly

and support economic activity in the 2020s decade, as it has done in the past few years.

Gradual fiscal consolidation (to lower India’s government debt-to-GDP to ~80% of GDP by FY30) implies primary spending

(total

less

interest payments) by the general government is likely to grow at an average of 7.1% in the 2020s decade v/s

average growth of 11.3% in the 2010s decade. The faster the fiscal consolidation, the lower the government debt, but the

slower the growth in fiscal spending (and vice-versa).

Moreover, if primary spending growth eases to 7.3% over the next decade from 11.3% in the past decade, it becomes

apparent that the government would be unable to grow its investments (capital outlays) at the same pace as in the past

decade. Since a large part of non-interest revenue spending (such as defense, salary & wages, pensions etc.) is fixed or

non-discretionary in nature, there is a high possibility fiscal investments would grow at an even slower rate in the 2020s

decade. Either the government would have to rationalize its spending or the idea of government investments growing

decently in the 2020s decade would remain a distant dream.

Importantly, since we expect India’s nominal GDP growth to average at 9% over the next decade, higher than the average

effective interest rate of 6.9%, there is no fear of debt unsustainability. Nevertheless, the gap between growth and

interest rate (at 2pp) would be the lowest in the past five decades and less than half of 4–5pp each in the past two

decades. This means the amount of primary surplus required to lower the debt-to-GDP ratio faster would be higher. This

would have the potential to hurt real GDP growth further, creating a vicious circle, which would eventually make it more

difficult to bring down the debt-to-GDP ratio, as planned.

Overall, there are five important conclusions. 1) India’s general government debt-to-GDP ratio is likely to be at ~80% of

GDP by FY30 and unlikely to fall to the 60% target even by FY40 without hurting GDP growth more seriously. 2)

Government support to real GDP growth in the 2020s decade would be lower than in the past few years. 3) Fiscal

investments are likely to grow at an even slower pace since a large part of non-interest revenue spending is non-

discretionary. 4) Although the government debt-to-GDP ratio is expected to remain high, there is no fear of debt

unsustainability (or debt spiraling out of control). 5) Unless private spending picks up strongly, real GDP growth over the

next decade would be slower, such as 5–6% v/s 7% in the 2010s decade.

Among these issues, one really wonders about the Government of India (GoI)’s ability to implement a large fiscal

stimulus. However, this does not imply that there should be no fiscal support. As we had discussed in detail

earlier,

GoI

needs to support only those vulnerable sections that are the worst affected, and this would not cost the government

more than 2% of GDP.



Nikhil Gupta – Research Analyst

(Nikhil.Gupta@MotilalOswal.com)

Yaswi Agarwal

– Research Analyst

(Yaswi.Agarwal@motilaloswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

Impact of COVID-19 pandemic on public finances

Some years ago, GoI had set a target to bring down India’s general government debt

(center + states) to 60% of GDP by the end of FY25. The

RBI’s 2018-19 Annual

Report

states

“…As per the revised FRBM architecture, the aim is to attain a central

government debt to GDP ratio of 40 per cent and a general government debt to GDP

ratio of 60 per cent by 2024-25…”

The pandemic, however, has rendered this target

entirely unachievable.

While this is not surprising, a cause for concern is that GoI might not be able to

achieve its target of 60% debt-to-GDP ratio even two decades down the line (i.e., by

FY40). In fact, the most likely fiscal consolidation path (which would be gradual at

best, to avoid strong adverse effects to GDP growth) suggests India’s debt-to-GDP in

FY30 would be much higher than pre-COVID-19 levels. Moreover, even with such

gradual fiscal consolidation, growth in government spending over the next decade

would be much slower than in the recently concluded decade. If the government’s

ability to grow its spending is hurt, its capital spending may be disproportionately

hurt since a large part of non-interest revenue spending is non-discretionary in

nature. This means unless private spending sees strong revival, real GDP growth in

the 2020s decade would be lower.

Role of fiscal spending in India’s GDP growth

It is widely known that personal consumption and government spending have been

the key drivers of real GDP growth in the past few years, when private investments

have been subdued. In fact, against negligible contribution of 0.2–0.4 percentage

point (pp) to real GDP growth in FY13 and FY14, government spending (consumption

+ investments) has contributed at least 1.0pp to real GDP growth in each of the past

six years (FY15–20). While real GDP growth weakened to 4.2% in FY20 (v/s 6.1% in

FY19), real fiscal spending grew 7.5% (v/s 9.7% in FY19). This implies the addition of

1.1pp to real GDP growth last year, accounting for ~27% of annual growth – the

highest seen in at least the past eight years

(Exhibit 1).

Within fiscal spending, while

the government’s real investments declined 3.2% YoY in FY20, real fiscal

consumption spending grew 11.8%, marking the highest growth in a decade.

While real GDP growth

weakened to 4.2% in FY20,

real fiscal spending grew

7.5%, implying the addition

of 1.1pp to real GDP growth

last year, accounting for

~27% of annual growth.

Exhibit 1:

Fiscal spending contributed more than a quarter to real GDP growth in FY20

Contribution of fiscal spending (consumption + investments) to real GDP growth

In pecentage points (pp)

% of real GDP growth (RHS)

21.6

14.7

6.5

0.2

FY13

0.4

FY14

1.1

FY15

1.2

FY16

1.1

FY17

1.5

FY18

1.4

FY19E

1.1

FY20E

15.5

13.4

22.7

26.6

3.8

E = Estimate (FY19 data of government investment is based on actual data for 21 states; FY20 is based on provisional data for 17 states)

Source: Central Statistics Office (CSO), Comptroller & General Auditor (CAG), Controller General of Accounts (CGA), CEIC, MOFSL

25 August 2020

Our estimates suggest

government debt rose from

70% in FY18 to 71% in FY19

and 75% of GDP in FY20.

Estimating the government debt-to-GDP ratio for FY19 and FY20

Although the central government’s debt data is available on a quarterly basis,

aggregate data on all states’ liabilities is published by the RBI with a lag of up to 18

months. For instance, currently, we have actual data on all states’ liabilities for the

year-ended Mar’18 (FY18), and data for FY19 should ideally be released in a month

or two. To fill this gap, we extracted monthly data for 21 individual states*

(accounting for ~96% of all states) for FY19 and 17 states (accounting for ~87% of all

states) for FY20 to prepare an estimate for all states. Hereafter, we made the

required adjustments and prepared our estimates of general government (center +

all states) debt for FY19 and FY20. These suggest government debt rose from 70% in

FY18 to 71% in FY19 and 75% of GDP in FY20

(Exhibit 2).

A comparison of reported fiscal deficit (RFD) and derived fiscal deficit (DFD) then

suggests that, as in FY18 and FY19, DFD came in almost 2pp higher than RFD

(Exhibit

3).

Although DFD has been higher than RFD for most years, the role of off-budget

transactions has increased sharply in the past few years. This is certainly the case as

we had explained in our earlier

report.

Exhibit 2:

India’s government debt-to-GDP has risen

continuously since FY16

FY80 FY85 FY90 FY95 FY00 FY05 FY10 FY15 FY20E

General governemnt debt-to-GDP ratio (%)

85.9

75.2

66.4

74.5

67.6

75.4

66.6

Exhibit 3:

Dependence on off-budget transactions has

increased in the past few years

(% of GDP)

FY99

FY02

FY05

FY08

FY11

FY14

FY17

FY20E

Reported fiscal deficit

Derived fiscal deficit

FY19 and FY20 debt estimates (E) are based on monthly data for 21

and 17 states, respectively

DFD = Debt(t) – Debt(t-1)

Source: Reserve Bank of India (RBI), CEIC database, MOFSL

Reported fiscal deficit is

different from derived fiscal

deficit (difference between

the debts over the two

periods), and the latter

presents a true picture.

Four things to remember when charting the likely path of the debt-to-GDP ratio

Before we talk about our estimates of India’s government debt-to-GDP ratio over

the next decade, there are four important things to keep in mind:

1) Several accounting entries form a part of government liabilities (or debt);

however, these are not considered when calculating fiscal deficit. Some

examples include the treatment of the national small savings fund (NSSF),

market stabilization bonds, and the recapitalization of public sector banks,

among others. Therefore, the reported fiscal deficit number (RFD) may be

different from the fiscal deficit number derived (DFD) from the difference

between the debts over the two periods. The difference between the reported

and derived fiscal deficits may be positive or negative depending on the entries.

Nevertheless, the latter (DFD) is more inclusive and presents a truer picture than

the former (RFD).

* 21 states for FY19 are: Andhra Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala,

Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, Uttarakhand, West Bengal, National Capital

Territory (NCT) of Delhi. Of these, Assam, Bihar, Himachal Pradesh and NCT of Delhi are not available for FY20.

25 August 2020

2) It is also useful to distinguish between gross fiscal balance and primary budget

balance. The difference is the interest payments on government debt. While

gross fiscal balance is measured as total receipts

minus

total government

outlays, primary balance is calculated as the difference between total receipts

and non-interest government outlays.

3) Movement in government debt-to-GDP ratio may be

attributed

to three

macroeconomic parameters: interest rate (r), primary deficit-to-GDP ratio (p),

and nominal GDP growth (g). As a thumb rule, the higher the difference is

between (g) and (r), for any given level of (p), the faster the decline in the

government debt-to-GDP ratio would be, and vice-versa. Similarly, the lower the

primary deficit (p) is, for any given level of (g – r), the faster the fall in the

government debt-to-GDP ratio would be, and vice-versa.

4) The interest rate (r) used in this equation refers to the effective interest rate on

outstanding debt. It is estimated as total interest payments during the period (t)

divided by outstanding debt in the (t-1) period or outstanding debt at the start

of the period.

Five key assumptions

Our estimates of the likely path of India’s government debt-to-GDP ratio by FY30

(the end of the 2020s decade) are presented with these five assumptions on:

Reported fiscal deficit:

Our estimates are based on three scenarios: Path-1 –

combined fiscal deficit falling gradually from 5.8% of GDP each in FY18 and FY19

to 4.5% of GDP by FY27 and remaining there up to FY30; Path-2 – combined

fiscal deficit falling to 5.5% of GDP by FY27 and remaining there up to FY30; and

Path-3 – combined fiscal deficit rising to 6.5% of GDP by FY27 and remaining

there up to FY30. Assumed RFD for the center and states over the next decade

are provided in

Exhibits 4, 5.

Our base case is Path-2.

Exhibit 4:

Three different scenarios assumed for the central

government deficit…

Different asssumptions for center's fiscal deficit

Path-1

(% of GDP)

Path 2

Path 3

(% of GDP)

Exhibit 5:

…Similarly, three scenarios assumed for state

deficits for the 2020s decade

Different asssumptions for states' fiscal deficit

Path-1

Path 2

Path 3

3.5

3.0

2.5

FY16

FY18

FY20E FY22F FY24F FY26F FY28F FY30F

Path-2 is our base case

FY16

FY18

3.0

2.5

2.0

FY20E FY22F FY24F FY26F FY28F FY30F

Excluding UDAY for FY16 and FY17

Source: RBI, CEIC database, MOFSL

F = Forecasts

25 August 2020

We assume average

nominal GDP growth (g) of

9% during the next decade.

Interest payments:

We assume the effective interest rate (interest payments

divided by outstanding debt at the beginning of the period) for the central

government would fall from an average of 6.8% in the 2010s decade to 6.5%

over the next decade, and from 7.5% to 7.1% for states. For the general

government, this implies a fall in effective interest rate (r) from 7.7% to 6.9%.

Nominal GDP growth:

We assume average nominal GDP growth (g) of 9% during

the next decade. This includes our forecast of 3.5% decline in FY21, growth of

10.7% in FY22, and average growth of 10.3% for the remaining eight years of the

2020s decade.

Primary balance:

As mentioned above, the primary budget balance is the

difference between total receipts and non-interest government outlays. Using

our assumptions for fiscal deficit and interest payments, we arrive at three

different paths for primary deficit (p) as well.

Off-budget transactions:

While the difference between DFD and RFD has

widened in the past few years to 2pp, we assume (and hope) the gap narrows

gradually over the next decade to 0.6pp in FY30. Please note that this

assumption extends a favorable bias to our government debt-to-GDP estimates

for the next decade.

Likely trajectory of India’s government debt-to-GDP ratio in the 2020s decade

With these five assumptions, our estimates suggest India’s government debt-to-GDP

ratio would rise from 75% in FY20 to 91.1% of GDP in FY21, peak at 91.3% of GDP in

FY22, before moderating slowly to 80% by FY30

(Exhibit 6).

This is provided the

(reported) fiscal deficit is brought down to 5.5% by FY27 (Path-2), almost similar to

pre-COVID-19 levels. It also implies primary deficit would be negligible post-FY26.

Under Path-1 (assuming faster fiscal consolidation), the government debt-to-GDP

ratio would fall faster to 73.5% of GDP by FY30. But, it would fall even more

gradually to 87% by FY30 under Path-3 (assuming slower fiscal consolidation). The

assumed primary surplus under Path-1 would be closer to 1% of GDP in FY30, while

Path-3 implies primary deficit of more than 1% of GDP in the years leading up to

FY30.

Exhibit 7:

Likely trajectory of government debt under

different assumptions of (g – r)

Likely path* of government debt (as % of GDP) with

average nominal GDP growth

8.0%

9.0%

10.0%

As per our base case, India’s

government debt-to-GDP

ratio would rise from 75% in

FY20 to 91.2% of GDP in

FY21, peak at 91.4% of GDP

in FY22, and moderate

slowly to 80% by FY30.

Exhibit 6:

Likely trajectory of government debt under

different assumptions of gross fiscal deficit

Likely path of government debt (as % of GDP) with

gross fiscal deficit in FY30

Path-1

Path-2

Path-3

86.9

80.2

73.5

FY18

FY20E

FY22F

FY24F

FY26F

FY28F

FY30F

85.7

80.2

74.8

FY18

FY20E

FY22F

FY24F

FY26F

FY28F

FY30F

Path-1 assumes combined fiscal deficit at 4.5% of GDP in FY30, Path-

2 (base case) assumes 5.5% and Path-3 assumes 6.5% in FY30

* Based on Path-2 (Base case) and effective interest rate of 6.9%

Source: RBI, CEIC database, MOFSL

25 August 2020

A change in (g – r) by 1

percentage point would

result in a difference of as

much as 5.5% of GDP in the

government debt-to-GDP

ratio by FY30.

Apart from the primary balances, the difference between nominal GDP growth (g)

and interest rate (r) is what matters for the debt-to-GDP ratio.

Exhibit 7

above

shows the likely trajectory of India’s government debt-to-GDP ratio in case, the (g –

r) difference varies. Under our base case (Path-2), we assume average nominal GDP

growth of 9% and an average effective interest rate of 6.9% over the next decade. If

nominal GDP growth turns out lower at 8% and ‘r’ is unchanged at 6.9% (i.e. if the

difference reduces to 1pp), the government debt-to-GDP ratio would be 86% in

FY30. And, if the difference increases to 3pp (such as ‘g’ rises to 10% or ‘r’ falls to

6%), the government debt-to-GD ratio would fall to 75% in FY30 (as in FY20). A

change in (g – r) by 1 percentage point implies a difference of as much as 5.5% of

GDP in the government debt-to-GDP ratio by FY30.

Implications on GDP growth

While preparing the likely trajectory of the government debt-to-GDP ratio, we

actually never talked about receipts and/or spending as what really matters is fiscal

deficit. However, fiscal spending plays a very important role from the economic

growth perspective, as discussed above

(Exhibit 1).

India’s tax buoyancy has

remained broadly stable at

around 1x over the past

four decades.

To determine the likely impact of the different levels of government debt-to-GDP

ratio on real GDP growth, we need to make one more assumption on the

relationship between GDP growth and the government’s total taxes – ‘tax

buoyancy’. Notwithstanding the numerous steps undertaken by the authorities,

India’s tax buoyancy has remained broadly stable at around 1x over the past four

decades

(Exhibit 8).

On average, India’s tax buoyancy was 1.15x in the 1980s, 0.91x

in the 1990s, 1.12x in the 2000s decades, and 0.95x in the most recent 2010s

decade.

Exhibit 9:

Likely trajectory of total receipts and spending by

the general government in the 2020s decade

Receipts

Spending

Exhibit 8:

India’s tax buoyancy has averaged at around 1x

over the past four decades

2.0

Tax buoyancy for the general government

1.0

0.0

(10)

(% YoY)

(20)

FY80 FY85 FY90 FY95 FY00 FY05 FY10 FY15 FY20E

Combined taxes = Center’s net taxes + States’ total taxes

Tax buoyancy = Combined taxes growth/nominal GDP growth

(1.0)

FY16

FY18 FY20E FY22F FY24F FY26F FY28F FY30F

Combined total receipts exclude ‘Grants from the center to states’

Source: RBI, CEIC database, MOFSL

Since taxes accounted for 77% of all (net) receipts of the central government and

73% of all receipts of the states in the 2010s decade, we use our estimates of tax

collections in the next decade (using tax buoyancy) to arrive at the total receipts of

the general government.

25 August 2020

Once we get an estimate of the total receipts of the general government, we derive

the likely trajectory of total spending (and primary spending after excluding our

assumptions of interest payments made earlier) over the 2020s decade by adding

our projections of combined fiscal deficit under Path-2.

Primary spending is likely to

grow at an average of 7.1%

during the 2020s decade v/s

11–16% average growth in

the previous five decades.

Based on these assumptions and the methodology, our calculations suggest the

total receipts of the general government would grow at an average of 8.5% over the

next decade (v/s 12.4% over the previous decade), and total spending growth would

average at 7.6%

(Exhibits 10, 11).

Primary spending (total excluding interest

payments) is likely to grow at an average of 7.1% over the 2020s decade v/s 11.3%

in the recent decade and 13–16% average growth in the previous four decades. The

annual projected trajectory on total receipts and spending is shown in

Exhibit 9.

Exhibit 11:

Average growth in total spending and primary

spending of the general government since 1970s decade

Primary spending

15.2

12.4

8.5

15.4

15.6

13.2

13.3

11.3

16.1

14.0

Total spending

(%, CAGR)

12.8

11.4

7.6

7.1

2020sF

Exhibit 10:

Average growth in total receipts of the general

government since the 1970s decade

Total receipts of the general government (%, CAGR)

14.7

15.7

13.4

13.1

1970s

1980s

1990s

2000s

2010s

2020sF

1970s

1980s

1990s

2000s

2010s

F = Forecasts

Combined total receipts exclude ‘Grants from the center to states’

Total spending is derived by adding receipts’ estimates with deficit

projections under Path-2

Source: RBI, CEIC database, MOFSL

Notwithstanding the

different scenarios, average

(primary) spending growth

would almost certainly be in

the single digits v/s 11–16%

over the past five decades.

Furthermore, we analyze the movements in primary spending during the next

decade based on various scenarios of fiscal deficit / government debt and tax

buoyancy. Assuming the two extreme scenarios (with the highest deficit/tax

buoyancy and lowest deficit/tax buoyancy), growth in primary spending would

average between 5.6% and 8.4% in the 2020s decade. This implies that

notwithstanding the different scenarios, average (primary) spending growth would

almost certainly be in the single digits v/s 11–16% during the past five decades

(Exhibit 12).

Exhibit 12:

Likely decadal average growth in primary sending under different assumptions (%, CAGR)

Receipts buoyancy vis-à-vis nominal GDP growth

% CAGR

1.10

1.05

1.02*

0.95

0.90

90.0

Debt-to-GDP

ratio in FY30

85.0

80.0

75.0

70.0

Assuming fiscal deficit under Path-2

8.4

8.1

7.9

7.6

7.3

8.0

7.7

7.5

7.2

6.9

7.6

7.4

7.1

6.8

6.5

7.2

6.9

6.6

6.4

6.1

6.8

6.5

6.2

5.9

5.6

Fiscal deficit

in FY30 (% of

GDP)

6.5

6.0

5.5

5.0

4.5

Source: RBI, MOFSL

25 August 2020

No fear of debt unsustainability

Although we expect the government debt-to-GDP ratio to reach 91% of GDP at its

peak in FY22 and decline only marginally to sustain at ~80% of GDP by the end of

this decade, there is no fear of debt unsustainability. Yes, it may take up to 20–25

years to bring down the debt-to-GDP ratio to the targeted level of 60% of GDP;

however, India’s government debt-to-GDP ratio is likely to continue to decline. The

debt-to-GDP ratio is unlikely to spiral out of control.

While the difference

between nominal GDP

growth and effective

interest rate is likely to be

much lower than in the

previous decade, it would

still be positive.

There are two very simple reasons for this.

First,

as discussed above, while the

difference between nominal GDP growth (g) and effective interest rate (r) is likely to

be much lower than in the previous decade, it would still be positive. We assume (g)

at 9% in the 2020s decade (7.6% in the first half and 10.3% in the second half of the

decade), while (r) is expected to average at 6.9% (almost similar in both the halves).

This means the difference (g – r) would be 2 percentage point (pp) over the next

decade, against 4.8pp in the 2010s decade and 4.2pp in the 2000s decade

(Exhibits

13, 14).

Second,

the primary deficit is also expected to narrow sharply over the next decade

from ~3% of GDP each in the past two decades to 2.1% of GDP over the 2020s

decade. This is in line with the gradual fall in government debt-to-GDP ratio and

slower growth in primary spending, as discussed in the above sections.

Exhibit 13:

Difference between growth and interest rate

likely to narrow, but remain positive in the 2020s decade…

Nominal GDP growth (g)

(%, CAGR)

Eff int rate (r)

Exhibit 14:

…and a continuous reduction in primary deficit

would also help keep debt-to-GDP ratio sustainable

Derived primary deficit (% of GDP)

(g - r, pp)

1980s

1990s

2000s

2010s

2020sF

1980s

1990s

2000s

2010s

2020sF

Source: RBI, CEIC database, MOFSL

After rising sharply in the

first few years of the 2020s

decade, the government

debt-to-GDP ratio fell

slowly during the rest of the

decade.

If you are wondering how the government debt-to-GDP ratio could fall despite

primary deficit in the 2020s decade being higher than (g –r), well, the nuances

explain this. When we break the 2020s decade into two equal halves, we find that

the primary deficit at 3.3% of GDP in the first half of the 2020s decade is much

higher than the average (g – r) of 0.7pp. Therefore, the government debt-to-GDP

ratio actually moves to 88.4% of GDP in FY25 from 75% in FY20. However, the ratio

falls faster in the second half – to ~80% of GDP by FY30 – when the primary deficit

averages only 0.9% of GDP and the (g – r) averages 3.3pp.

Therefore, it is clear that after rising sharply in the first few years of the 2020s

decade, the government debt-to-GDP ratio falls slowly over the remainder of the

decade. Thus, there is no fear of debt unsustainability.

25 August 2020

Conclusions

Overall, the Indian government has been criticized for not doing enough to support

the vulnerable sections of society during the pandemic. As we have argued

earlier

well, just because some other nations have implemented a large fiscal stimulus does

not mean India should follow suit. Any government with chronic fiscal deficit and

high debt has very limited capabilities v/s those with low debt or fiscal surplus. Even

without substantial stimulus, Indian public finances are likely to deteriorate

significantly, which we have discussed in this note. To conclude, we highlight five

key takeaways:

The faster the fiscal

consolidation happens, the

lower the government debt

would be, but the slower

the growth in fiscal

spending would be, and

vice-versa.

Unless private spending

picks up strongly, real

GDP growth in the next

decade would be

slower (such as 5–6%

v/s 7% in the 2010s

decade).

1) After falling only marginally to 66.6% of GDP in FY15 from 67.6% in FY11, India’s

general government debt is estimated to have risen to 75% of GDP in FY20. We

expect India’s government debt to reach 91% of GDP for the first time ever in

FY21 and peak at 91.3% of GDP in FY22. Thereafter, decline is expected to be

gradual to avoid strong adverse impact on GDP growth, and the government

debt-to-GDP ratio could be ~80% of GDP by the end of the 2020s decade.

Moreover, it may take another decade (or even more) to fall to 60% of GDP –

the target the government had hoped to achieve by FY25 a few years ago.

2) One of the key implications of this sudden surge in the government debt-to-GDP

ratio would be the government’s limited ability to support economic activity

over the next decade. Assuming a gradual fall in the debt-to-GDP ratio, as

mentioned in #1, the government’s primary spending is projected to grow ~7%

over the 2020s decade, lower than 11.3% in the previous decade and marking

the slowest growth in any decade since the 1970s. The faster the fiscal

consolidation happens, the lower the government debt would be, but the

slower the growth in fiscal spending would be, and vice-versa.

3) Moreover, if primary spending growth slows, it is quite apparent that the

government would not be able to grow its investments (capital outlays) at the

same pace as it has done in the past decade. Since the large part of non-interest

revenue spending (such as defense, salary & wages, pensions, etc.) is fixed or

non-discretionary in nature, there is a high possibility that fiscal investments

would grow even slower in the 2020s decade. Either the government would

have to rationalize its spending or the idea of government investments growing

decently in the 2020s decade would remain a distant dream.

4) Very importantly, although the government debt-to-GDP ratio is expected to

remain high, there is no fear of debt unsustainability (or debt spiraling out of

control).

5) Finally, unless private spending picks up strongly, real GDP growth in the next

decade would be slower (such as 5–6% v/s 7% in the 2010s decade).

Among all these issues, one really wonders about the government’s capability to

implement a large fiscal stimulus. However, this does not imply that there should be

no fiscal support. As we had discussed in detail

earlier,

GoI needs to stimulate only

those vulnerable sections that are the worst affected, and this would not cost the

government more than 2% of GDP.

25 August 2020

NOTES

25 August 2020

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

*In

case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30

days take appropriate measures to make the recommendation consistent with the investment rating legend.

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).

Motilal Oswal Financial Services Ltd. (MOFSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOFSL, the Research Entity (RE) as defined in the Regulations,

is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial products. MOFSL is a subsidiary

company of Passionate Investment Management Pvt. Ltd.. (PIMPL). MOFSL is a listed public company, the details in respect of which are available on

www.motilaloswal.com.

MOFSL

(erstwhile Motilal Oswal Securities Limited - MOFSL) is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock Exchange of

India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Multi Commodity Exchange of India Limited (MCX) and National Commodity & Derivatives Exchange Limited (NCDEX) for its

stock broking activities & is Depository participant with Central Depository Services Limited (CDSL) National Securities Depository Limited (NSDL),NERL, COMRIS and CCRL and is member

of Association of Mutual Funds of India (AMFI) for distribution of financial products and Insurance Regulatory & Development Authority of India (IRDA) as Corporate Agent for insurance

products. Details of associate entities of Motilal Oswal Financial Services Limited are available on the website at

http://onlinereports.motilaloswal.com/Dormant/documents/Associate%20Details.pdf

Details of pending Enquiry Proceedings of Motilal Oswal Financial Services Limited are available on the website at

https://galaxy.motilaloswal.com/ResearchAnalyst/PublishViewLitigation.aspx

MOFSL, it’s associates, Research Analyst or their relative may have any financial interest in the subject company. MOFSL and/or its associates and/or Research Analyst may have

actual/beneficial ownership of 1% or more securities in the subject company in the past 12 months.

MOFSL and its associate company(ies), their directors and Research Analyst and their

relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in

any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as

an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.;

however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of

the views of the associates of MOFSL even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

Research Analyst may have served

as director/officer, etc. in the subject company in the past 12 months. MOFSL and/or its associates may have received any compensation from the subject company in the past 12 months.

In the past 12 months , MOFSL or any of its associates may have:

managed or co-managed public offering of securities from subject company of this research report,

received compensation for investment banking or merchant banking or brokerage services from subject company of this research report,

received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company of this research report.

Subject Company may have been a client of MOFSL or its associates in the past 12 months.

MOFSL and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. To enhance transparency,

MOFSL has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. MOFSL and / or its

affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report should be aware that MOFSL may

have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or

brokerage service transactions. Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only. While calculating beneficial

holdings, It does not consider demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income

from clients which are not considered in above disclosures. Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only.

While calculating beneficial holdings, It does not consider demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.).

MOFSL also earns DP income from clients which are not considered in above disclosures.

Terms & Conditions:

This report has been prepared by MOFSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be

altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of MOFSL. The report is

based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from

publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made

as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not

constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers

simultaneously, not all customers may receive this report at the same time. MOFSL will not treat recipients as customers by virtue of their receiving this report.

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research

analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

Disclosure of Interest Statement

Companies where there is interest

Analyst ownership of the stock

A graph of daily closing prices of securities is available at

www.nseindia.com, www.bseindia.com.

Research Analyst views on Subject Company may vary based on Fundamental research and

Technical Research. Proprietary trading desk of MOFSL or its associates maintains arm’s length distance with Research Team as all the activities are segregated from MOFSL research activity

and therefore it can have an independent view with regards to subject company for which Research Team have expressed their views.

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use

would be contrary to law, regulation or which would subject MOFSL & its group companies to registration or licensing requirements within such jurisdictions.

For Hong Kong:

This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities

and Futures Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal

Oswal Financial Services Limited(SEBI Reg No. INH000000412) has an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Hong

Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is

only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction

where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in

Hong Kong.

Expected return (over 12-month)

>=15%

< - 10%

> - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

25 August 2020

For U.S:

Motilal Oswal Financial Services Limited (MOFSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state

laws in the United States. In addition MOFSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934

Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by

MOFSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as

defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on

by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in

only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and

interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOFSL has entered into a

chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be

executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered

broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading

securities held by a research analyst account.

For Singapore:

In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets services

license and an exempt financial adviser in Singapore,

as per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110)

provided to MOCMSPL by Monetary Authority of Singapore. Persons in Singapore should contact MOCMSPL in respect of any matter arising from, or in connection with this

report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of whom may consist of "accredited" institutional investors

as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such

Singapore Person must immediately discontinue any use of this Report and inform MOCMSPL.

Disclaimer:

The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or

distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose

and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes

investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions

expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific

recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems

necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its

own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those

involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty,

express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this

document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior

notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their

directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They

may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities

functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of

information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or may not

subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to

any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of

or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOFSL to any

registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in

whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall

be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

The person accessing this information specifically agrees to exempt MOFSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not

to hold MOFSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses,

costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263; Website

www.motilaloswal.com.

CIN No.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad(West), Mumbai- 400 064. Tel No: 022

7188 1000.

Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412. AMFI:

ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579 ;PMS:INP000006712. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration

No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:

INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond,

NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a group company of MOFSL. Private Equity is offered

through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL. Research & Advisory services is backed by proper research. Please read the Risk

Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in securities market is subject to market risk,

read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.

* MOFSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company

Law Tribunal, Mumbai Bench.

25 August 2020