Consider the following statements about Interest rate growth rate differential (IRGD):
1. Positive IRGD facilitates debt sustainability of the country.
2. India’s IRGD has remained positive in recent decades.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Explanation
The Interest Rate–Growth Rate Differential (IRGD) is defined as the difference between the average interest rate paid on public debt and the nominal GDP growth rate of the country. It is an important indicator in assessing debt sustainability.
Statement 1 is not correct: A negative IRGD means the growth rate exceeds the interest rate. Negative IRGD can facilitate debt sustainability. A positive IRGD implies that the interest rate is higher than the growth rate, which worsens the debt-to-GDP ratio over time, making debt less sustainable.
Statement 2 is not correct: Since the interest rate on debt paid by the Indian Government has been less than India’s growth rate, India’s IRGD remained negative in the last decade. As the IRGD is expected to be negative in the foreseeable future for India, it shows India’s debt sustainability.
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