Hindu Editorial Analysis : 29-November-2024

India’s debt-to-GDP ratio has become a growing concern in recent years, surpassing global and emerging market averages. This increase in debt poses a challenge to the country’s economic stability and long-term growth. Both the Central and State governments need to take concerted efforts to manage this growing burden effectively.

India’s Debt-to-GDP Ratio: A Rising Trend

As of 2024, India’s debt-to-GDP ratio stands at approximately 83.1%. This is a significant rise from 69% in 2018, with the ratio reaching a peak of 90% during the pandemic. The surge in public debt was primarily due to increased government spending aimed at mitigating the economic impact of COVID-19.

  • Central Government Debt: The Central government’s debt reached ₹173 lakh crore in March 2024, more than double its ₹86 lakh crore debt in 2020. It is expected to rise to ₹181.6 lakh crore by March 2025.
  • State Government Debt: State governments account for about 33% of India’s total public debt, with their liabilities reaching ₹82.2 lakh crore at the end of FY24.

Comparison with Global Debt Levels

Globally, public debt has risen significantly, with the global debt-to-GDP ratio increasing from 83.9% in 2019 to 93.2% in 2024. India’s debt-to-GDP ratio is higher than the average for emerging markets, which stands at around 70%. However, it is still lower than advanced economies like the United States (121%) and Japan (251%).

Factors Contributing to India’s Debt Levels

Several factors contribute to India’s rising debt:

  • Fiscal Deficit: The fiscal deficit for 2024-25 is projected at 4.9% of GDP, showing the gap between government spending and revenue.
  • High Borrowings: Governments borrow to cover the deficit, and a large portion of the debt is used to pay interest on previous borrowings.
  • Pandemic Response: The COVID-19 pandemic forced the government to borrow more to finance healthcare and social safety nets.
  • Declining Tax Revenue: Tax revenue has been insufficient to meet rising expenditures, leading to increased borrowing.

Consequences of High Debt

High debt levels have several negative consequences:

  • Higher Borrowing Costs: The government may face higher interest rates when borrowing more.
  • Currency Instability: A high debt-to-GDP ratio can lead to instability in the currency markets.
  • Reduced Government Spending: With a higher proportion of funds going toward servicing debt, the government may reduce spending on essential services.

Managing India’s Debt-to-GDP Ratio

To ensure long-term economic stability, the government needs to adopt policies to manage public debt effectively:

  1. Fiscal Consolidation: Reducing the fiscal deficit is key. The government plans to reduce the fiscal deficit to 4.5% of GDP by 2025-26.
  2. Public-Private Partnerships (PPP): Encouraging PPPs can reduce the financial burden on the government by leveraging private sector investment.
  3. Enhancing Revenue: Increasing revenue through better tax compliance and reforms in the GST system can help meet expenditure needs without borrowing excessively.
  4. Rationalizing Expenditure: Focusing on essential expenditures and cutting non-essential spending will help manage the fiscal deficit.
  5. Structural Reforms: Implementing long-term economic reforms can boost growth and reduce debt over time.

Policy Recommendations for Sustainable Debt Management

To tackle the growing debt burden, the following policy recommendations are crucial:

  • Improved Tax Collection: Strengthening the GST system and improving tax compliance can help increase government revenue.
  • Expenditure Rationalization: Prioritizing essential spending and reducing inefficiencies can help lower the fiscal deficit.
  • Reinforcing Fiscal Responsibility: Strengthening the Fiscal Responsibility and Budget Management (FRBM) Act to set clear fiscal targets will ensure more disciplined fiscal management.

Why In News

India’s debt-to-GDP ratio has been a growing concern, surpassing both global and emerging market averages, and reflecting the strain on the country’s fiscal health. Addressing this issue requires a concerted effort from both the Central and State governments, along with targeted economic reforms, to ensure long-term economic stability and sustainable growth. This collective approach is crucial to managing the rising debt burden while fostering an environment of fiscal discipline and economic resilience.

MCQs about India’s Growing Debt-to-GDP Ratio: Challenges and Solutions

  1. Which of the following is a major consequence of a high debt-to-GDP ratio?
    A. Increased government savings
    B. Reduced borrowing costs
    C. Higher borrowing costs and inflation expectations
    D. Decreased government expenditure
    Correct Answer: C. Higher borrowing costs and inflation expectations
    Explanation: High debt levels can lead to higher borrowing costs as lenders may demand higher interest rates due to the increased risk. It can also raise inflation expectations, reducing confidence in the economy.
  2. Which of the following factors contributed most to the rise in India’s public debt?
    A. Decline in tax revenue
    B. Increased government spending due to the COVID-19 pandemic
    C. Higher interest rates
    D. Reduced public-private partnerships (PPP)
    Correct Answer: B. Increased government spending due to the COVID-19 pandemic
    Explanation: The surge in public debt was primarily driven by increased government spending during the pandemic, including funds for healthcare and social safety measures, which significantly impacted the overall debt levels.
  3. What is the projected fiscal deficit for India in the year 2024-25?
    A. 3.0% of GDP
    B. 4.5% of GDP
    C. 4.9% of GDP
    D. 6.0% of GDP
    Correct Answer: C. 4.9% of GDP
    Explanation: The fiscal deficit for 2024-25 is projected to be 4.9% of GDP, which reflects the gap between government expenditure and revenue.
  4. Which of the following is a key recommendation for managing India’s rising debt-to-GDP ratio?
    A. Decreasing government spending on infrastructure
    B. Encouraging public-private partnerships (PPPs)
    C. Cutting all social welfare programs
    D. Reducing tax compliance efforts
    Correct Answer: B. Encouraging public-private partnerships (PPPs)
    Explanation: One of the key recommendations for managing India’s rising debt-to-GDP ratio is to encourage public-private partnerships (PPPs). These can help reduce the financial burden on the government by leveraging private sector investments for infrastructure projects.

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