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India Faces High Debt but Sustainable for Now: NCAER

  • July 4, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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India Faces High Debt but Sustainable for Now: NCAER

Sub: Economy

Sec: National Income

India’s public debt is very high, almost 82% of GDP, but the country doesn’t face a debt-sustainability issue due to its high growth rate and the higher share of local-currency debt, according to NCAER.

Key Points:

  • High Debt Levels:
    • Current Situation: India’s public debt stands at nearly 82% of GDP.
    • Sustainability: Despite high debt levels, the situation is sustainable for now because of higher real or nominal GDP and the fact that most of the debt is held in rupees.
  • State-Level Debt:
    • Proportion of Debt: States collectively hold one-third of the total debt.
    • Future Projections: In a ‘business-as-usual’ scenario, state debt levels are expected to increase over the next five years.
    • Example: In states like Punjab and Himachal Pradesh, the Debt-to-GDP ratio could increase by 50%.
  • Factors Supporting Debt Sustainability:
    • Implicit Guarantee: States, including the most indebted ones, do not face sustainability issues due to the implicit guarantee of the Centre.
    • Debt Characteristics: States cannot hold debt in foreign currency or at a floating rate, reducing associated risks.
  • Comparison of States:
    • Interest Rates: Most indebted states ironically fare better because the interest rate is similar for all states.
    • Debt Maturity: More indebted states often hold longer maturity debt and pay little premium.
  • Policy Recommendations:
    • Incentives for Prudent States: NCAER highlighted the need for more prudent states to receive a better deal as they are effectively subsidising the more indebted states.
    • Finance Commission’s Role: NCAER suggested that the Finance Commission should reward fiscally prudent states and incentivise profligate ones to become more fiscally responsible.

Summary: India’s public debt is high but sustainable due to its economic growth and local currency debt structure. State-level debt is projected to increase, but the implicit central guarantee and debt characteristics support sustainability. Policy changes are recommended to reward fiscally prudent states and promote fiscal responsibility among more indebted ones.

National Council for Applied Economic Research (NCAER)

  • Established: 1956
  • Nature: India’s oldest and largest independent, non-profit, economic policy research institute.
  • Function: Undertakes grant-funded research and commissioned studies for governments and industry. It is one of the few think tanks globally that also collect primary data.

Key Thematic Areas of Work:

  • Growth, Macro, Trade, and Economic Policy:
    • Focuses on macroeconomic stability, economic growth, trade policies, and overall economic policy formulation.
  • Investment Climate, Industry, Infrastructure, Labor, and Urban:
    • Analyzes the business environment, industrial performance, infrastructure development, labor markets, and urbanization.
  • Agriculture and Rural Development, Natural Resources, and Environment:
    • Studies agricultural policies, rural development strategies, sustainable use of natural resources, and environmental conservation.
  • Poverty, Equity, Human Development, and Consumers:
    • Investigates issues related to poverty alleviation, social equity, human capital development, and consumer behavior and protection.

Significance:

  • Independent and Non-Profit: NCAER operates independently without any profit motive, ensuring unbiased and rigorous research output.
  • Primary Data Collection: Unlike many think tanks, NCAER collects primary data, which enhances the accuracy and reliability of its research findings.
  • Policy Impact: The institute’s research supports informed policy-making that addresses India’s socio-economic challenges and fosters sustainable development.
economy India Faces High Debt but Sustainable for Now: NCAER

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