Growth in government debt of India

  • June 16, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Growth in government debt of India

Subject : Economy

Section: Fiscal Policy

Key points:

  • From 2014 to 2022 the government’s debt has increased from ₹55-lakh crore to ₹155-lakh crore.
  • India’s government debt as a proportion of GDP has remained relatively stable at around 82% in 2023 up from 81% in 2005. (the FRBM Act 2003 mandates Debt Ceilings of 60% for general government and 40% for the Central government)
  • It is expected to follow a declining trend if India’s GDP continues to expand at a rapid pace. (nominal rate of 11% and above).
  • Arguments in favor of India’s public debt management:
    • The rise in public debt has been conservative.
    • Government debt increase is necessary in a period when the private sector is recovering its balance sheet after a phase of over-borrowing.
    • Government expenditure when in infrastructure and other capital asset building helps ‘crowd in’ private investment.
  • Factors against high level of public debt:
    • Debt affordability: The general government interest payments as a percentage of revenues indicate debt affordability. For India at 26%, it indicates a low level of debt affordability. (It is around 8.4% for countries with Moody’s Baa rating)
    • High level of debt: India’s general government debt is considered to be relatively high at around 8% of GDP (It is around 56% for countries with Moody’s Baa rating)
    • Reduced Fiscal capacity: The high proportion of revenue going towards interest payments reduces the funds for developmental activities. In addition it reduces the capacity of the government to respond to the next economic shock/crisis.
    • Sustainability of debt: Rise in primary deficit and deterioration in interest rate growth differential, since 2019 cast doubts on debt sustainability of India.
  • Way ahead:
    • High growth can support and help reduce a high public debt. Generally this capacity to support public debt is seen in how high the interest rate-growth differential
    • To increase debt affordability, tax buoyancy needs to be improved along with expansion of the tax base.
India’s Debt profile

  • The total general (Centre+States) government debt stands at ₹155-lakh crore.
  • About 29.6 % of the outstanding dated securities have a residual maturity of less than 5 years, this has increased in recent years.
    • The implication of short-term debt (less than one-five years) is the immediate refinancing risks.

External debt:

  • $613.1 billion
  • The share of short-term debt, with maturity of up to one year, in total external debt is around 21%
economy Growth in government debt of India