Three ways to deal with the high govt debt
- February 5, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Three ways to deal with the high govt debt
Subject: Economy
Section: External Sector
Context:
- The Narendra Modi-headed National Democratic Alliance (NDA) government will end its second term with overall public debt in excess of 80% of India’s gross domestic product (GDP) at current market prices.
More on news:
- According to International Monetary Fund (IMF) data, general government debt – the combined domestic and external liabilities of both the Centre and the states – touched 84.4% of GDP in 2003-04.
- That ratio fell to a low of 66.4% in 2010-11.
- It rose gradually to 7% in 2013-14 and 70.4% in 2018-19.
- The present government’s second innings saw the debt-GDP ratio soar to 75% in 2019-20 and peak at 88.5% in 2020-21, before easing to 83.8% and 81% in the following two fiscal years (April-March).
- The IMF has projected the ratio at 82% in the current fiscal and 4% for 2024-25, which is still close to the high levels of the early 2000s.
- General government debt climbed from 7% of GDP in 2019 to 133.5% in 2020 and 121.4% in 2022 for the US; from 97.4% to 115.1% and 111.7% for France; from 85.5% to 105.6% and 101.4% for the United Kingdom; and from 60.4% to 70.1% and 77.1% for China during these years.
What public debt entails:
- Government debt is basically the outstanding domestic and foreign loans raised by the Centre and states.
- It includes other liabilities, including against small savings schemes, provident funds and special securities issued to the Food Corporation of India, fertilizer firms and oil marketing companies – on which they have to pay interest and the principal amounts borrowed.
- As per the Fiscal Responsibility and Budget Management (FRBM) law 2003, the general government debt was supposed to be brought down to 60% of GDP by 2024-25.
- The Centre’s own total outstanding liabilities were not to exceed 40% within that time schedule.
- In absolute terms, the Centre’s total liabilities have more than doubled from Rs 90.84 lakh crore to Rs 183.67 lakh crore between 2018-19 and 2024-25.
- There is a decline in the interest-to-GDP ratio from a high of 4.7% in 2002-03 to 3.1% by 2010-11.
- The ratio more or less stabilized at 3-3.1% till 2019-20, before surging to 3.4% in 2020-21 and 3.6% in the current and ensuing fiscal
Why has debt spiralled?
- The most obvious reason is the Covid-induced disruptions that forced governments to borrow more in order to fund additional public health and social safety net expenditure requirements.
- The combined gross fiscal deficit of the Centre and the states i.e. the gap between their total spending and revenue receipts went up from 8% and 7.2% of GDP in 2018-19 and 2019-20 respectively, to 13.1% and 10.4% in the next two fiscals.
- The Centre’s fiscal deficit alone increased from 4% of GDP in 2018-19 to 4.6% in 2019-20, 9.2% in 2020-21 and 6.8% in 2021-22.
- The present government, apart from spending more on income and consumption support schemes, also stepped-up public investments in roads, railways and other infrastructure.
- The Centre’s capital expenditure has dropped from 3.9% to 1.5% of GDP between 2003-04 and 2017-18.
- It revived significantly thereafter to reach2% in 2023-24 and 3.4% in the Interim Budget for 2024-25.
How can debt be reined in?
- The FRBM Act envisaged limiting the Centre’s gross fiscal deficit to 3% of GDP by 2020-21.
- The present government has opted for a new broad “glide path” of fiscal consolidation.
- As per Union Budget speech 2021-22 which aims to attain a fiscal deficit-to-GDP ratio of “below 4.5%” by 2025-26.
- While fiscal consolidation can ensure a check on borrowings and not too much being added to the stock of government debt relative to GDP – the IMF has warned against crossing the 100% mark.
- There are two other routes as well for bringing the latter down.
- That would involve what one may call the denominator effect.
- Government debt and fiscal deficits are usually quoted as ratios to GDP at current market prices.
- High nominal GDP growth where the denominator rises faster than the numerator helps in some way in solving the government’s debt problem.
- GDP growth, in turn, can come from both real output increases and inflation.
- The second and third way to drive down the government debt-to-GDP ratio is to “grow” or “inflate” it away.
- This actually happened during 2003-04 to 2010-11 when general government debt plunged from 84.4% to 66.4% of GDP.
- However, this period incidentally, also witnessed an average annual GDP growth of 7.4% in real and 15%-plus in nominal terms after adding inflation.