India’s Public Debt

Context: At the start of 2023, experts at the World Economic Forum warned that the global rise in public debt was a ‘fiscal ticking bomb’. About Public Debt:
  • It refers to the total amount of money that a government owes to external creditors and domestic lenders.
  • It is the accumulation of borrowing by a government over time to cover budget deficits or finance various projects and programs.
General government debt-to-GDP ratio
  • It measures the gross debt of the general government as a percentage of GDP.
  • It is a key indicator for the sustainability of government finance.
Reasons for rise in Indebtedness:
  • First, governments around the world unleashed fiscal stimuli to support their economies during the pandemic.
  • Second, as the pandemic receded, a steep rise in interest rates increased the costs of servicing debt.
Forecast About India’s Public Debt:
  • India’s public debt is not expected to fall in the medium term, because budgetary revenues are unlikely to meet its growing funding needs, thus ensuring that the government will remain a large and consistent borrower.
  • Yet India’s debt is considered to be sustainable, meaning that it is expected to meet its current and future debt obligations without default.
Tenor Matters:
  • India’s public debt is dominated by loans with long tenor and fixed-rate coupons.
Sustainability Strategy:
  • Public Debt is said to be sustainable if it increases at a stable or declining rate.
  • India’s GDP growth has usually been higher than the government borrowing rate. The growth-interest differential remained positive even when rates went up in 2022. However, keeping a lid on primary deficit is much harder. The International Monetary Fund estimates India’s debt-stabilizing primary deficit at 2.3% of GDP, but the deficit was a whopping 4.6% in 2021-22.

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