Ways to Deal with the High Govt Debt

What’s in today’s article?

• Why in News?
• What Government/ Public Debt Entails?
• Data Related to the Public Debt in India
• Why has India’s Public Debt Spiraled?
• Scenario in Other Economies
• Ways to Deal with the High Govt Debt

Why in News?

• The 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.

What Government/ Public Debt Entails?

• Government debt is basically the outstanding domestic and foreign loans (plus other liabilities) raised by the Centre and states (to meet its development expenditure) - on which they have to pay interest and the principal amounts borrowed.
• It is measured by the debt-to-GDP ratio, which is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year).
• As per the Fiscal Responsibility and Budget Management (FRBM)Act 2003,
  • The general government debt (Centre + states) 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.

Data Related to the Public Debt in India

• According to the International Monetary Fund (IMF), 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 and rose gradually to 67.7% in 2013-14 and 70.4% in 2018-19.
• The debt-GDP ratio soars to 75% in 2019-20 and peaks at 88.5% in 2020-21, before easing to 83.8% and 81% in the following two fiscal years (April-March).
• 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.
• The IMF has projected the ratio at 82% in the current fiscal and 82.4% for 2024-25, which is still close to the high levels of the early 2000s.

Why has India’s Public Debt Spiraled?

• The most obvious reason is the Covid-induced disruptions that forced governments to borrow more - to fund additional public health and social safety net expenditure requirements - amid a drying up of revenues.
• The Indian 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 dropped from 3.9% to 1.5% of GDP between 2003-04 and 2017-18.
  • It revived significantly thereafter to reach 3.2% in 2023-24 and 3.4% in the Interim Budget for 2024-25.
• All these widened the deficits and only added to debt. For example, the Centre’s fiscal deficit alone increased from 3.4% of GDP in 2018-19 to 4.6% in 2019-20, 9.2% in 2020-21 and 6.8% in 2021-22.

Scenario in Other Economies

• India was no exception though. Most countries sought to mitigate the impact of the pandemic through fiscal stimulus and relief programmes.
• General government debt climbed from 108.7% 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; and 60.4% to 70.1% and 77.1% for China during these years.

Ways to Deal with the High Govt Debt

• The FRBM Act envisaged limiting the Centre’s gross fiscal deficit to 3% of GDP by 2020-21.
  • The Union Budget 2021-22, announced to attain a fiscal deficit-to-GDP ratio of “below 4.5%” by 2025-26.
  • But given the high post-pandemic starting points in 2020-21 and 2021-22, the deficit ratios of “below 4.5%” by 2025-26 will be difficult to achieve.
• 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.
  • This means, high nominal GDP growth - the denominator rising faster than the numerator - can go some way in solving the government’s debt problem.
  • GDP growth can be driven by both increases in real output and inflation.
  • This actually happened during 2003-04 to 2010-11, when India witnessed an average annual GDP growth of 7.4% in real and 15%-plus in nominal terms after adding inflation.
• India probably needs a combination of both fiscal consolidation and growth (from output more than inflation) to deal with its current debt woes, which are also a result of Covid.

Q.1. What is the Fiscal Responsibility and Budget Management (FRBM) Act 2003?

The FRBM Act is an Act to institutionalise financial discipline, reduce India's fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence.

Q.2. Why is the rising public debt a cause of worry for India?

This increasing burden of public debt is a matter of concern because of mounting interest payments on the government, sovereign debt crisis, inflationary pressure, crowding out effect, the burden on future generations, etc.

Source: Three ways to deal with the high govt debt