India's fiscal deficit and public debt have been a concern, even before the COVID-19 pandemic, with debt levels among the highest in developing countries and emerging markets.
Due to the pandemic, the fiscal deficit in 2020-21 increased to 13.3% and the aggregate public debt to 89.6% relative to GDP.
As the economy recovered, the deficit and debt ratios decreased to 8.9% and 85.7%, respectively.
Projections suggest that the debt level is unlikely to return to pre-pandemic levels in the medium term, and the electoral budget cycle could further push the debt ratio, raising questions about its sustainability.
High deficits and debt have various consequences, including crowding out essential expenditures on infrastructure, human development, and green transition priorities.
The debt market in India is mainly captive, leading to constraints on lending to the manufacturing sector and increased borrowing costs for the government.
Achieving the recommended debt-to-GDP ratio of 58.2 would be unfeasible in the medium term.
Fiscal consolidation is crucial, and policy interventions should rethink the role of the state, focus on disinvestment, and enforce hard budget constraints to manage the debt burden effectively.
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