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India’s growing Debt UPSC NOTE

 India’s growing Debt

Challenges India faces regarding its growing public debt

  • Apart from managing public debt deftly, India faces challenges in enhancing its credit ratings

  • Elevated debt levels and substantial costs associated with servicing debt impact credit rating.

  • Even with the tag of being the fastest-growing major economy, sovereign investment ratings for India have remained the same for a long time.

  • Both Fitch Ratings and S&P Global Ratings have kept India’s credit rating unchanged at ‘BBB- with stable outlook’ since August 2006. 

  • It should be noted that BBB- is the lowest investment grade rating

  • Though one could raise methodological issues and biases on the rating process.

  • The rating agencies believe that India’s stronger fundamentals are undermined by the government’s weak fiscal performance and burdensome debt stock

  • India’s low per capita income is a major factor that pulls down score in the sovereign rating.

  • The Union government’s debt was ₹155.6 trillion, or 57.1% of GDP.

  •  This is as per the  end of March 2023 and the debt of State governments was about 28% of GDP. 

  • As stated by the Finance Ministry, India’s public debt-to-GDP ratio has barely increased from 81% in 2005-06 to 84% in 2021-22, and is back to 81% in 2022-23. 

  • The way higher than the levels specified by the Fiscal Responsibility and Budget Management Act (FRBMA). 

  • The 2018 amendment to the Union government’s FRBMA specified debt-GDP targets for the Centre, States and their combined accounts at 40%, 20% and 60%, respectively.

  • Adding to this are the emerging worrying signs on the fiscal front. 

  • Despite handsome growth in tax collections, there is the possibility of fiscal slippage in FY24, according to a report by India Ratings and Research (IR&R)

  • IR&R attributes this to higher expenditure on employment guarantee schemes and subsidies.

  • They state that budgeted fertilizer subsidy of ₹44,000 crore was almost over by end-October 2023 and the Union government has now increased it to ₹57,360 crore

  • Similarly, due to sustained demand for employment under MGNREGA, a sum of ₹79,770 crore has already been spent till December 19, 

2023, as against the budgeted ₹60,000 crore and an additional sum of ₹14,520 crore has been allocated. 

  • Increased subsidies do not come as a surprise as the country is heading for general elections next year, but the MNREGA outlay increase raises questions about employment growth and livelihoods in rural areas. 

  • Though the IMF’s debt projections could be viewed as worst-case scenarios of the medium term, the short-term challenge of sticking to the fiscal correction path in an election year might go a long way towards avoiding worst-case scenarios.

IMF's Concerns about India's Debt Sustainability

  • The IMF, in the report, states that India’s government debt could be 100% of GDP under adverse circumstances by fiscal 2028

  • According to them, “Long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets and improve resilience to climate stresses and natural disasters. 

  • This suggests that new and preferably concessional sources of financing are needed, as well as greater private sector investment and carbon pricing or equivalent mechanism.” 

  • The Finance Ministry refutes IMF projections as “a worst-case scenario and is not fait accompli”.

  • There are no two arguments on the fact that government borrowings can play a vital role in accelerating development. 

  • However, the weight of debt can act as a drag on development due to limited access to financing, rising borrowing costs, currency devaluations and sluggish growth. 

  • As noted by the United Nations, “Countries are facing the impossible choice of servicing their debt or serving their people.” 

  • According to the UN in 2022, 3.3 billion people live in countries that spend more on interest payments than on education or health.

  • Global public debt has increased more than fourfold since 2000, while global GDP only tripled. 

  • In 2022, global public debt reached a record USD 92 trillion

  • Developing countries accounted for almost 30% of the total, of which roughly 70% is attributable to China, India and Brazil. 

  • Public debt has increased faster in developing countries compared to developed countries over the last decade. 

  • The rise of debt in developing countries is due to growing development financing needs, the cost-of-living crisis, and climate change. 

  • As a result, the number of countries facing high levels of debt increased from 22 in 2011 to 59 in 2022.

  • Further, the burden of debt is asymmetric between developed and developing countries as the latter have to pay higher interest rates. 

  • This undermines debt sustainability of developing countries, as the number of countries where interest spending represents 10% or more of public revenues increased from 29 in 2010 to 55 in 2020. 


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: India’s growing Debt UPSC NOTE
India’s growing Debt UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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