An ominous warning from American investor Jim Rogers: if India runs up debt, it’ll have a problem just like America did a few months ago. In the early months of 2023, there were headlines all over the place about how the US might be running out of cash as it neared its debt ceiling. “Is America going bankrupt?” was a common question asked to analysts.
Even now, America’s debt load is growing further.
In fact, Elon Musk said on Twitter just recently that the US would go bankrupt soon if they didn’t stop overspending. But where exactly does India stand on debt? Let’s understand in four points:
Why Had India’s Debt Run Up?
Why had India’s debt run up in the first place? Essentially, the government’s borrowings from markets through issuing bonds shot up during COVID because their expenditures mounted and revenues were drying up.
This resulted in a fiscal deficit of 99.2% of GDP in 2020-21. The government’s gross borrowings jumped 77% since the government announced the stimulus package to aid the economy.
Modi’s Perspective on Government Debt
Ratings agency Modi seems to echo this view that the government debt needs to be reduced aggressively.
According to a Reuters interview, Modi’s analysts say that while India’s fiscal deficit target for 2025-26 is reasonable, an aggressive reduction in government debt would benefit a sovereign rating.
They say that interest payments account for a very high share of government revenue but do little to promote economic growth.
Also, India’s government debt is higher than similarly rated peers.
Importance of Faster Debt Reduction
A faster reduction of debt is important because the interest burden of the government is now 11.62 lakh crore rupees.
25% of the additional increase in expenditure of the government is only due to interest liability.
Government’s Response to the Debt Issue
Fourth and most important, the government is aware of the problem and is working towards it.
In the budget speech, Finance Minister Nirmala Sitharaman indicated a transition from using just the fiscal deficit as a measure of fiscal health to the debt-to-GDP ratio being the anchor of fiscal management.
She reiterated the center’s commitment to scale down the fiscal deficit target below 4.5% of GDP by 2025-26 and said that from the year after, the effort will be to keep the deficit such that debt as a percentage of GDP will be on a declining path.