Debt Metrics

• 11 Apr 2025

Source: IE 

Why in News? 

Household debt in India rose from 36.6% of GDP to 42.9% between June-2021 and June 2024, signaling a macroeconomic shift and underscoring the need to examine key debt metrics such as Debt-to-GDP ratio, public debt, and internal vs external debt. 

What are the Key Debt Metrics? 

• Debt-to-GDP Ratio: 
  • It is the ratio of a country’s total debt to its Gross Domestic Product (GDP). 
  • It indicates the country’s ability to repay its debt. A high ratio suggests a potential risk to fiscal sustainability, while a moderate ratio is manageable if economic growth is strong. 
  • India's Context: For the central government, the debt-to-GDP ratio is estimated to be 57.1% in 2024-25 and 56.1% in 2025-26. 
    • Government aims to bring it down to 50 ± 1% by 2030–31. 
    • State governments account for nearly one-third of total public debt and contributed to over 50% of the rise in overall public debt between 2014-15 and 2019-20. 
• Public Debt: 
  • About: Public debt refers to the total liabilities incurred by the government to finance its developmental and fiscal needs.  
    • It is repaid from the Consolidated Fund of India and includes both internal and external borrowings. 
  • Constitutional Basis: As per Article 292 of the Constitution, the Union government defines public debt as liabilities contracted against the Consolidated Fund of India within such limits, if any, as may be fixed by Parliament by law. 
  • Classification:  
    • Debt under the Consolidated Fund of India (includes market borrowings like G-Secs and T-Bills). 
    • Public Account Liabilities (like provident funds, small savings, etc.). 
• Internal vs External Debt: 
  • Internal Debt refers to public loans raised within the country, primarily from domestic sources like individuals, banks, and financial institutions. It is denominated in Indian Rupees. 
    • It forms over 93% of the centre's public debt and is divided into marketable (G-Secs, T-Bills) and non-marketable (special securities, etc.). 
  • External debt refers to the obligations of the country to foreign governments, international institutions, or foreign investors, usually denominated in foreign currencies. 
    • It includes loans from foreign sources and multilateral institutions. 
    • The external debt to GDP ratio stood at 19.4% as of September 2024. 

Key Provisions Related to Debt Management in India:  

• Article 292 & 293: 
  • Article 292: Allows the Union government to borrow money on the security of the Consolidated Fund of India, within limits set by Parliament. 
  • Article 293: Enables State governments to borrow money domestically upon the security of the Consolidated Fund of the State, with prior Centre approval if they owe existing loans to the Union. 
• RBI Act, 1934: RBI Act, 1934 authorizes the Reserve Bank of India to manage public debt on behalf of the Central Government. 
• FRBM Act, 2003: The FRBM Act, 2003 aims to institutionalize fiscal discipline, reduce fiscal deficits, and ensure long-term macroeconomic stability by setting targets for deficits, enhancing transparency, and ensuring timely fiscal reporting. 

Factor	Effect on Public Debt	Explanation
Fiscal Deficit Increase	Increase	A higher fiscal deficit requires borrowing to meet the gap between revenue and expenditure.
Revenue Increase (Taxes)	Decrease	Higher revenue reduces the need for borrowing and public debt.
Expenditure Increase (e.g., Welfare Schemes)	Increase	Increased government spending leads to higher borrowing to finance the deficit.
Interest Rate Increase	Increase	Higher interest rates increase the cost of servicing debt, leading to more borrowing or higher debt.
Privatization/Asset Sales	Decrease	Proceeds from asset sales can reduce the fiscal deficit and thus lower the need for borrowing.
Foreign Borrowing	Increase	Borrowing from foreign sources increases external debt.
Currency Depreciation	Increase	Depreciation increases the cost of repaying foreign-denominated debt, leading to higher overall debt.

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Prelims:

Q. Consider the following statements: (2018)

1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments. 
2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments. 
3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter. 

Which of the statements given above is/are correct? 

(a) 1 only 
(b) 2 and 3 only 
(c) 1 and 3 only 
(d) 1, 2 and 3 

Ans: C