Indian Economy
India’s Public Debt Ratio
- 15 Oct 2020
- 4 min read
Why in News
As per the International Monetary Fund (IMF), India’s public debt ratio is projected to jump by 17 percentage points to almost 90% because of an increase in public spending due to Covid-19.
- India’s public debt ratio has remained stable at about 70% of the Gross Domestic Product (GDP) since 1991.
Key Points
- Increase in Public Debt Ratio:
- The increase in public spending, in response to Covid-19, and the fall in tax revenue and economic activity, will make the public debt ratio jump by 17 percentage points.
- The ratio is projected to stabilise in 2021, before slowly declining up to the end of the projection period, in 2025.
- The pattern of public debt in India is close to the norm around the world.
- This debt-to-GDP ratio is the metric comparing a country's public debt to its Gross Domestic Product (GDP). It is often expressed as a percentage.
- By comparing what a country owes (debt) with what it produces (GDP), the debt-to-GDP ratio reliably indicates a particular country’s ability to pay back its debts.
- A country with a high debt-to-GDP ratio typically has trouble paying off public debts.
- Assessment of Fiscal situation (relating to taxation, public spending, or public debt):
- India has been an important source of growth in the world since the 1991 economic liberalisation reforms.
- Real GDP growth averaged 6.5% between 1991 to 2019, and real GDP per capita was multiplied by four over that period.
- Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices.
- This impressive growth performance helped lift millions of people out of extreme poverty.
- The extreme poverty rate, measured as the proportion of people whose income is less than $1.90 a day at purchasing power parity (the international poverty line), fell from 45% in 1993 to 13% by 2015.
- India achieved the millennium development goal of halving poverty by 2015 (from its 1990 level).
- India has made astonishing progress in other areas. Education enrollment is nearly universal for primary school. Infant mortality rates have been halved since 2000. Access to water and sanitation, electricity, and roads has been greatly improved.
Way Forward
- In the near-term, additional fiscal action should be deployed as needed to support the poor and the vulnerable. This should be accompanied by a credible medium-term fiscal consolidation plan that can reinforce market confidence and structural reforms that boost India's growth potential.
- The effects of Covid-19 on health, education, poverty and nutrition render progress towards the Sustainable Development Goals even more urgent. Macroeconomic and financial stability are important necessary conditions for sustainable development.
