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Sambhav-2025

  • 28 Feb 2025 GS Paper 3 Economy

    Day 77: India’s increasing public debt has raised concerns about future fiscal sustainability. How can India manage rising public debt while sustaining its developmental goals? (150 words)

    Approach

    • Briefly introduce the concept and objectives of Public Debt in India.
    • Discuss the key concerns for Public Debt Management in India.
    • Suggest Strategies for Sustainable Debt Management.
    • Conclude suitably.

    Introduction

    Public debt is the government's total borrowing from domestic and external sources, measured as the debt-to-GDP ratio. It funds developmental programs but, if excessive, can threaten fiscal sustainability, requiring a balance between debt management and growth.

    Body

    Challenges of Rising Public Debt :

    • Burgeoning Public Debt Levels in India: As per the Reserve Bank of India (RBI), India’s general government debt stood at 81% of GDP (2023-24), exceeding the FRBM target of 60%
    • High Debt Servicing Burden – Interest payments accounted for 41% of net tax revenue in FY 2023-24, reducing fiscal space for infrastructure, healthcare, and education.
    • Inflation & Interest Rate Risks – Persistent high debt may push inflation and increase borrowing costs, impacting private investment.
    • Crowding Out Effect – Excessive government borrowing can reduce credit availability for the private sector, hampering job creation.
    • Declining Revenue Mobilization – Tax-to-GDP ratio remains low at 11.1% (2022-23), affecting fiscal consolidation efforts.
    • External Debt Vulnerability – Though only 18.8% of India’s total debt is external, any depreciation of the rupee can increase repayment costs.

    Strategies for Sustainable Debt Management:

    • Enhancing Revenue Generation
      • Expanding GST coverage and improving compliance to boost indirect tax collection.
      • Strengthening direct tax reforms, including rationalizing tax exemptions and improving tax buoyancy.
      • Strategic disinvestment – FY 2023-24’s target was ₹51,000 crore, yet actual proceeds were lower, requiring efficiency.
    • Rationalizing Expenditure
      • Targeted subsidies instead of blanket subsidies; the Direct Benefit Transfer (DBT) system saved ₹2.7 lakh crore since its launch.
      • Curbing revenue expenditure while prioritizing capital spending on infrastructure and social sectors.
    • Public-Private Partnerships (PPPs) & Privatization
      • Encouraging PPPs in infrastructure to reduce direct government spending while enhancing service delivery.
      • Revitalizing the privatization agenda to improve efficiency in public enterprises.
    • Boosting Economic Growth & Productivity
      • Investing in human capital (education & skill development) to improve labor productivity.
      • Strengthening MSMEs and startups, which contribute 30% to GDP and 45% of exports, ensuring sustainable job creation.
      • Promoting manufacturing and exports through incentives like PLI schemes to enhance revenue generation.

    Conclusion

    The NK Singh Committee on FRBM had envisaged a debt-to-GDP ratio of 40% for the central government and 20% for states aiming for a total of 60% general government debt-to-GDP. By implementing structural reforms, boosting investments, and ensuring prudent fiscal management, India can sustain its development without compromising fiscal sustainability.

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