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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.
