There is nothing to panic immediately about India’s current general government debt, for which the International Monetary Fund has warned that it may exceed 100 percent of the country’s gross domestic product (GDP) in the medium term, or by 2028. In its annual ‘Article IV’ consultation report, IMF said that long-term risks are high and stressed the need for “new and preferably concessional sources of financing.” Interestingly, K.V. Subramanian, India’s executive director at the IMF, said: “The risks from sovereign debt are very limited as it is predominantly denominated in domestic currency. Despite the multitude of shocks the global economy has faced in the last two decades, India’s public debt-to-GDP ratio has barely increased from 81 percent in 2005-06 to 84 percent in 2021-22 and back to 81 percent in 2022-23.” The IMF report carries his statement. The IMF visualized the global debt at US$97 trillion in 2023.
The IMF said India needs “ambitious” fiscal consolidation over the medium term to reduce its public debt. It said: “A sharp global growth slowdown in the near term would affect India through trade and financial channels. Further global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures for India. Domestically, weather shocks could ignite inflationary pressures and prompt further food export restrictions. On the upside, stronger than expected consumer demand and private investment would raise growth.” The IMF is absolutely right about the last part of its statement that constantly rising consumer demand in India is inducing higher production, supplies and investment. India’s import-led economy is somewhat insulated against the current global slowdown. Barring unforeseen circumstances, the economy is expected to grow at a faster pace at least in the next 10 years.
Last week, it was reported that overall public debt accumulated by governments across the world stood at $97 trillion in 2023. It is 40 percent more than what it was in 2019. The United States alone holds 33 percent of the total world public debt. The debt-to-GDP ratio of the US is 123.3 percent. For Japan, it is as high as 255.2 percent, making up 11 percent of the global debt. Italy’s is 143.7 percent, followed by France (110 percent), Canada (106.4 percent), the UK (104 percent), Brazil (88.1 percent) and China (83 percent). The aggregate global debt has risen by $100 trillion over the last decade, showing the sheer pace of debt accumulation by governments, households and the private sector together. In the first half of 2023, the aggregate global debt was $307 trillion accounting for a whopping 336 percent of the world GDP.
For now, the India government’s debt position is certainly not alarming in the context of growing large economies. However, the same can’t be said about the debt position of several of the country’s states, which are faced with limited revenue generation capabilities causing massive debt servicing problems. The latter are forcing the states to borrow more every year. And, their debt burden continues to go up. The projected debt-to-state GDP ratio in 2023-24 for Punjab is as high as 46.8 percent, followed by Bihar (37.8 percent), West Bengal (37.7 percent), Rajasthan (36.8 percent), Kerala (36.6 percent), Andhra Pradesh (33.3 percent), Uttar Pradesh (32.1 percent), Madhya Pradesh (30.4 percent), Tamil Nadu (25.6 percent) and Assam (24.4 percent). Some of the smaller Indian states have a very high debt-to-SGDP ratio. For instance, the ratio in Arunachal Pradesh is as high as 53 percent. The states with a high debt-to-SGDP ratio include Punjab, Nagaland, Manipur and Meghalaya. State government loans comprise 65 percent of their overall borrowings. They rose 28 percent on-year between April and November 2023. A slowdown in economic activity can hurt SGDP growth posing downside risks.
The rising debts of the central and state governments themselves would look natural in a developing federal economy. Unfortunately, the reasons behind these government debts seem to be connected more with doles than development. Both the central and state governments are giving massive doles to low-income groups with an eye to win elections. For instance, Prime Minister Narendra Modi announced in November, last year, that the government’s free food grains scheme for the poor through rations shops, started in the wake of the Covid epidemic and extended by a year, would continue for five more years to benefit 81 crore of the country’s population. The generous food dole will cost the national exchequer more than Rs. 11 lakh crore. This is despite the fact that by the government’s own estimate, the number of the poor in the country is around Rs. 20 crore. Obviously, the food gift through ration shops may have more to do with the national and state elections for the ruling party in the Centre. Political parties at the helm of state governments are competing with each other in dole innovation and distribution to catch the imagination of electorates while a vast majority of India’s retired industrial workers earn only Rs. 1,000 per month as contributory pension.
gher debt-to-GDP ratio for the country and states may be welcome if it is the result of higher development expenditure on social and industrial infrastructure development and improvement of public services. Notably, the concern for development is not behind the massive debt accumulation with Indian states. Instead, the increasing debt burden of the states are on account of the giveaways to a large section of the people. This is basically intended to induce them to vote for the ruling party. Also, in most of the states, poor governance quality has been impacting responsible debt management. It is a matter of concern that political pressures are increasingly leading to populist spending despite limited revenue-raising powers of state governments. Debt accumulation arises to bridge growing fiscal gaps more to address the diverse demands of the population than to stimulate growth and employment. This should worry the political leadership in the government. (IPA Service)
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