The Politics and Economics of Public Debt
by Ashwani Mahajan on 05 Mar 2023 0 Comment

For the last few days, a discussion is going on in the media and social media that the debt on the government has increased much more than before. Congress says that when they left office in 2014, the country had a debt of only Rs 56.7 lakh crore, which has increased to Rs 152.6 lakh crore in 2022-23, that is, by about Rs 96 lakh crore. Apparently, this figure appears big.


Debt-GDP Ratio


Theoretically, government debt is not measured by its absolute size. It’s measured as a percentage of GDP. Accordingly, in the context of GDP of Rs 112 lakh crore at current prices in the year 2013-14, the total debt and liabilities of the government were Rs 56.7 lakh crore, in absolute terms, but were 50.5 percent of India’s GDP.


By the year 2018-19, the total debt and liabilities of the government reached 90.8 lakh crores, but were only 48 percent of the GDP of 189 lakh crores of GDP (at current prices), that is, as a percentage of GDP, the government debt and liabilities had decreased by 2.5 percentage points in five years.


The outbreak of the pandemic, which had started in the year 2019-20, affected both production and tax revenue. In such a situation, despite an increase of only Rs 12 lakh crore in government debt, the government debt as a percentage of GDP had increased by 3 percentage points to reach 51 percent in 2019-20.


The year 2020-21 was badly affected by Covid19, in which the nominal GDP also decreased by Rs 2 lakh crore, But due to the relief to the poor and other affected sections of society, and huge increase in relief and public health related expenditures, the government debt and liabilities had increased by Rs 18 lakh crore. Due to this, government debt and liabilities as a percentage of GDP reached 61 percent by 2020-21.


According to the budget estimates for the year 2023-24, the government debt and other liabilities will be Rs. 169.5 lakh crores; however, as a percent of GDP, of Rs. 301 lakh crores projected GDP at current prices in 2023-24 it will be reduced to only 56 percent of the total GDP. Interestingly, India’s foreign debt is a very small part of total public debt, which is less than 2 percent of the GDP.


Whether the loan is private or public, there is a liability attached to it, to repay interest and principal. As far as governments are concerned, governments continuously borrow and this debt keeps increasing progressively. It is worth mentioning that in 1950-51, the total debt and other liabilities of the government were only Rs 2865.4 crore, which according to the revised estimates of 2022-23 has reached Rs 152.6 lakh crore. In the budget of the year 2023-24, a provision of about Rs. 10.8 lakh crore has been kept for interest and principal return, which is 24 percent of the total expenditure of the government.


It can be understood that the repayment of interest and principal, which is increasing year after year, cannot be met with the current revenue of the government and hence more loans have to be taken for interest and loan repayment. But we need to understand that governments of all countries borrow. Therefore, what has to be seen is our position in comparison to other countries of the world in terms of public debt.


Debt-GDP in Top 5 Countries


If we look at the world’s five largest economies, according to the IMF, in the year 2021, the government debt in the US was 122 percent of GDP, in Japan it was 221.3 percent and in India it was only 54.3 percent. Although the IMF does not publish figures for China, other global estimates put it at 79.2 percent. Only Germany’s debt to GDP ratio was slightly less than that of India, at 46.3 per cent.


During the Corona period, there was an increase in government debt as a percentage of GDP not only in India but in all countries of the world. The reason for this was that on the one hand, not only did the GDP shrink, but government revenue also decreased drastically and the expenditure of governments to provide aid and relief to the weaker sections of the society also increased. Government’s debt in the US in the year 2019, which was only 93.1 percent as a percentage of GDP, now increased to 122 percent. The situation is more or less the same in other countries as well.


We understand that in the discharge of the responsibility towards the society, due to paucity of resources, governments have to borrow. But we need to acknowledge that total debt and liabilities of the Government of India are very low in comparison to other major economies of the world, if seen in terms of debt-GDP ratio. The ratio of government’s debt and other liabilities to GDP remained around 50 percent, but this ratio has increased recently, which may decrease again when the situation becomes normal.


How to reduce the burden on Government Budget?


It is true that governments have to take loans not only for public welfare but also for capital formation and due to the difficulties of increasing the Tax-GDP ratio, government debt keeps on increasing with the needs of the times. In such a situation, the concern of economic analysts and policy makers is that how to reduce its impact on the government budget. The payment of interest affects the government budget. This year also 24 per cent of total government expenditure is being absorbed by the repayment of interest and principal. So how can this burden be reduced?


The only way to reduce the burden of interest on government debt is by reducing interest rates. It is well known that interest rates in India have been much higher as compared to USA and European countries. In India, the government has to pay about 7 percent interest on government bonds. Significantly, this interest rate largely depends on the ‘Bank Rate’ determined by the Reserve Bank.


Generally, the main reason for the ‘Bank Rate’ to be high is the high rate of inflation. Due to the high rate of inflation, there is compulsion to keep the ‘Bank Rate’ high because the interest paid to the savers has to compensate for inflation as well. Today, since the inflation rate is around 6 per cent, the bank rate remains at 6.5 per cent. Therefore, the government can issue these bonds only at a higher interest rate. But if the inflation rate comes down, the government can take new loans at low interest rate, which can reduce the burden of government debt.


In the past also, the Atal Bihari Vajpayee government, when the inflation rate touched around 3 percent, sold bonds at low interest and also took loans at very low interest rate, for infrastructure construction as well. In many cases, new loans could be taken at a lower rate of interest by repaying old loans. In such a situation, the debt burden on the government was reduced. It can be said that in order to reduce the burden of government debt, it’s imperative to reduce the interest rates by controlling inflation.


The author is a Professor of Economics at PGDAV College, University of Delhi, Delhi

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