In a recent annual consultation report, the International Monetary Fund (IMF) has highlighted concerns over India’s general government debt, warning that it may surpass 100% of the country’s GDP by 2028. While immediate panic may not be warranted, the IMF emphasizes the need for “ambitious” fiscal consolidation to mitigate long-term risks. K.V. Subramanian, India’s executive director at the IMF, points out that despite global economic shocks, India’s public debt-to-GDP ratio has remained relatively stable, hovering around 81-84% over the past two decades. The IMF’s cautionary stance is grounded in the potential impact of a global growth slowdown on India through trade and financial channels. The report also highlights domestic challenges, including weather shocks leading to inflationary pressures and recurrent commodity price volatility. However, the IMF acknowledges the upside of India’s robust consumer demand, fostering higher production, supplies, and investment. The global debt landscape is also under scrutiny, with overall public debt reaching $97 trillion in 2023, marking a 40% increase since 2019. The United States alone holds a significant 33% share of the world’s public debt, with a debt-to-GDP ratio of 123.3%. Japan follows closely with a staggering ratio of 255.2%, constituting 11% of the global debt.
Despite India’s relatively stable national debt scenario, concerns arise at the state level. Several states grapple with limited revenue generation capabilities, leading to escalating debts and servicing challenges. The debt-to-state GDP ratio projections for 2023-24 reveal worrisome figures for states like Punjab, Bihar, and West Bengal. Some smaller states, including Arunachal Pradesh, face exceptionally high debt-to-state GDP ratios, reaching up to 53%. The root cause of escalating government debts, both at the central and state levels, appears to be linked more to populist measures than strategic development initiatives. Governments, driven by electoral considerations, are providing substantial subsidies and doles to low-income groups. For instance, Prime Minister Narendra Modi’s extension of the free food grains scheme for five more years, benefitting 81 crore people, comes at a cost exceeding Rs. 11 lakh crore. Notably, this generosity is extended despite the government’s own estimate putting the number of poor in the country at around 20 crore.
While a higher debt-to-GDP ratio can be acceptable if directed towards development expenditure on social and industrial infrastructure, the worrying trend in India is the mounting debt burden resulting from political giveaways. The focus on inducing voter support rather than fostering sustainable growth and employment raises concerns about responsible debt management. Political pressures, combined with poor governance quality in several states, contribute to a situation where debt accumulates to address diverse population demands rather than promoting overall development. In essence, the rising state government debts in India should not be overlooked. It is imperative for policymakers to shift their focus from short-term populist measures to long-term, sustainable development initiatives. Prudent fiscal management, coupled with responsible governance, will be crucial to ensuring that the debt trajectory aligns with the nation’s growth objectives. As India navigates the complexities of a changing global economic landscape, a strategic and disciplined approach to managing government debt becomes paramount for securing a robust and resilient economic future. India faces mounting concerns over rising state government debts, prompting the International Monetary Fund to stress the need for ambitious fiscal consolidation. Political pressures and populist spending raise apprehensions about responsible debt management.