It is a matter of serious concern that India’s public debt level is among the highest in emerging economies while the country’s debt affordability is among the weakest. Generally, the average threshold limit prescribed for the public debt-to-GDP ratio is 77 percent with each additional percentage point of debt costing 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold for the debt-to-GDP ratio is preferred at 64 percent. India recorded a government debt-to-GDP ratio of 73.95 percent in 2020. According to Moody’s Investor Service, “With the exception of Chile, most of the 11 emerging markets have weak government effectiveness, suggesting potential risks executing fiscal reforms or consolidation plans.” The global rating agency further states that India’s debt affordably is among the weakest alongside Ghana. “Across the 11 emerging markets, India, South Africa, and Ghana have the highest public debt and weakest debt affordability,” the agency added.
Moody’s assessment of India’s debt affordability may be debated by official economists. However, few can contest the basic logic, linking government debt serviceability with the state of the economy. Some may cite that China’s debt is over 250 percent of its GDP, higher than that of the United States and lower than Japan. The US government’s debt-to-GDP ratio averaged 64.54 percent from 1940 to 2021. The ratio for Japan, the world’s most indebted advanced economy, was 224.8 percent of the country’s nominal GDP in December 2021. Unfortunately, despite its high economic potential, import-led India has been almost perpetually under expanding trade deficit and foreign borrowing. The country’s GDP growth has remained poor, especially in recent years. The real growth rate has been continuously down since 2016. The country’s GDP growth rate was in the negative in 2020 (-7.96 percent), showing a 12.01 percent decline from 2019. India’s GDP growth rate in 2019 was 4.04 percent, a 2.49 percent decline from the 2018 level of 6.53 percent. The growth rate for 2018 showed a decline of 0.26 percent from 2017. India’s economic growth rate for 2017 was 6.80 percent, a decline of 1.46 percent from the 2016 level. Incidentally, India posted a 10.08 percent economic growth rate in 2006-07, the highest since the economic liberalisation in 1991.
It makes a rather sad commentary on the country’s economic performance in the last few years despite all the tall promises and groovy pictures of the economy made during the government’s annual budget presentation, year after year. India’s high public debt-to-GDP ratio would have been of little concern if the economy performed according to its potential and the country’s high trade imbalance was not on account of the import of luxuries such as gold by the rich. On the other hand, RBI has failed to contain inflation, and protect the purchasing power of the Rupee and its exchange value vis-a-vis popular hard currencies such as USD, Euro, and Japanese Yen. Both the government and RBI seem to be ignoring the fact that high debt-to-GDP ratios — above 64 percent in emerging economies — can hinder economic growth under debt service pressure. It can put a country at risk of defaulting on debts, creating havoc on its economy and financial markets. India must create enough wealth to improve its debt affordability.
