Intro

Public debt is a fundamental component of modern economies, enabling governments to

finance infrastructure projects, social welfare programs, and economic stimulus measures.
However, the accumulation of excessive public debt raises concerns about long-term fiscal
sustainability, economic growth, and macroeconomic stability. In the Indian context, public
debt has seen significant fluctuations, influenced by various domestic and global factors,
including economic reforms, financial crises, and the COVID-19 pandemic.

Over the years, India has relied on both internal and external borrowing to meet its fiscal
needs. The debt-to-GDP ratio, a key indicator of debt sustainability, has risen sharply in
recent decades, raising questions about its impact on economic growth and financial stability.
While debt can serve as a powerful tool for fostering development, excessive debt levels may
lead to higher interest payments, reduced government spending on essential sectors, and
potential investor concerns regarding the country's creditworthiness.

Additionally, public debt has significant implications for inflation, exchange rates, and
monetary policy effectiveness. High debt levels may lead to inflationary pressures if the
government resorts to excessive borrowing from the central bank or excessive deficit
financing. Furthermore, a growing debt burden can crowd out private investment, limiting
capital availability for businesses and entrepreneurs. The long-term effects of sustained high
debt levels can include lower economic growth rates, increased vulnerability to external
shocks, and reduced fiscal space for responding to economic crises.

Given these complexities, it is imperative to assess whether India's high public debt is
sustainable and what measures can be taken to ensure responsible debt management. This
paper aims to analyze India's debt trends, its impact on economic growth, and the policy
responses required to maintain fiscal stability. By examining both historical and
contemporary data, this study seeks to provide insights into the effectiveness of current debt
management strategies and offer recommendations for future fiscal policies. Through a
detailed analysis of fiscal deficits, interest payments, debt composition, and revenue
mobilization, this paper will contribute to the ongoing discourse on public finance and
economic sustainability in India.

analysis of the issue

India's debt burden has been a persistent concern, shaped by various macroeconomic and
fiscal factors. The debt-to-GDP ratio has witnessed fluctuations due to policy decisions,
economic growth trends, and external shocks. As of 2023, India's debt-to-GDP ratio stands at
approximately 83%, a significant increase from the early 2000s when it hovered around 70%.
The increasing fiscal deficit, largely driven by welfare expenditures, infrastructure
investments, and subsidies, has necessitated higher borrowing levels. With a growing
population and rising public expenditure demands, the government has continued to rely on
both domestic and external borrowing to meet financial needs. However, the question of
sustainability arises when the rate of borrowing surpasses economic growth, leading to
concerns over debt repayment capacity and fiscal health.

One of the major issues associated with India's public debt is the rising interest payment
burden. Interest payments as a percentage of revenue have steadily increased over the years,
accounting for nearly 28% of total government revenue in 2023. This growing burden limits
the government's ability to allocate funds to essential sectors such as healthcare, education,
and infrastructure. The higher the interest payments, the less fiscal space the government has
for productive spending, leading to long-term economic inefficiencies. Furthermore, with
global interest rates fluctuating and India's reliance on market borrowings increasing, any
adverse changes in borrowing costs can severely impact fiscal stability.

The nature of India's debt is another critical factor in assessing its sustainability. A significant
portion of the country's public debt is domestic, reducing vulnerability to external shocks
compared to economies heavily reliant on foreign debt. Domestic borrowing accounts for
nearly 81% of India's total public debt, largely through government securities and bonds.
While this lowers exposure to currency risks, it does not eliminate concerns regarding high
debt accumulation. Additionally, India's external debt, though relatively low at around 19%,
is primarily denominated in foreign currencies, making it susceptible to exchange rate
fluctuations. A depreciation of the rupee against major currencies could increase the effective
repayment burden on foreign borrowings, impacting the fiscal deficit further.

The effectiveness of debt management strategies is crucial in determining long-term

sustainability. India has implemented various fiscal consolidation measures over the years,
such as the Fiscal Responsibility and Budget Management (FRBM) Act, which aims to
control fiscal deficits and improve transparency in government borrowing. While these
measures have contributed to some degree of fiscal discipline, deviations from fiscal targets,
particularly during economic downturns, have often led to increased borrowing.

Another key aspect of debt sustainability is the relationship between economic growth and
the cost of borrowing. If the real GDP growth rate exceeds the interest rate on government
debt, the debt burden remains manageable. Historically, India's growth rates have outpaced
borrowing costs, particularly during the 2000s when GDP growth averaged around 7.2%,
while borrowing costs remained near 6%. However, recent trends indicate that growth has
slowed, with GDP expanding at 6.5% in 2023, only slightly above the prevailing interest
rates of 6.2-7%. This narrowing margin poses a risk to debt sustainability, as prolonged
periods of slow growth could make it more challenging to manage and service the
accumulated debt effectively.

The government's revenue mobilization efforts also play a vital role in managing public debt.
India's tax-to-GDP ratio has historically remained low, averaging around 10-11%, compared
to 15-20% in other emerging economies. The introduction of the Goods and Services Tax
(GST) in 2017 was expected to streamline tax collection and increase revenue efficiency.
However, compliance challenges, structural inefficiencies, and economic slowdowns have
limited its full potential. Improving tax administration, broadening the tax base, and reducing
tax evasion are essential steps to enhance revenue collection and ensure fiscal sustainability.

data analysis

Public debt in India has followed a dynamic trajectory, influenced by economic growth
cycles, fiscal policies, global financial events, and domestic crises. This section examines key
trends in India's debt-to-GDP ratio, fiscal deficit, interest payments, revenue mobilization,
and economic growth over the past two decades. The analysis incorporates data from official
sources such as the Reserve Bank of India (RBI), the Ministry of Finance, and the World
Bank.

Debt-to-GDP Ratio Trends (2000-2023)

India’s debt-to-GDP ratio has exhibited cyclical movements over the past two decades,
reflecting shifts in economic policy, revenue generation, and external economic conditions. In
2000, the ratio stood at 73.2%, driven by fiscal deficits and government borrowing. The high
growth period between 2003-2008, when GDP growth averaged 8% per year, led to a
decline in the debt-to-GDP ratio to 66.5% by 2010. This was facilitated by improved tax
revenues and fiscal consolidation efforts.

However, post-2011, economic growth slowed due to policy uncertainties, global financial
instability, and domestic structural challenges, causing the debt ratio to rise again. By 2019,
India’s debt-to-GDP ratio had climbed back to 72.4%, indicating a reversal of previous gains.
The COVID-19 pandemic in 2020 severely impacted public finances, necessitating large-
scale government spending to counter economic disruptions. As a result, the debt-to-GDP
ratio surged to 89.6% in 2021, marking the highest level in India’s recent history.

Although economic recovery post-pandemic has contributed to a slight reduction, the ratio
remains elevated at 83% as of 2023. The persistence of high debt levels underscores
concerns about long-term fiscal sustainability, especially as global economic uncertainty and
domestic challenges continue to impact revenue and expenditure trends.

(Graph: Debt-to-GDP Ratio Trend (2000-2023))

Fiscal Deficit Trends and Debt Accumulation

India's fiscal deficit has been a key driver of public debt accumulation. In the early 2000s,
fiscal deficits averaged 5.7% of GDP, reflecting significant government spending. However,
fiscal consolidation efforts under the FRBM Act (2003) led to a reduction in deficits,
bringing them down to 3.1% of GDP by 2008.

The 2008 global financial crisis disrupted this trend, with fiscal deficits rising to 6.5% of
GDP in 2009, as the government implemented countercyclical policies. Between 2014-2019,
India managed to keep deficits within the 3.5-4% range, aligning with FRBM targets.
However, post-pandemic, the fiscal deficit widened sharply, reaching 9.3% of GDP in 2021,
necessitating higher borrowings. In 2023, the government has aimed to bring the deficit
below 6.4%, but achieving long-term fiscal discipline remains a challenge.

(Graph: Fiscal Deficit as a % of GDP (2000-2023))

Interest Payments and Debt Servicing Burden

The rising debt burden has led to an increasing share of government revenue being allocated
toward interest payments. In 2000, interest payments accounted for 19% of total revenue.
However, as borrowing increased, this share grew to 25% by 2010 and 28% by 2023,
placing significant pressure on government finances.
A key concern is that high interest payments reduce the fiscal space available for capital
expenditures on infrastructure, healthcare, and education. If this trend continues, it could
hinder long-term economic growth by limiting productive government investments.
Additionally, rising global interest rates could increase borrowing costs for India, further
exacerbating debt servicing challenges.

(Graph: Interest Payments as % of Revenue (2000-2023))

Economic Growth vs. Borrowing Costs

The sustainability of public debt is highly dependent on the relationship between GDP
growth and the interest rate on government debt. If the GDP growth rate remains higher than
borrowing costs, debt remains manageable.

Between 2000-2010, India's GDP growth averaged 7.2%, comfortably outpacing the average
borrowing cost of 6%, allowing the country to manage its debt burden effectively. However,
in 2011-2019, growth slowed to 6.5%, while borrowing costs remained around 6.2%,
narrowing the sustainability margin. The situation worsened in 2020-21, when GDP growth
fell to 4.2%, while borrowing costs ranged between 6.5-7%, making debt repayment more
challenging.

For 2023, GDP growth is projected at 6.5%, slightly above the average borrowing rate of
6.2-6.8%, which suggests that debt sustainability could improve if growth remains robust.
However, any economic slowdown in the future could tilt this balance, leading to an
unsustainable debt trajectory.

(Graph: GDP Growth vs. Borrowing Costs (2000-2023))

Debt Composition: Domestic vs. External Debt

India’s debt structure is another critical determinant of its financial stability. The majority
(81%) of India's public debt is domestic, reducing vulnerability to external shocks.
Government bonds, market borrowings, and loans from financial institutions constitute the
bulk of domestic debt. This reliance on internal financing means that India does not face
significant risks from foreign exchange fluctuations compared to economies with high
external debt exposure.

However, external debt, which makes up 19% of total public debt, is still a factor to
monitor. A large portion of India's external debt is denominated in U.S. dollars and euros,
making it sensitive to currency depreciation. A weaker rupee increases the repayment burden
of external obligations. While India's external debt remains relatively low compared to global
standards, its composition and repayment schedule must be managed carefully to avoid
unnecessary fiscal pressure.

(Graph: Composition of India’s Debt: Domestic vs. External (2023))

Revenue Mobilization and Tax-to-GDP Ratio

One of the biggest challenges in ensuring debt sustainability is improving India's revenue
generation. Historically, India's tax-to-GDP ratio has been low, averaging 10-11%,
compared to 15-20% in other emerging economies.

The introduction of the Goods and Services Tax (GST) in 2017 was expected to enhance
tax collection efficiency. However, initial implementation challenges and compliance issues
led to lower-than-expected revenue gains. The pandemic further impacted tax collections,
widening the fiscal deficit.

For effective debt management, India needs to increase tax revenues through better
compliance, broader tax base, and reduced evasion. Strengthening digital tax
infrastructure, rationalizing exemptions, and improving GST implementation can contribute
significantly to fiscal stability.

(Graph: Tax-to-GDP Ratio (2000-2023))

Debt Outlook and Sustainability

Despite India's high public debt, the country has several structural strengths that prevent an
immediate crisis. Key factors include:

 Strong domestic savings and financial markets that support government borrowing.
 A relatively low external debt-to-GDP ratio, reducing exposure to foreign debt
crises.
 Resilient economic growth projections for the next decade.

However, risks remain, especially regarding fiscal deficits, interest payments, and revenue
mobilization. Without sustained growth and improved fiscal discipline, debt sustainability
could become a concern in the future. The government's target to reduce the fiscal deficit
below 4.5% of GDP by 2025-26 will be crucial in maintaining investor confidence and
ensuring long-term stability.

(Graph: Projected Fiscal Deficit Reduction (2023-2026))

Case studies

case studies

Japan vs. India: A Comparison of High Public Debt Sustainability

Japan presents an interesting case of a country with an extremely high debt-to-GDP ratio—
standing at over 250%—yet it has not faced a debt crisis. One of the key reasons Japan is
able to sustain such a high level of debt is extremely low interest rates and a high domestic
savings rate. The Bank of Japan (BoJ) has maintained a near-zero or negative interest rate
policy, which significantly reduces the cost of borrowing. Furthermore, almost 90% of
Japan's public debt is held domestically, primarily by institutions like the BoJ and pension
funds, making it less vulnerable to external shocks.

In contrast, India’s debt-to-GDP ratio, while much lower at 83% in 2023, poses greater
sustainability risks due to higher borrowing costs and a lower domestic savings rate.
Unlike Japan, India’s interest rates have averaged between 6-7%, making debt servicing a
significant burden. Additionally, India’s public debt is increasingly being financed through
market borrowings, which means it is more sensitive to investor confidence and
macroeconomic stability. While India does not face an immediate crisis, its fiscal policies
need to be managed carefully to avoid excessive debt accumulation.

The key takeaway from Japan’s case is that high public debt does not necessarily translate
into an economic crisis if the cost of borrowing remains low and debt is primarily financed
domestically. However, since India’s borrowing costs are relatively high and its fiscal deficits
remain elevated, achieving long-term debt sustainability requires prudent fiscal management
and continued economic growth.

U.S. Debt Ceiling Crisis and Lessons for India

The United States regularly faces political and economic challenges regarding its public debt,
particularly through the debt ceiling crisis. The U.S. federal government has a legal limit on
how much debt it can issue, and political gridlock often delays raising this ceiling, leading to
temporary government shutdowns and financial market instability. Despite having the world's
largest economy, the U.S. struggles with rising debt, which surpassed $31 trillion in 2023,
accounting for more than 120% of GDP.

The frequent debt ceiling debates in the U.S. highlight the importance of strong fiscal
institutions and political consensus in managing public debt. India, while not subject to a
strict debt ceiling, faces its own challenges in fiscal discipline. Unlike the U.S., where the
dollar’s status as the global reserve currency allows it to sustain high debt levels, India does
not have this luxury. Any deterioration in investor confidence could lead to higher borrowing
costs and potential capital outflows.

One lesson India can learn from the U.S. is the need for clear, long-term fiscal planning to
avoid economic uncertainty. While India has frameworks like the Fiscal Responsibility and
Budget Management (FRBM) Act, adherence to fiscal targets has been inconsistent,
especially during economic downturns. Strengthening fiscal rules and ensuring transparent
debt management policies can enhance investor confidence and prevent fiscal imbalances.

Greece’s Sovereign Debt Crisis: A Cautionary Tale

Greece’s debt crisis in 2010 serves as a stark reminder of the dangers of unsustainable
borrowing. Before the crisis, Greece had accumulated a debt-to-GDP ratio of over 140%,
largely due to excessive government spending, tax evasion, and over-reliance on external
borrowing. When the European financial crisis struck, Greece’s high debt burden, coupled
with a weak economy and high borrowing costs, led to a full-blown sovereign debt crisis.

Unlike India, Greece was dependent on foreign lenders, particularly the European Union
(EU) and the International Monetary Fund (IMF). When investor confidence plummeted,
Greece was unable to finance its debt, leading to severe austerity measures, multiple bailout
programs, and a deep economic recession. The Greek economy contracted by nearly 25%
between 2010 and 2015, and unemployment soared to over 27%.

India’s situation is different, as its debt is largely domestically financed, and the country has
strong economic growth potential. However, the Greek crisis underscores the importance of
maintaining fiscal discipline and ensuring that debt levels remain manageable. If India’s
fiscal deficits continue to rise without corresponding revenue growth, investor sentiment
could weaken, leading to higher interest costs and potential financial instability.

A key lesson from Greece is that prolonged high deficits and unsustainable borrowing
can lead to severe economic consequences. To avoid such risks, India must strengthen its
tax revenue system, rationalize subsidies, and ensure that public debt is used for productive
investments that generate long-term economic returns.

China’s Debt Model: Balancing Growth and Risk

China provides another important case study in public debt management. Unlike India, China
has significantly higher levels of total debt, including corporate and local government debt,
but it has managed to sustain economic growth through state-controlled lending and
infrastructure investments.

China’s total debt-to-GDP ratio, including government, corporate, and household debt, has
risen to over 280% in 2023. A large portion of this debt is linked to state-owned enterprises
(SOEs) and local government financing vehicles, which have borrowed extensively to fund
infrastructure projects. While this has supported rapid economic growth, concerns over
hidden debt risks, non-performing loans, and property sector vulnerabilities have grown
in recent years.

India, in contrast, has a more market-driven financial system, which means it does not have
the same level of government control over credit allocation. However, China’s model
highlights the potential of using targeted public debt to finance productive investments. If
managed effectively, public debt can support long-term economic expansion, but excessive
reliance on borrowing without proper financial oversight can lead to systemic risks.

One key lesson India can draw from China is the need for careful monitoring of public
sector borrowing. Ensuring that government debt is directed towards infrastructure,
technology, and human capital development—rather than unproductive expenditures—will
be crucial in maintaining sustainable economic growth.