If we compare ourselves with the debt levels of emerging market economies then we are over-leveraged

Then finance minister Piyush Goyal stated in his 2019 budget speech that along with the completion of the fiscal deficit consolidation programme, India will focus on debt consolidation. After four years, the opposition has trained its gun on the rising debt and questions are raised on India’s debt servicing capacity. It is simple economics that a higher liability requires more outlays towards interest and thereby reducing the resources available for general economic purposes. A higher debt level for the country will impact the borrowing costs also. More than the economics of debt, this has become a tool for the opposition to divert Modi’s attack on the politics of freebies.

An analysis that is solely based on absolute numbers hides more than uncovering the underlying factors and impacts. India’s internal debt increased from Rs. 16.91 lakh crores in 2004 to Rs. 54.85 lakh crore in 2014, an increase of 224 per cent. On a comparative term, internal debt registered an increase of 171 per cent over 9 years in the Modi era and stood at Rs. 148.88 lakh crores in March 2023. Similarly, there was a 66 per cent rise in external debt during the UPA era (USD 268 billion in 2004 to USD 446 billion in 2014) while it noted a modest increase of 36 per cent in the NDA era (USD 606 billion in March 2022) [source – RBI data].

Overall outstanding liabilities to GDP ratio of the central government stood at 50.5 per cent in 2014 which has gone up to 59 per cent in 2023 (source- Economic Survey 2022-23). It may be noted that external circumstances like the economic impact of the Covid pandemic and the committed amount of GST compensation to the state governments had majorly contributed to this increase. Centre’s liabilities peaked in 2020-21 due to the Covid pandemic and thereafter it has come down. This rise was in line with the global trend when public debt peaked in 2020 and came down in the next year, except in China & Germany where it continued to increase in 2021 as well (source- IMF).

The Covid pandemic resulted in an increase in central government debt from 50.9 per cent of GDP in 2019-20 to 61 per cent in 2021. Covid impact was on multiple fronts decline in tax collection, increase in government expenditure to support the economy, ad hoc expenditure on vaccination & free rationing to the poor, ongoing payout of committed compensation at the time of GST rollout, lower proceeds from disinvestment (non-tax receipts) due to deterioration of overall economic conditions etc.

If a natural calamity that shook the world is not considered while pulling the triggers on the Modi government for an increase in debt then it is blatant dishonesty of the opposition to mislead the people of this country. Pre Covid level debt of the centre was pretty much at the same level of 2014. From an overall debt perspective (centre & state both), India’s debt-to-GDP ratio increases marginally from 81 per cent in 2005 to 84 per cent in 2021.

Having identified the factors causing the increase in liability on the government’s balance sheet, it is appropriate to benchmark ourselves with peers and discuss the way out. Comparing India’s debt level with major economies of the world is misleading as their economy is more formal and thereby their ability to raise resources is better as compared to ours. If we compare ourselves with the debt levels of emerging market economies then we are over-leveraged.

Emerging market debt to GDP level was ~60 per cent in 2021 which was much lower as compared to ours. This higher debt proportion requires a higher payout towards debt service. Indian policymakers understand the importance of the need to bring it down. Now it is time for better resource allocation, improved tax administration and fast-track reforms are the keys to come out of the situation before it entraps us.

(The writer is Chartered Accountant, Author, and Public Policy Analyst)