Sovereign Debt, National debt, Fiscal deficit VS public debt, Public Debt to GDP Ratio, Significance of Public Debt to GDP Ratio, How to control debt

 

National debt /Sovereign Debt /Public Debt :

• Debt taken by the governments is national debt.
• It is said to be national as it is backed by the government which is national power.
• Public debt consists of budgetary as well as extra budgetary borrowings of the govt.
• Public debt is the accumulated borrowings of the govt over a period of time
• This type of debts are most reliable in the sense that such debt can't default as government is backing such debt.
• Default on national debt means government has failed .
• It can be from internal sources as well as external sources.

Internal debt can be of following types :

●       Market loans

●       Market Stabilisation Bills / Bonds

●       Treasury Bills

●       Other Special Securities issued to RBI

●       Ways and Means Advances /14 days T-Bills

●       Securities against Small Savings

●       Cash Management Bills

Special Securities Issued to Public Sector Banks

External National debt includes:

• External Debt under the ‘External Assistance’ programme 
• Multilateral loans (debt from Multilateral Creditors such as the International Development Association (IDA), International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB) etc. 
• Bilateral Debt (debt from sovereign countries with whom sovereign and non-sovereign entities enter into one-to-one loan arrangements). 
• Other Government Debt includes IMF Loans, FPI investment in G-sec and defence debt .

Fiscal deficit VS public debt:

1. Fiscal Deficit includes exclusively the budgetary borrowings.
2. Fiscal deficit is the borrowings of the government for the current year

                                            while 

1. public debt consists of budgetary as well as extra budgetary borrowings of the govt. 
2. public debt provides a better and holistic picture as compared to fiscal deficit.

Public Debt to GDP Ratio:

The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP).

Significance of Public Debt to GDP Ratio:

By comparing country's debt, with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts. As per FRBM Act, the Debt to GDP ratio should be around 60%.

•        40% for Central Government

•        20% for the State Government.

Centre’s outstanding debt reduced from 50.5% of GDP in 2013-14 to 48.1% in 2018-19 .Subsequently, it shot up to 50.7% in 2019-20 and 60.8% in 2020-21, before marginally dipping to 55.9% in 2022-23, 56.9% in 2023-24 and a budgeted 56% in 2024-25 .Increase in debt was on account of additional public health and social safety net expenditure requirements – amid a drying up of revenues during  Covid-19.

India’s public debt (combined liabilities of the Central and State governments) to gross domestic product (GDP), at constant prices, increased to a record high of 105.23 per cent in 2021(Economic survey 2023). 

Across the world, General government debt climbed from 108.7% of GDP in 2019 to 133.5% in 2020 and 121.4% in 2022 for the US; from 97.4% to 115.1% and 111.7% for France; from 85.5% to 105.6% and 101.4% for the United Kingdom; and from 60.4% to 70.1% and 77.1% for China during these years. 

Impact of High Debt to GDP ratio on Economy:

•        Crowding Out Effect.

•        Major Part of Budget going to Interest Payments.

•        Poor ratings by Credit Rating Agencies.

•        Higher Borrowing Cost.

•        Privatisation of Loss-making PSUs

How to control debt:

 Public Debt to GDP Ratio is usually quoted as:

 Public Debt ratio / GDP at current market prices. 

Higher the denominator, lower the ratio 

Denominator is directly proportional to ----------GDP and inflation. So GDP and inflation should be higher to lessen public debt to GDP ratio.

During 2003-04 to 2010-11 when general government debt plunged from 84.4% to 66.4% of GDP. That period, also witnessed an average annual GDP growth of 7.4% in real and 15%-plus in nominal terms after adding inflation, thus reining in public debt to GDP ratio.

Reasons for increase in Public Debt Ratio :

• Bank Recapitalisation,
• UDAY bonds,
• Small Share of Taxes in National Income, 
• Imperfect Tax System 
• Increase in public spending in response to Covid-19, and the fall in tax revenue and economic activity,