Public Debt to GDP Ratio

 

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.

Analysing India's Debt to GDP Ratio in Figures:

• 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). 

Analysing World's Debt to GDP Ratio in Figures :

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.