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5th February 2024 (9 Topics)

Debt Conundrum: Strategies for the Next Government


The significant debt burden accumulated during the aftermath of the pandemic. Analyzing the trajectory of this debt reveals a complex scenario that demands strategic solutions for sustainable economic recovery.

Understanding the Debt Landscape: Historical Trends and Current Realities

  • The outgoing government concludes its term with the overall public debt surpassing 80% of India's Gross Domestic Product (GDP).
  • Drawing parallels with the early 2000s, the International Monetary Fund (IMF) data showcases a resemblance, underlining the persistent challenge of managing burgeoning debt levels.

Fiscal Responsibility and Budget Management (FRBM) Goals: A Vision Diverged

  • Envisioned under the Vajpayee-led NDA government in 2003, the FRBM law aimed to reduce the general government debt to 60% of GDP by 2024-25.
  • However, subsequent years witnessed a departure from this target, with the Centre's outstanding debt surpassing the set limits.
  • The Fiscal Responsibility and Budget Management Act faced practical challenges as the debt scenario evolved, necessitating a recalibration of fiscal goals.

Deconstructing Government Debt Components: Implications and Challenges

  • Government debt encompasses a spectrum of obligations, from domestic and foreign loans to liabilities against various schemes.
  • These commitments require interest and principal repayments, adding strain to the overall financial framework.
  • Examining the Fiscal Responsibility and Budget Management (FRBM) law's trajectory reveals a widening gap between envisioned targets and the Centre's actual liabilities.

Economic Fallout of the Pandemic: A Catalyst for Soaring Debt Levels

  • The onset of the Covid-19 pandemic triggered unparalleled disruptions, compelling governments to amplify borrowing to meet emergent public health and social expenditure demands amid dwindling revenues.
  • The resultant surge in the combined gross fiscal deficit of the Centre and states became a defining feature, escalating from 5.8% and 7.2% of GDP in 2018-19 and 2019-20 to 13.1% and 10.4% in the subsequent fiscal years.

Strategies for Debt Mitigation: Balancing Fiscal Consolidation and Growth

  • Addressing the challenge of reining in government debt necessitates a multifaceted approach.
  • The current government's fiscal consolidation "glide path," targeting a deficit-to-GDP ratio of "below 4.5%" by 2025-26, marks a strategic shift.
  • However, the IMF's caution against surpassing the 100% debt-to-GDP threshold underscores the importance of balancing fiscal prudence with growth initiatives.

Leveraging Economic Growth: The Denominator Effect

  • Acknowledging the impact of nominal GDP growth on the debt-to-GDP ratio, strategies must focus on fostering robust economic expansion.
  • High nominal GDP growth, driven by real output increases rather than inflation, offers a viable pathway to alleviate the burden of government debt.
  • Historical trends from 2003-04 to 2010-11 highlight the potential effectiveness of this approach.

Charting the Future: A Dual Approach for Sustainable Debt Management

  • Harmonize fiscal consolidation, robust economic growth, and prudent management of public finances.
  • A judicious combination of these strategies holds the key to steering India towards a resilient and sustainable economic trajectory.

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