Debt Dilemma

Context: The elevated levels of India’s fiscal deficit and public debt have been a matter of concern for a long time in India. Even before the COVID-19 pandemic, debt levels were among the highest in the developing world and emerging market economies. The pandemic pushed the envelope further and relative to GDP, the fiscal deficit in 2020-21 increased to 13.3% and the aggregate public debt to 89.6%.

Consequences of Large Fiscal Debt

  • Crowding out of Capital Expenditure:  On an average, interest payments constitute over 5% of GDP and 25% of the revenue receipts. As a result, large interest payments crowd out the much-needed expenditures on physical infrastructure and human development and emerging priorities to make the green transition.
  • Reduced Ability of Government in Responding to Shocks: High levels of debt make it difficult to calibrate counter-cyclical fiscal policy and constrain the ability of the government to respond to shocks.
  • Curtailed Lending to Manufacturing Sector: The debt market in India is largely captive with mainly the commercial banks and insurance companies participating in it to meet statutory liquidity ratio (SLR) requirements. With a cash reserve ratio (CRR) of 4.5% and SLR of 18% of net demand and time liabilities, and 40% of the credit by the commercial banks earmarked for the priority sector, the resources available for lending to the manufacturing sector gets squeezed, driving up the cost of borrowing of the sector.
  • Rising Costs of External Borrowings: The rating agencies keep the sovereign rating low when deficits and debt are higher, and this increases the cost of external commercial borrowing.
  • Negatively Affects Intergenerational Parity: The burden of large deficits and debt will have to be borne by the next generation through higher tax liabilities.

Way Forward

  • Fast Pacing the Fiscal Consolidation: The FRBM Act seeks to limit Fiscal Deficit to 3% of GDP by end of 2022 and Combined debt of Centre and States to 60% of GDP by end of 2024-25. 
  • Increasing Revenue Receipts: By a means of improved tax administration and compliance, the aggregate tax-GDP ratio may be increased by 1.5 percentage to 2 percentage points in the medium term.
  • Rethinking the Role of the State: This requires disinvestment of fiscally laggard corporations such as Bharat Sanchar Nigam Limited.
  • Check on Fiscal Populism: At the State level, it is important to guard against the return to the old pension scheme and indulge in large-scale giveaways for electoral reasons. Redistribution is a legitimate government activity, and it should be done through cash transfers rather than subsidising commodities and services. 

PYQ 2018:

Consider the following statements:

    1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
    2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.
    3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Answer: (c)

Leave a Reply

Your email address will not be published. Required fields are marked *

The maximum upload file size: 20 MB. You can upload: image, document, archive, other. Drop files here

Online Counselling
Table of Contents