The country is in full swing, preparing for General elections and the state assembly elections in various states. Poll promises are being made with the manifestos of the contesting political parties, promising freebies and huge social welfare spending if they are voted to power. However, the promises they make shall be fulfilled from the coffers of the Government and it will have implications for the fiscal conditions of the respective governments.
On many occasions the governments end up borrowing exorbitant amounts to fulfil poll promises, thereby piling up huge public debt, which would burden the public exchequer and the taxpayers. It is in this context it is pertinent to take stock of the country's public debt situation and contemplate on how to manage it.
The public debt management quarterly report released recently by the Ministry of Finance, Government of India found that India's total gross liabilities of the government increased to Rs 160.69 lakh crore at the end of December 2023 from Rs 157.84 lakh crore at the end of September 2023. This report provides a detailed account on managing the public debt and cash management operations during the period between October–December 2023. In addition to this, it also provides detailed information on several key aspects of debt management. The pertinent point that raises concern in this report is that the public debt accounted for 90 per cent of the country's gross liabilities during the third quarter of the fiscal year 2023-24.
Basically, the government debt or the public debt is the outstanding foreign and domestic loans raised by the states and the central governments plus other liabilities, on which they have to pay interest and the principal amounts borrowed. The 'other liabilities' include provident funds, small savings schemes, and special securities issued to the Food Corporation of India, Oil marketing companies, etc. However governments have limits to borrow and the limit is set by the Fiscal Responsibility and Budget Management (FRBM) Act, enacted by the NDA government in 2003. According to this Act, the general government debt was supposed to be brought down to 60 per cent of GDP by 2024-25, and the Centre's own total outstanding liabilities were not to exceed 40 per cent within that time schedule.
However, these targets could not be realised over a period of time. One of the main reasons for this is the unprecedented health emergency that shook the world in 2020 in the form of the Covid-19 pandemic. The economic shocks and the supply chain disruptions generated by the pandemic had long-lasting effects on the country's fiscal fabric, as the tax revenues dwindled. Governments had no option but to resort to borrowing, in order to meet the government spending on schemes that promote incomes and consumption of people, during the pandemic. It is evident from the fact that the Centre’s total outstanding debt which was at 48.1 per cent of the GDP in 2018-19 rose to 50.7 per cent in 2019-20 and 60.8 per cent in 2020-21. Although it slightly reduced to 55.9 per cent in 2022-23, it again went up to 56.9 per cent in 2023-24 and a budgeted at 56 per cent of GDP during 2024-25. By any parameter, this is relatively high and it is to be tamed.
Tackling the Debt Burden:
As a growing economy, India needs enough capital to fund its growth story and this in turn requires a fiscal policy that ensures there is a less debt burden. Thus, any policy discourses on managing the country’s debt need to focus on two components of the debt. The first one is the private debt and the other one is the public debt.
It is in this context it is pertinent to note that as per the estimates of the report released by a financial services firm, Motilal Oswal on 9th April 2024, India's household debt had hit its all-time high, by touching 40 per cent of its GDP, by December 2023, which is a note of caution for the policymakers. To manage the private debt, there is a need for policies that aim at monitoring household as well as non-financial corporate debt levels in the country, on a continuous basis.
On the other hand, effective public debt management calls for having a foolproof fiscal framework in place, which could further guide the balancing of expenditure and debt sustainability. This could achieve the ideal debt-to-GDP ratio. However, to develop such a fiscal framework in a developing country like India there is a two-way approach.
The first approach is to reduce the debt burden by improving the capacity to bring in additional tax revenues while keeping a cap on unproductive expenditures simultaneously. Tax revenues could be improved by bringing efficiency in tax administration and compliance. Moreover, the cross-matching of GST and income tax returns using the updated technology could go a long way in curbing evasion of taxes. As a part of the first approach, efforts could be made, by making optimal use of government resources, thereby giving less room for additional borrowings.
The second approach is to focus on the denominator of the debt-to-GDP ratio. It is to be understood that government debt levels are always measured as a percentage of a country’s GDP. If it is difficult to reduce the Government debt (the numerator), there is another option i.e., to increase the GDP (denominator). An increase in the GDP will automatically bring in a better debt-to-GDP ratio and improve the government's fiscal position.
In either of the options, states also play a crucial role. They need to be cautious enough with their borrowings and abstain from huge unproductive expenditures for electoral gains. Instead, a focus on improving the quality of expenditure and attracting more investments could put them in a better fiscal position and propel the states to a high growth trajectory. Quality in government expenditure could be achieved by making investments in human capital, besides physical infrastructure, and green initiatives. In order to address the spending on social sector schemes, policymakers could tap the option of the Public Private Partnership Model, which reduces the debt burden in the states.
Both the Centre and the states may follow either one or a combination of both approaches mentioned above, depending on their respective economic capabilities and fiscal constraints. This creates enough fiscal space for the country and promotes fresh investments. Eventually, it leads to a long-term sustainability of economic growth and also lowers the debt burden of the country. Once the election fever subsides and new regimes take charge, debt management should be one of the top priorities of the new governments at both at the Centre and the states, given its strategic importance in managing the economy, while consolidating the political gains.
