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%. As the economy recovered after the pandemic, the deficit and debt ratios have receded to 8.9% and 85.7%, respectively.

Fiscal Deficit It is the difference between a government’s total expenditure and its total revenue in a given fiscal year. It represents the amount by which the government’s total spending exceeds its total income (revenue). In other words, it is the shortfall that the government needs to bridge through borrowing. 

Public Debt - It refers to the total amount of money that a government owes to its creditors, both domestic and foreign. It includes both Internal debt (owed to domestic lenders) and external debt (owed Definition to foreign lenders and institutions). Public debt is accumulated over time due to budget deficits and borrowing to finance various expenditures and projects. It is a key component of a country’s national debt. 

• Components of the Public Debt:
• Components Public debt comprises two main components: 
• Internal Debt: Debt owed to domestic creditors, such as individuals, banks, financial institutions, and the central bank. This debt is denominated in the local currency. 
• External Debt: Debt owed to foreign creditors, including foreign governments, international organizations, and investors. This debt Is denominated in the foreign currencies. 

COVID Phases & Debt Levels:

• Pre-COVID Phase: Even before the COVID-19 pandemic, debt levels were among the highest in the developing world and emerging market economies. 
• COVID Phase: 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%.
• Post-COVID Phase: As the economy recovered after the pandemic, the deficit and debt ratios have receded to 8.9% and 85.7%, respectively.
• Essence of the data: The projections show that even without any serious disruptions to the economy, the debt level is unlikely to return to the pre-pandemic trajectory in the medium term.

Interventions by the Central Bank of India:

• The statutory liquidity ratio (SLR): Through SLR, Reserve Bank of India (RBI) requires the banking system to hold 18% of their demand and time liabilities in government securities. 
• Open Market Operations (OMOs): Through OMOs, RBI by way of sale/purchase of government securities to/from the market with an objective to regulate money supply in an economy.

Concerning Facts: 

• Debt is declining but the Financial market is Destroying: When the interest rate on government debt is lower than the growth of GDP, the debt may decline but the financial market gets distorted.
• Sustainable Debt without Threat but Heavy Consequences: Even when the sustainability of debt may not be threatened in the medium term, the costs of carrying high deficits and debt to the economy are heavy.

Concerns of a Country with a High Public Debt

• High Debt, less Revenue: On average, interest payments constitute over 5% of GDP and 25% of the revenue receipts, this is more than the government expenditure on education and health care put together. 
• Concerning Data of States: The issue is of concern in Punjab, Kerala, Rajasthan, and West Bengal. 
• In Punjab, the Debt to GSDP ratio is 48.9%, in West Bengal, 37.6%, Rajasthan 35.4%, and in Kerala close to 33%.
• Constraining the Ability to Respond in Emergency: High levels of debt make it difficult to counter-cyclical fiscal policy and constrain the ability of the government to respond to shocks.
• Reserve Ratios: The reserves by the commercial banks and insurance companies resulting in less liquidity in the market.
• Less Credit Availability to Manufacturing Sector: With a cash reserve ratio (CRR) of 4.5% and SLR of 18% of net demand and time liabilities, the resources available for lending to the manufacturing sector slows down, resulting in an increase in the cost of borrowing of the sector. 
• Effect on Ratings & Borrowings: The rating agencies keep the sovereign rating low when deficits and debt are higher, and this increases the cost of external commercial borrowing. 
• Continuing Debt: ‘Today’s borrowing is taxing tomorrow’ and the burden of large deficits and debt will have to be borne by the next generation.
• Individual Debt: As per data, every individual in the country bears a debt burden of ₹ 1,64,000. 
• High Primary Deficit: With the high primary deficit of 3.7% of GDP in 2022-23 and budgeted at over 3% in 2023-24, we will have to contend with elevated debt levels in the medium term.
• In short, the concerns are: Default, Credit Rating Downgrade, Loss of Investor Confidence, Financial Market Turmoil, Raise Taxes, Austerity Measures, Recession and Economic Crisis, International Bailouts & Debt Restructuring 

Number of Factors that could Threaten the Sustainability of Debt in India: 

• A Slowdown in Economic Growth: If economic growth slows down, it will be more difficult for the government to generate revenue to repay its debts. 
• An Increase in Interest Rates: If interest rates increase, it will become more expensive for the government to borrow money. This could make it difficult for the government to service its debts. 
• A Decline in the Value of the Rupee: If the value of the rupee declines, it will make it more expensive for the government to repay its foreign debts. 

Number of Factors that could help to Ensure the Sustainability of Debt in India: 

• The Country’s High Growth Potential: India’s economy has the potential to grow at a high rate in the coming years. This could help the government to generate more revenue to repay its debts. 
• The Country’s Large Pool of Savings: India has a large pool of savings that could be used to finance the government’s debt. 
• The Government’s Commitment to Fiscal Consolidation: The government has committed to reducing the fiscal deficit in the coming years. This could help to reduce the debt burden and make it more sustainable. 

Looking ahead

• Stabilizing & Helping Technology: As the technology platform has stabilized, it is expected to maintain high buoyancy in the medium term.
• The technology has helped and will help in future to improve tax administration and improved compliance. 
• Need of Policy Interventions: This is the time to rethink the role of the state and vacate activities that should really belong to the market rather than competing with it. 
• Investment rather than Disinvestment: Rather than dispensing with activities such as telecom to the private sector, the government continues to pour money into Bharat Sanchar Nigam Limited. 
• Arranging of Employment Melas: Focus should be made on employment melas to fill vacant posts.
• Check on Old Pension Scheme: 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 rather than Subsidies: Redistribution is a legitimate government activity, and that is best done through cash transfers rather than subsidizing commodities and services. 
• Concern with Subsidy: Giving subsidies alters relative prices, resulting in unintended resource distortions. 
• Imposing Hard Budget Constraints: It is equally important to impose hard budget constraints by enforcing Fiscal Responsibility and Budget Management rules in allowing States to borrow. 
• Stabilization of Macroeconomy by the Union Government: Macroeconomic stabilization is predominantly a Union government responsibility. Therefore, the Union government should follow the rules it makes, and enforce the rules on the States effectively.