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What is Debt to GDP Ratio?

What is Debt to GDP Ratio?

Tag:GS3 || Economy || Public Finance || Budget

Why in news?

  • India’s debt stands at 88.13 lakh crores at the end of June 2019– the latest data on public debt.
  • This is a 4% jump from the previous quarter i.e. rise in debt by 3.5-4 lakh crores.

 What is the National Debt of India?

  • The national debt – is the money owed by the Indian federal government.
  • The debts of India’s states and local government are not counted as part of the country’s national debt.
  • According to the IMF, India’s debt to GDP ratio is around 68%. This is a comfortable figure which is well below 100%.it leaves the country room to borrow more in the event of a financial crisis.

Who is responsible for raising debt?

  • The Indian national debt is managed by the country’s central bank.
  • The national debt is managed by bank divisions, called the public debt office(PDO).

 How the debt is raised by?

  • The Reserve Bank of India raises debt for the government of India through a range of instruments that the rbi calls ‘G-secs’.
  • The instruments that the PDO issues fall into the following categories:
    • Fixed-rate bonds: the interest rate payable does not alter over time.
    • Floating rate bonds(FRB) -the interest rate is expressed as a margin over the national base rate.
    • Zero-coupon bond: pay no interest but are sold at a discount and redeemed at full face values.
    • Capital indexed bonds: the face value of the bond increase in line with inflation.
    • Inflation index bonds(IIBs): Both the loan amount and the interest are index-linked. Since 2013 these bonds have been issued exclusively to the general public.
    • Bonds with call/put options: the RBI has the right to redeem the bond before maturity(call) or the holder has the right to cash in bond before maturity(put).
    • Sovereign gold bond(SGB): payable in cash, but the value of bond is linked to the price of gold.

 Who Holds India Debt?

  • Fiscal deficit is targeted at 3.3% of GDP, lower than the revised estimate of 3.4% in 2018-19

Reason for the increase in Debt:

  • The above graph is showing that after 2012-13 the central government’s borrowing is decreased but the state government borrowing is increasing which leads to an increase in overall debt.
  • States finished the fiscal year to March 2019 with a combined fiscal deficit of 2.9 percent, 34 basis points worse than what was budgeted for and Debt in states rises to 25% of GDP, may pose challenges in medium-term, the RBI said.
  • A farm loan waiving is also a big reason.

Types of debt:

  • External debt: India’s external debt increased 2.6% year on year at the end of fiscal year 2018-19.
  • At the end of March 2019, India’s external debt was $543 billion, recording an increase of $13.7 billion year on year.
  • It was primarily on account of a rise in short-term debt, commercial borrowings, and non-resident Indian (NRI) deposits, the RBI said
  • The external debt to GDP ratio stood at 19.7% at the end-march of 2019.

Why don’t the Indian government repay the debt by printing new currency?

  • Currency notes are printed in India on the basis of the minimum reserve system(MRS) since 1957.
  • Accordingly, RBI has to maintain assets of at least Rs 200 crores all the time, Rs115cr in the form of Gold and 85cr in the form of foreign currency.
  • Holding these assets of Rs200cr. RBI can print any number of currency notes.
  • Share of currency in external debt:

US dollar-denominated debt – largest component of India’s external’s debt and share of 50.5% at end-March 2019.

  • Share of other currency:
    • Rupee(35.7%)
    • Japanese yen(5%)
    • SDR(4.9%)
    • Euro(3%)
  • Printing new currency affects the economy:-
  • It increases the supply of money in the economy which leads to more inflation(e.g Great depression in Germany in 1929. In the present time, Venezuela also experiences 3000% inflation).
  • The cost of printing will increase.

Government Efforts:

  • The government has been mainly targeting to reduce fiscal deficit and revenue deficit under the existing fiscal responsibility and budget management (FRBM) Act.
  • Over the past 15 years, the government has largely been able to keep the deficits below budgeted levels
  • Under the FRBM Act, 2003, the three-year target (2021-22) for fiscal and revenue deficits have been set at 3% and 1.5%, respectively.

Conclusion:

  • India needs to significantly improve its tax to GDP ratio to be able to serve its running cost without borrowing and thus maintain a primary surplus.
  • India also has to maintain a high growth rate while the interest rate has to ease down sharply for significantly bringing down debt to GDP ratio

References: