India’s Public Debt

India’s Public Debt


India’s public debt stands at almost 82% of GDP, but it is not considered a debt-sustainability issue due to the country’s high growth rate and a higher share of local-currency debt.

  • According to NCAER, the high debt levels are currently sustainable because most of the debt is held in rupees and the GDP is growing both in real and nominal terms.

GS-03 (Economy)


  • The latest annual consultation report from the IMF had projected an outlook for India’s Economic Growth.
  • The report acknowledged India’s effective inflation management but raised concerns about the long-term sustainability of its debts.
  • It emphasized the need for a prudent approach to managing debt in the future.

Key highlights:

  • States account for one-third of the total public debt, and their debt levels are projected to increase over the next five years in a ‘business-as-usual’ scenario.
  • In States like Punjab and Himachal Pradesh, the Debt-to-GDP ratio could rise by 50%. Despite being heavily indebted, these States do not face sustainability issues due to the implicit guarantee of the Centre and the restriction against holding debt in foreign currency or floating rates.
  • Heavily indebted States often have longer debt maturity and pay little premium, making them ironically better off despite higher debt levels. The interest rates are similar for all States.
  • More fiscally prudent States are effectively subsidizing the more indebted ones. The Finance Commission may need to reward fiscally responsible States and incentivize less prudent States to adopt more responsible fiscal practices.

Key Observations of the IMF Report:

  • Concerns Over Long-Term Debt Sustainability:
    • India’s government debt could reach 100% of GDP by 2028 under adverse conditions.
    • Significant investments are needed to meet climate change mitigation targets, raising long-term risks in debt management.
  • Reclassification of India’s Exchange Rate Regime:
    • The IMF has reclassified India’s exchange rate regime from “floating” to a “stabilised arrangement,” indicating a perceived shift in how India manages its currency.

Public Debt Overview:

  • Public debt is the total amount of money a government owes to both foreign and domestic lenders.
  • In India, it includes all financial obligations of the Union government that must be paid from the Consolidated Fund of India.
  • Types of public debt: External (owed to foreign entities) and Internal (owed to domestic lenders).

Concerns for Public Debt Management in India:

  • High Public Debt Levels: Union government debt was ₹155.6 trillion (57.1% of GDP) as of March 2023, with states adding around 28% of GDP.
  • High-Interest Payments: Interest payments exceed 5% of GDP and 25% of revenue receipts, surpassing spending on critical sectors like education and healthcare.
  • Fiscal Policy Limitations: High public debt restricts the government’s ability to implement counter-cyclical fiscal measures during economic downturns.
  • Credit Ratings and Borrowing Costs: Persistent high deficits can lead to lower sovereign ratings, increasing the cost of external borrowing.
  • Crowding Out Private Investment: Large government borrowings may limit funds available for private investment, affecting economic growth and competitiveness.
  • Systemic Financial Risks: High debt concentration poses systemic risks that could destabilize the financial system.