Daily News Analysis :-

India’s debt burden

Recently, IMF termed India’s debt is unsustainable in the long run and reclassified India’s exchange rate regime as ‘stabilized arrangement’ from ‘floating’.

Status on India’s debt

• Currently, India’s debt to GDP ratio is 82%. However, FRBM mandates it to be reduced to 60%.
• IMF projects India would breach the mark of 100% by 2028. Deeming it as unsustainable.

Impact of debt burden

1. Paying more interest: Highest share of revenue goes for interest payments. 20% of the budget.
   • Drag on development
   • Dilemma between servicing debt and serving people.

2. More riskier: debt and interest rates are subjected to higher interest rates, fluctuating exchange rate.
3. Intergenerational injustice: Future generations to pay higher taxes for the debt incurred by current generations.
4. Affects investment interests on India: Higher debts leads to lower investment ranking by Moody, Fitch and S&P.
   • India is ranked under BBB, which is a low investment ranking.
5. Further encouragement for fiscal slippage: Breach of FRBM targets would allow future governments to continue the incur debts affecting accountability.

Reasons for increaing debts

1. Developmental interests from developing countries. 30% of world debt is incurred by developing countries. Within 30%, 70% of debt is incurred by China, India and Brazil.
2. Climate change and disaster management. Mitigation and adaptation efforts.
3. Increased revenue expenditures in developing countries: MGNREGA, MSP, NFSA.
4. Election promises and excessive expenditure to fulfill those promises.  Eg: Freebies culture.

Measures

1. Concessional sources of financing.
2. Private sector investments in infrastructure projects
3. Carbon financing, carbon tax for climate change financing.
4. External borrowing through masala bonds: Averts the risk of exchange rate on loans.

How public debt has differnet impact of developing and developed countries.

1. Cheaper loans for developed countries due to trust of return and stronger fundamentals.
2. Greater revenue and per capita income to service interests rate through taxes.
3. No exchange rate problems due to
   • Borrowing in domestic currencies.  Eg: America borrows in dollars.
   • Better performing currencies.

Hence, developing countries like India should follow fiscal prudence guided by FRBM to make its debt sustainable in shorter and longer term.