India’s mounting public debt has become a pressing concern, particularly in the wake of the economic disruptions caused by the COVID-19 pandemic. With global public debt expected to surpass $100 trillion in 2024, India’s debt trajectory mirrors a global trend of rising fiscal liabilities. The country has witnessed a sharp increase in its debt-to-GDP ratio, standing at 83.1% in 2024, compared to 69% in 2018, signaling heightened economic vulnerabilities.
The outstanding debt of the Central government escalated from ₹86 lakh crore in March 2020 to a staggering ₹173 lakh crore in March 2024, with projections estimating it to reach ₹181.6 lakh crore by March 2025. This increase reflects extensive pandemic-induced spending on welfare and healthcare. However, the central government accounts for only 67% of India’s total public debt, while state governments contribute the remaining 33%, amplifying the fiscal challenge. The situation among states is particularly worrisome, with 19 states and union territories reporting a debt-to-GDP ratio exceeding 30%, breaching the Finance Commission’s recommended threshold of 25%. Larger states like Punjab, West Bengal, and Bihar exhibit ratios exceeding 38%, signifying fiscal mismanagement and a reliance on unsustainable borrowing.
Why is Rising Debt a Concern for India?
High debt levels come with a slew of economic consequences, jeopardizing fiscal stability and long-term growth prospects.
- Increased Borrowing Costs: Elevated debt levels translate to higher bond yields as markets demand a premium for perceived risks. India’s bond yields reflect this strain, further burdening public finances.
- Capital Outflows: Foreign investors have been steadily exiting Indian debt markets since 2020, driven by concerns over fiscal stability and better returns in other economies. While the inclusion of Indian bonds in global indices has brought some inflows, these remain insufficient to offset broader outflows.
- Reduced Developmental Spending: Rising interest obligations and repayment costs limit the government’s capacity to allocate funds toward infrastructure and social welfare. This diversion of resources hampers economic growth and delays critical development projects.
- Economic Instability: Persistent high debt exacerbates inflation expectations, creates currency instability, and deters long-term investment, undermining economic resilience.
What Challenges Lie Ahead in Addressing Public Debt?
Addressing India’s rising debt involves significant challenges, particularly as the country’s revenue-to-GDP ratio stands at 21.1%, far below the 27% average for emerging and middle-income economies. Additionally, much of the debt at the state level is disguised as guarantees, complicating efforts to track and manage liabilities effectively.
- State-Level Fiscal Indiscipline: Political pressures during elections often lead to unsustainable expenditure commitments, such as subsidies and loan waivers. These measures prioritize short-term electoral gains over long-term fiscal prudence, deepening the debt crisis.
- Structural Deficiencies in Revenue Collection: India’s narrow tax base and exemptions for sectors like agriculture create revenue constraints. Without expanding the tax net to include wealthier farmers and small businesses, bridging the fiscal gap remains difficult.
- Rising Interest Costs: Servicing existing debt consumes a substantial share of government revenues. In the absence of reforms to curtail expenditure, the interest burden risks crowding out productive investments.
How Can India Effectively Reduce Debt?
A comprehensive, multi-pronged strategy is essential to rein in India’s mounting debt. This involves boosting revenues, optimizing expenditures, and implementing structural reforms.
1. Revenue Augmentation:
- Expanding the tax base is crucial. Bringing wealthy farmers and small businesses under the tax net can yield significant revenue without overburdening the middle class.
- Exploring non-tax revenue streams such as the sale of surplus public sector land, strategic disinvestment in CPSEs, and increasing fees for public utilities can provide immediate fiscal relief.
- Improving property tax collection at the state level through better assessment mechanisms and stricter enforcement is another critical measure.
2. Rationalizing Expenditures:
- Reducing subsidies on fertilizers, food, and public utilities can help curb wasteful expenditure. Offering direct benefit transfers or subsidy coupons to the most vulnerable sections of society ensures targeted assistance while reducing fiscal leakage.
- Optimizing wage bills through contractual hiring and leveraging digitization to automate services can significantly reduce administrative costs.
- Encouraging state governments to adopt market-linked pricing for services like electricity and transportation can enhance fiscal sustainability.
3. Structural and Institutional Reforms:
- Implementing fiscal responsibility frameworks at both central and state levels can provide clear targets for debt reduction.
- Enhancing transparency by bringing off-budget liabilities, such as guarantees, under direct fiscal accounting is vital for accurate debt assessment.
- Strengthening coordination between the Centre and states in areas like GST compliance and public sector reforms can foster a unified approach to debt management.
What Lessons Can India Draw from Global Debt Trends?
Globally, advanced economies like the US and Japan operate with far higher debt-to-GDP ratios, at 121% and 251%, respectively. However, these countries enjoy unique advantages as issuers of reserve currencies, enabling them to finance debt by printing money without immediate economic repercussions. India, lacking such privilege, cannot afford to let its debt spiral unchecked.
The International Monetary Fund (IMF) has emphasized the importance of fiscal consolidation, suggesting that countries need a cumulative fiscal adjustment of 3.0–4.5% of GDP to stabilize debt. For India, this necessitates bold policy decisions, including tough reforms in taxation, expenditure management, and governance.
What Are the Risks of Inaction?
Failing to address mounting debt can have dire consequences for India’s economy. Prolonged high debt levels erode market confidence, making external borrowing costlier and riskier. As repayment obligations escalate, public investment in critical sectors like health, education, and infrastructure may suffer, impeding socio-economic progress.
Moreover, without immediate corrective measures, India risks being caught in a vicious cycle of debt and underinvestment, leading to slower growth and worsening fiscal imbalances. To avoid this scenario, India must prioritize fiscal discipline while safeguarding development priorities.
India’s rising public debt poses a formidable challenge, but it is not insurmountable. By adopting a holistic approach that combines revenue generation, expenditure rationalization, and institutional reform, the country can chart a path toward fiscal sustainability. The process will require coordinated efforts from both the Centre and state governments, alongside public support for tough but necessary measures.
While the journey to debt reduction may involve short-term sacrifices, the long-term rewards of financial stability, sustained growth, and economic resilience make it an imperative worth pursuing.