- This FAQ tells what is
Debt GDP Ratio, which countries have the highest ratio (USA, China), What is the impact of high debt for India and Interest rate rise in USA. How one uses borrowed money is important.
Before and during the elections, individual supporters make various charges depending on which party you back. An individual tweeted (now X) that India’s debt GDP ratio was very high. To my surprise former foreign secretary replied with the ratio numbers for USA, Japan etc. saying that India’s ratio was lower than them.
Just a few days ago finance minister N Sitharam, probably in a bid to calm the stock markets said, “That India’s debt-to-GDP ratio was at 81% in FY22, compared with 260.1% for Japan, 121.3% for the US, 111.8% for France and 101.9% for the UK.” Source
How to define this
ratio and why is it important? I have tried to tell simply.
1. What
is Debt GDP Ratio?
“The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.” It is always expressed as a %. Source
In India debt would mean combined debt
of Central and State governments.
If debt goes down or GDP increases the ratio change would be favourable. “A high debt-to-GDP ratio signifies a state's debt burden is substantial compared to its economic output. This indicates financial vulnerability and reduced fiscal flexibility.” Forbes India
The higher the ratio it means that a country is using more of debt to fund its current expenditure and incur higher interest cost due to borrowings. High debt levels and interest pay-outs reduce funds available for development/welfare activities for e.g. health, education and making roads. If lenders believe there is a risk of loan default, they will hike interest rates which increases cost of servicing debt.
Now let us relate the concept to your
household.
Assume that GDP is total household
income. The more loan you take the larger % of your income would go towards
repaying principal and interest. This would leave little money for expenses
like children education, saving for medical emergencies and entertainment.
2. What is country-wise
Debt GDP Ration % for 2023?
Japan is 260%, Italy is 151%, USA is 129%, France is 113%, UK is 97%, India is 89%, China 77%, Germany 69%. Source Wisevoter.com
Gross Public Debt as a % of GDP in April
2024 according
to IMF is Japan 255% (261), Italy 139%
(144), USA is 123% (121), France 112% (112), UK 104% (101), India 83% (83), China
89% (77), Germany 64% (67). Figures in brackets are 2022
IMF figures. Percentage for USA and China have gone up.
Note that IMF/World Bank classifications/measures differ from RBI/Government of India.
FM N Sitharaman said above, ratio for India in FY22 was 81%. In FY23 it is 89%. Debt peaked in the pandemic but Central Government debt has been coming down since, although debt ratios rose for some states.
3. India Government Debt
to GDP
India recorded a Government Debt to GDP of 86.54 percent of the country's Gross Domestic Product in the 2022-23 fiscal year. Government Debt to GDP in India averaged 69.71 percent of GDP from 1980 until 2022, reaching an all time high of 89.45 percent of GDP in 2020 (Covid) and a record low of 47.94 percent of GDP in 1980. Reserve Bank of
India Source Tradingeconomics.com
Read Ratio
expected to fall to 73.4% by 2030-31
Read RBI report in PDF The Shape of Growth Compatible
Fiscal Consolidation
Read Debt to GDP of States in FY 2023-24 ForbesIndia & 4 states have a debt gdp ratio of over 40% CMIE & State Ratio 2018 to 2023
4. When the country
borrows more its Debt goes up. If GDP does not increase what is the impact of
high debt?
“A study by the World Bank found that countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns in economic growth.”
It is important how the
money borrowed is used. If money is used for development expenditure say highways,
power plants, electrification of railways it will increase productivity and
lower costs. This will add to GDP over a period of time and could reduce the
ratio.
If money borrowed is used
to give doles, grants that is used to enhance personal consumption it could
lead to inflation i.e. more money chasing less goods. If borrowings increases
supply or money is sucked out of the economy, it may keep inflation under
check.
If inflation rises, the
Central Bank might increase interest rates to rein it. This would adversely
impact all borrowers be it corporate or individuals.
“Finally, financial stability could become strained in emerging markets with relatively weaker economic fundamentals, as high debt burdens make them much more vulnerable to capital outflow pressures, exchange rate depreciation, and increased expectations of future inflation.” IMF Blog
If debt is used to artificially inflate
asset prices, say real estate and stocks, the bubble, when it bursts, could
take the financial markets down. This in turn could lead to a political crisis
that would destabilise markets further.
5. What happens if interest
rates in USA are increased?
When interest rates rise
in USA, foreign institutional investors find it more attractive to retain funds
in USA rather than invest in emerging fund markets. When this happens, inward
remittances to emerging markets fall. This could precipitate a foreign exchange
crisis and impact financial stability.
It is easy to borrow money. What you do
with that borrowed money holds the key to your future. Companies that had debt
under control have invariably prospered long-term.
When in doubt remember these excerpts
from the International Debt Report 2023 by World Bank Group-
“It sounds an alarm about the danger confronting low- and middle-income countries—particularly the poorest. In 2022, the latest year for which data are available, low- and middle-income countries paid a record US$443.5 billion to service their external public and publicly guaranteed debt.” USA’s rising debt levels are giving jitters to many.
Individuals,
Companies, Countries think hard before you Borrow and importantly how you use
the money borrowed.
The incoming government BJP or Congress
at the Centre must reduce debt levels and ensure state government borrowings
are within limits set by the Finance Commission.
Also
read
1. Congress Freebies could damage hard-won fiscal success
2. Kerala goes to SC-Why state government borrowing needs
to be within limits
3. Inflation trends in India
4. Freebies are paid for by the common man
5. Foreign remittances from the Gulf are falling and US
rising