A Deep Dive into India's Debt Situation

You've probably heard countless debates about India's debt, but how much of it do you really understand? Fret not, this blog post will help unravel the complicated web of macroeconomics surrounding the country's debt scenario in a way that even a beginner can comprehend.

Understanding Debt

Let's get back to the basics. What exactly is debt? Simply put, debt is something you owe. Just like how an individual might take on a loan to buy a house, a nation also borrows to meet its financial requirements. Every single country on earth has debt. As countries grow, so does their debt.

However, a bigger debt pile doesn't necessarily spell doom. A more significant metric to consider is the 'debt to GDP ratio'. This metric describes a country's debt in relation to its Gross Domestic Product (GDP). In India's case, the debt-to-GDP ratio has remained fairly steady around the 80-82% mark since 2018.

Assessing Debt-to-GDP

Still, the question arises: Is India's debt-to-GDP ratio high? To put things in perspective, consider that Japan's ratio stands at around 450%. In fact, many economies sport far higher ratios than India. This implies that India's situation isn't all gloom and doom.

However, it's crucial to consider the ‘strength of the economy’ argument. Even though the debt-to-salary ratio of a regular salaried person might be lower than that of a rich industrialist, it doesn't necessarily make it less problematic. It all boils down to how many assets one possesses. A high debt level with zero assets to back it up is indeed a cause for concern.

Internal Vs. External Debt

There are two primary categories of national debt: Internal and External.

• Internal Debt: This is money borrowed within the internal eco-system of the country. It could be as simple as a government issuing bonds to its own citizens.
• External Debt: This is when a country borrows from foreign sources. Managing external debt is essential as excessive external debt can lead to losses in the nation's sovereignty.

It would be wrong to classify one form of debt as 'better' than the other. The key lies in maintaining a balance between the two.

Understanding the Threat of High External Debt

Being burdened with high levels of external debt can lead to various issues, especially when a nation's currency falls too aggressively against the value of the borrowed foreign currency. Countries like Sri Lanka and Pakistan recently felt the pinch due to their high levels of external debt.

India's Debt Situation

India's external debt as a percentage of GDP has varied over time, reflecting global business cycles. The government has been managing its external debt by maintaining a reserve of foreign currencies, known as Forex reserves.

An interesting phenomenon has been observed in recent times. It seems that India might be raising more internal debt to pay off its external debt.

The Productivity of Debt

Essentially, the question isn't just about how much debt a country has, but more about how the borrowed money is utilised. If the borrowed money goes to sectors that generate employment and encourage growth, then you have a more productive use of debt. A good indicator of this is Gross Capital Formation expressed as a percentage of GDP.

Unfortunately, India's Gross Capital Formation has been on a decline since 2007. We need to ensure that the money borrowed is not used to fuel unsustainable expenditure, but to generate income and create assets.

Conclusion: Is India's Debt a Time Bomb?

Just like every household needs to comfortable manage its debts, the key for India is to ensure its GDP grows faster in real terms compared to the rate of increase in debt. That said, a meaningful part of this debt must be used productively that will ultimately spur economic growth, employment, and increased tax revenues.

In summary, while India's debt situation can't be classified as 'unmanageable' yet, there are enough concerns to warrant close attention and regular reviews.

Key Takeaways

1. India's debt-to-GDP ratio is steady around the 80-82% mark since 2018, which is less than many developed economies.
2. Balancing internal and external debt is vital, and recently India seems to be raising more internal debt to pay off its external debts.
3. The productivity of debt is a key factor - ensuring debt generates income and creates assets is essential for a healthy economy.