Banking Finance 2023, Banking Finance August 2023


Public debt or Govt Debt is the total amount borrowed by the government of a country.  In the Indian context, public debt includes the total liabilities of the government (Both Central and State).

Since the government relies heavily on market borrowing to meet its operational and developmental expenditure, the study of public debt becomes key to understand the financial health of the government and its ability to raise funds to improve the economy by increasing Government expenditure in current and post covid scenario.

Let’s understand the public debt Facts in Indian Context:

The debt to GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP) and is a widely accepted parameter to understand and compare the health of the economy.

Debt to GDP= Total debt of the country/Total GDP of the country

The general principle is higher a country’s debt to GDP ratio means higher is the risk of default. Delay in making payments by a country triggers the panic button of domestic and international financial markets.

As per Government of India report dated May 2020, Overall government debt to GDP ratio which includes the central govt debt and state govt debt as a percentage to GDP dropped marginally by 0.1% from 68.7% in fiscal 2017-18 to 68.6% or Rs 1.3 crore crores ( Rs 130 trillion) in FY 2018-19.

Overall government debt to GDP ratio of the central govt debt as a percentage to GDP dropped marginally by 0.1% from 45.8% in fiscal 2017-18 to 45.7% or Rs 86.73 lacs crores in FY 2018-19.

There are two types of debts i.e. Internal & external debt. The government finance was largely protected by currency risk as overall external debt stood at 2.7% of GDP in FY 2019.



Who funds this Public Debt: In India, most of the public debt is funded by Commercial banks, insurance companies and RBI.


Interest Payments to Revenue Receipts

The ratio of interest payments to revenue receipts is another crucial indicator of debt sustainability. The ratio of interest payments to revenue receipts of the Central Government has remained in the range of 35.6 per cent to 37.5 per cent during 2011-12 to 2018-19

The IP/RR ratio for States’ and UTs with legislature moderated from 12.5 per cent in 2011-12 to 11.2 per cent in 2018-19.

The combined IP/ RR ratio of both the Central and state governments  was 20.4 per cent in FY 2018-19 as compared to 22.0 per cent in FY 2011-12


Average Interest Cost (AIC)

It is arrived at by dividing interest payments during a year with average debt. Centre’s AIC increased marginally from 6.6 per cent in 2011-12 to 7.1 per cent in 2018-19, while States’ AIC declined slightly from 7.2 per cent to 7.0 per cent over the same period


What should be Ideal Debt to GDP and should the Indian Government go for Debt shopping for dealing with the current Economy scenario:

A study by World Bank reveals that if the Debt/GDP ratio exceeds 77% for prolonged periods then those countries experience a significant slowdown in economic growth.

Every percentage point of debt above this level cost counties 1.7% in economic growth. In the emerging market, each additional percentage point of debt above 64% annually slow down growth by 2%

So we have already crossed the standard tolerance line of 64%. However, if we see the debt position of major economies we found following scenario.

Major Countries public debt as per IMF

Name of Country Debt to GDP Percentage
China 50.64
India 68.05
Austria 73.75
United Kingdom 86.77
Brazil 87.01
Canada 89.94
Egypt 92.65
Spain 97.09
France 98.39
Belgium 102.03
United States 106.91
Portugal 120.13
Italy 135.48
Venezuela 182.45
Greece 184.85
Japan 237.13


If we observe above data, we will find that their are many countries who have high chances of default with a higher level of loans. For example Portugal, Italy, Venezuela and Greece faced a default situation in recent past. They all have their Debt levels above 64% of GDP.

However many developed countries like USA, UK, Japan, France, Spain and Canada have higher Debt to GDP ratio and they have already  surpassed standard base level of 64% and still considered as strong economies.

China’s case is unique as it does not show its overall liabilities properly and some reports put its liabilities at over 300% and still it is considered as strong economy. Hence a few economist see the scope for India to increase its borrowing above 64% standard base line based upon above data.

Considering above what shall be Justification for Public Borrowing in current scenario:

Advantages of public debt:  Being welfare governments, India has to spend a lot on the welfare of their citizens whereas the tax revenue is quite insufficient to meet the expenditure especially due to covid scenario. The duty of government has increased substantially due to COVID and hence, the government should resort to public borrowings.

The following are the benefits of Public debt shopping in the current scenario

i. Unforeseen Emergencies:

As a country, we are also facing a unforeseen situation in form of  COVID emergencies wherein central and state government are facing huge medical, vaccination and other related expenses pressure.

The repetitive aggression on borders from our neighbouring countries and other natural calamities also adding pressure on Government exchequer to deal with them in short and long term.

ii. For Economic Development:

Due to covid 19, there are huge displacement and a job loss of working population. Many state government and central government are trying to create more jobs for its citizens who have become jobless. This requires spending on economic and social infrastructure.

iii. To Curb Inflation:

Needless to mention that India is an inflation-sensitive country and after Covid, the government has to ensure that prices of the good and commodities should not arise exponentially.

iv. To Control Depression:

As a Country India is currently looming towards depression due to fall in economic activities on account of Covid lockdown, migration of working-class and job loss. To control this Government expenditure has to step up to stimulate the economy. By increasing the government spending an economy can be brought out of recession. And, government spending has a multiplier effect on income and employment. Hence this proposed additional spending by the governments fuelled by public borrowing will revive the economy from depression.

  1. Providing for Social Services: Health being a state subject requires maximum investment from State Government and currently, state governments are in dire needs to funds to support their medical aid system.

Vi. Advantages to Investors: In the current scenario when many banks are bleeding with mounting NPA and a few banks were nearly busted, the investors are looking towards the safety of their hard-earned money. Hence this is the right situation to provide the investor with some respite in form of Government borrowing.

Vii. Finance to Public Enterprise: Currently, to revive the economy, reduce the import dependence and to support made in India the investment in such projects is the need of the hour. In times of uncertainties private investor or Enterprise would not like to risk his capital in such project without a thorough study, viablity and visiblity, however for overall growth and sustainability and to boost up the confidence of private entrepreneurs, such investment by govt on its own or PPP basis shall provide a base for economic revival.

Disadvantages of Public Debts in the current scenario

In the past, public debt has faced many criticisms by economists as its unplanned use has created many monetary and other problems. So, its use may’ be made very carefully. Taking loans for unproductive purposes, for extravagance, dependence on foreign investors and outflow of national wealth are some of the disadvantages.


Hence Public debt serves an important purpose in the national prosperity if excessive dependence on it can be avoided. The government should go for debt shopping only when there is no other option.

Conclusion: Should we go ahead with more public debt

In the short run, public debt is a good way for any country to get funds to invest in its economic growth and come out of recession.  With proper planning, public debt expenditure improves the standard of living of the citizens. It allows the government to build new roads and bridges, improve education and job training, and provide social benefits like medical, education etc.


Governments usually take too much debt because the benefits make them more popular with citizens. Increasing debt allows the government to increase spending on populist schemes without raising taxes.

Investors are usually not concerned until the debt-to-GDP ratio reaches an alarming level. When debt approaches at a certain level, investors then demand higher compensation to compensate that risk in form of the higher interest rate. They want more return for the greater risk. If the country keeps spending, then its bonds may receive a lower rating.

As interest rates increases, it becomes more costly for a country to refinance its existing debt. Some times, more income has to go toward debt repayment, and less toward public services. We have seen similar examples in a few countries of Europe, wherein a similar scenario had lead to a sovereign debt crisis.

Currently, as a country, we are facing a downgrade of our rating and we have already crossed the critical benchmark of Debt to GDP. Our one-fourth revenue goes into just repaying of Interest liabilities and our average Interest cost is higher than our GDP growth rate.

However, if we compare ourselves with other major economies like China, USA, UK and other European countries then our position is better off as far as Debt to GDP ratio is concerned and as a short term measure to counter Covid Scenario and to boost economy we may go ahead with public spending based on public debt. Hence, governments need to carefully find that sweet spot of public debt. It must be large enough to drive economic growth but small enough to keep interest cost low.

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