The Ministry of Finance recently unveiled the Status Paper on government debt for the fiscal year 2017-18. This paper outlines the central government’s overall debt as a ratio of the GDP, which has dropped to 46.5% in 2017-18, down from 47.5% since March 2014.
However, the report indicates that state governments’ debt has seen an increase to 24% in 2017-18, with predictions reaching 24.3% in 2018-19. The document suggests that while the central government is making steady progress towards meeting the N.K. Singh Committee recommendations on public debt, state governments are lagging.
A Low Currency Risk and Negligible Impact on Balance of Payments
At the end of March 2018, external debt represented 2.9% of the GDP. This data indicates a low currency risk for the Government of India’s debt portfolio. In addition, its influence on the balance of payments remains insignificant.
Meanwhile, general government liabilities which include the liabilities of state governments, increased to 68.2% of the GDP in 2017-18 from 67.5% of the GDP in 2016-17.
Causes Behind Rising Debt
Two key factors have contributed to the escalating government debt:
Bank Recapitalisation
In 2017-18, the government instigated bank recapitalisation by infusing capital in state-run banks using recapitalization bonds. This process resulted in an increase in total central government debt in both absolute terms and as a percentage of GDP.
UDAY bonds
The liabilities of states have surged during 2015-16 and 2016-17 following the issuance of Ujwal Discom Assurance Yojana (UDAY) bonds. Launched in November 2015, UDAY aims at financially reviving loss-bearing state power distribution utilities with the backing from the respective State governments.
The N.K. Singh Committee and Its Recommendations
Constructed in May 2016, the N.K. Singh Committee, under the leadership of the former Revenue Secretary, was established for reviewing the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. The committee recommended using debt as the primary target for fiscal policy. It proposed a targeted Debt to GDP ratio of 60%, with a limit of 40% for the center and 20% for the states, to be achieved by 2023.
| Year | Targeted Debt to GDP Ratio |
|---|---|
| 2017 | 40% |
| 2018 | 45% |
| 2019 | 50% |
| 2020 | 55% |
| 2021 | 60% |
Government Debt and Its Types
Government debts are classified as Public Debt (debt contracted against the Consolidated Fund of India), Other Liabilities (liabilities in the Public Account), Internal Debt and External Debt.
Public debt includes marketable debt such as government dated securities and treasury bills issued through auctions and non-marketable debt including treasury bills issued to state governments, securities issued to National Small Savings Fund (NSSF) and international financial institutions.
External Debt refers to funds borrowed from foreign entities, which should be repaid in the currency in which it was borrowed.
Other Liabilities include accounts related to provident funds, reserve funds, deposits, among others.