Government Debt Management in India – A Decadal Focus

The Government of India is prioritising debt reduction in the upcoming decade. Finance Minister Nirmala Sitharaman has emphasised the need to manage the country’s fiscal deficit effectively. About government debt is crucial for grasping economic policies and their implications on growth.

About Government Borrowing

Governments borrow to meet vast financial needs. These needs arise from the desire to expand the economy. Borrowing can either be through high taxes or loans. When government expenditure exceeds its income, it incurs a fiscal deficit. This deficit is financed through borrowing, which increases the national debt.

Components of Government Debt

The central government’s debt is divided into several components. It includes public debt, which is the total outstanding liabilities from the Consolidated Fund of India. This consists of both internal and external debt. Additionally, liabilities in the Public Account of India and extra-budgetary resources also contribute to total debt.

Internal vs External Debt

Internal debt is classified as marketable and non-marketable. Marketable debt includes government securities and Treasury Bills. Non-marketable debt involves instruments issued to state governments and the central bank. External debt is sourced from non-domestic entities, including multilateral institutions and bilateral agreements with foreign countries.

State Government Debt

State governments are limited to borrowing from internal sources. They require the Centre’s approval for loans if they have outstanding debts owed to the central government. States also accumulate liabilities similar to the central government, which includes provident and reserve funds.

Total Government Sector Debt

General government debt encapsulates the debt of the central government, state governments, and Union Territories with legislatures. It reflects the overall indebtedness of the government sector. This total is calculated by aggregating liabilities and netting out inter-governmental debts.

Current Status of Government Debt

The pandemic increased government debt, peaking in 2020-21. However, as of 2024-25, outstanding liabilities are projected to decrease to 55.7% for the Centre and 27.4% for states. The general government debt remains elevated but is expected to be around 80% for the same period. The 15th Finance Commission has set specific debt-to-GDP ratios for the government, ensuring fiscal responsibility.

Future Debt Management Strategies

The 15th Finance Commission has provided a roadmap for managing government debt from 2021 to 2026. This includes prescribed debt-GDP ratios aimed at maintaining economic stability. The focus will be on ensuring sustainable debt levels while encouraging growth.

Questions for UPSC:

1. Examine the implications of fiscal deficit on economic growth in India.
2. Critically discuss the role of the 15th Finance Commission in shaping government debt policy.
3. Point out the differences between internal and external debt in the context of India’s economy.
4. Analyse the impact of the COVID-19 pandemic on the fiscal health of state governments in India.

Answer Hints:

1. Examine the implications of fiscal deficit on economic growth in India.

1. Fiscal deficit indicates government borrowing needs, impacting interest rates and investment.
2. High fiscal deficits can lead to inflation, eroding purchasing power and economic stability.
3. Persistent deficits may prompt government to raise taxes, affecting disposable income and consumption.
4. Increased borrowing can crowd out private investment, hindering long-term growth prospects.
5. However, strategic borrowing can fund infrastructure and social programs, stimulating economic growth.

2. Critically discuss the role of the 15th Finance Commission in shaping government debt policy.

1. The 15th Finance Commission sets fiscal targets and debt-GDP ratios to ensure fiscal discipline.
2. It assesses the financial needs of states and recommends equitable resource distribution.
3. Its recommendations aim to balance economic growth with sustainable debt levels.
4. The Commission plays important role in maintaining transparency and accountability in government borrowing.
5. By providing a roadmap for debt management, it influences long-term economic stability in India.

3. Point out the differences between internal and external debt in the context of India’s economy.

1. Internal debt is raised from domestic sources, including marketable and non-marketable instruments.
2. External debt is sourced from international entities, including multilateral and bilateral loans.
3. Internal debt is generally considered less risky as it is repaid in local currency.
4. External debt can lead to currency risk and dependence on foreign entities for funding.
5. The composition of debt affects monetary policy and exchange rate stability in India.

4. Analyse the impact of the COVID-19 pandemic on the fiscal health of state governments in India.

1. The pandemic led to increased expenditure on healthcare, straining state budgets .
2. Revenue losses from lockdowns and reduced economic activity exacerbated fiscal deficits.
3. States faced challenges in borrowing due to constraints imposed by the central government.
4. Government debt levels surged, impacting the long-term fiscal sustainability of states.
5. Recovery strategies require prudent fiscal management and support from the central government.