The International Monetary Fund (IMF) reports that due to an increase in public spending as a response to the Covid-19 pandemic, India’s public debt ratio is predicted to experience a considerable surge. From its stable position at about 70% of the Gross Domestic Product (GDP) since 1991, it is anticipated to jump by 17 percentage points to almost 90%.
The Escalation of Public Debt Ratio
A major factor contributing to the drastic increase in the public debt ratio has been the Covid-19 pandemic. The rise in public expenditure in response to the virus and the subsequent fall in tax revenue and economic activity are set to push the public debt ratio up by 17 percentage points. Nevertheless, according to IMF projections, the ratio is set to stabilize in 2021 and gradually decline until the end of the projection period in 2025.
This pattern of public debt in India aligns with global trends. It’s important to note that the debt-to-GDP ratio is a metric that compares a country’s public debt to its GDP. This ratio, usually expressed as a percentage, provides a reliable indication of a country’s ability to repay its debts. For countries with high debt-to-GDP ratios, repaying public debts becomes a significant challenge.
An Overview of India’s Fiscal Situation
Since the 1991 economic liberalisation reforms, India has become a critical growth contributor on a global scale. Real GDP growth averaged at 6.5% from 1991 to 2019, and real GDP per capita increased fourfold during this time. In stark contrast to real GDP, nominal GDP is calculated based on the current prevailing prices.
This impressive economic performance has propelled millions of Indian citizens out of extreme poverty. According to data, the rate of extreme poverty—defined as the proportion of people living on less than $1.90 a day at purchasing power parity—fell from 45% in 1993 to 13% in 2015. India fulfilled the millennium development goal of halving its poverty level by 2015.
India has also made significant progress in other areas such as education – enrollment is nearly universal at the primary school level. Since 2000, infant mortality rates have been reduced by half and access to utilities such as water and sanitation, electricity, and roads has significantly improved.
A Way Forward
In order to counterbalance the immediate ramifications of the pandemic, additional fiscal actions are recommended to support the poor and vulnerable segments of the Indian society. Along with this, the implementation of trustworthy medium-term fiscal consolidation plans could help bolster market confidence and stimulate India’s growth potential.
The Covid-19 pandemic has significantly disrupted progress in health, education, poverty, and nutrition sectors, making the achievement of the Sustainable Development Goals even more urgent. Macroeconomic and financial stability are crucial for sustainable development in these trying times.