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What is Debt to GDP Ratio of a Country?
As per the definition, “Debt to GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP)”. Let’s understand this with a simple example, suppose a country’s GDP is $100 and it owes a loan of $80, it means the Debt to GDP ratio of the country is 80%. By comparing what a country owes with what it produces, the debt to GDP ratio reliably indicates the particular country’s ability to pay back its debts.
What is the Status of India's Debt to GDP Ratio?
Finance Minsiter, Nirmala Sitaraman said on Monday that as far as Government’s Debt to GDP ratio is concerned, India has done relatively well compared to other countries. India is among the three least indebted Low and middle income countries (LMIC) in terms of debt to GDP ratio.Â
In 2022, India’s debt-to-GDP ratio was 81%. Comparing this to economies in the same period, the USA (121.3%), France (111.8%), UK (101.9%), Japan (260.1%), Italy (140.5%), and other countries, this is significantly lower. However, a number of nations have recently been in danger of experiencing a sovereign default. According to her, there were about 60 countries with significant levels of debt in 2022 compared to just 22 in 2011.
According to a comparison with other LMICs, the Finance Minister stated that India’s external debt scenario is strong. India is the third least indebted nation among all LMICs when total external debt is divided by gross national income (GNI). This is a crucial sign of a nation’s capacity to manage its external debt. India is the fifth least indebted nation among LMICs based on the ratio of its total external debt to exports of 91.9%.
India makes for 18.7% of the world’s total external debt in short-term debt. She noted that other LMICs with greater percentages, such as Bangladesh, South Africa, Vietnam, Thailand, China, and Turkey, have lower percentages.
It is advantageous to have a smaller percentage of short-term debt because it indicates less urgent repayment pressure.
It is also crucial to remember that the majority of the central government’s debt is denominated in rupees, with only a small portion (less than 5% of the total) coming from external borrowings (both bilateral and multilateral). This indicates that the government’s exposure to exchange rate volatility is typically on the lower end.
India's Debt to GDP Ratio Numbers are Getting Better
The Central Government debt stood at Rs 155.6 lakh crore or 57.1 percent of GDP at the end of March 2023. It has reduced from 61.5% of GDP in 2020-21 to 57.1% of GDP in 2022-23. The debt of state governments at the end of 2022-23 is estimated to be about 28% of GDP.
India’s government External Debt as % of GDP (2020) was just 6.7% compared to 24.4% of Mexico, 28.6% of Pakistan, 20.6% of Indonesia and 15.8% of Türkiye. Before 2014, India’s external vulnerability also shot up because of over-dependence on External Commercial Borrowings (ECBs). Between 2004-14, ECBs rose at a deplorable CAGR of 21.1%, whereas in the 9 years from FY14 to FY23, they have grown at an annual rate of 4.5%.Â
”Domestically issued debt of the Central Government, which is mostly raised through government securities, has a weighted average maturity of roughly 12 years, which indicates low rollover risk. This indicates the sustainability of the Central Government debt. Therefore, the risk profile of India’s Government debt stands out as safe and prudent in terms of accepted parameters of indicator-based approach for debt sustainability”, said FM Sitharaman.
Conclusion
If a country’s Debt to GDP ratio is low (typically lower than its GDP), it indicates the ability of that country to pay back the debts is good. It is a sign of healthy economy of a country and India is looking fit in terms of Debt to GDP ratio as not only it has reduced to 85% but also the number is lower than the its GDP. For India to become a $5 Trillion economy, the Debt to GDP ratio should be at safe levels.Â
