The Atal Bihari Vajpayee government had managed public debt well by taking advantage of low interest rates
For the last few days, a discussion has been going on in the media that the debt on the government has increased much more than before. The Congress says that when they left office in 2014, the country had a debt of only Rs 56.7 lakh crore, which has increased to Rs 152.6 lakh crore in 2022-23. Apparently, this figure appears big.
Theoretically, the government debt is not measured by its absolute size. It’s measured as a percentage of GDP.
Accordingly, in the context of GDP of Rs 112 lakh crore at current prices in the year 2013-14, the total debt and liabilities of the government which were Rs 56.7 lakh crore, in absolute terms, were 50.5 per cent of India’s GDP. By the year 2018-19, the total debt and liabilities of the government, though reached 90.8 lakh crores, but they were only 48 per cent of the GDP of 189 lakh crores of GDP (at current prices), that is, as a percentage of GDP, the government debt and liabilities had decreased by 2.5 percentage points in five years.
The outbreak of the pandemic upset production and tax revenue. In such a situation, despite an increase of only Rs 12 lakh crore in government debt, it as a percentage of GDP increased by 3 percentage points to reach 51 per cent in 2019-20. The year 2020-21 was badly affected by Covid-19, in which the nominal GDP also decreased by Rs 2 lakh crore, but due to the relief to the poor and other affected sections of the society, and huge increase in relief and public health related expenditures, the government debt and liabilities had increased by Rs 18 lakh crore. Due to this, government debt and liabilities as a percentage of GDP reached 61 per cent by 2020-21.
According to the budget estimates for the year 2023-24, the government debt and other liabilities will be Rs 169.5 lakh crore. However, as percent of the GDP of Rs 301 lakh crore it will be reduced to only 56 per cent of the total GDP. In this context, interestingly, in India, foreign debt is a very small part of total public debt, which is less than two per cent of the GDP.
Whether the loan is private or public, there is a liability attached to it, to repay interest and principal. As far as governments are concerned, governments continuously borrow and this debt keeps increasing progressively. It is worth mentioning that in 1950-51 the total debt and other liabilities of the government were only Rs 2,865.4 crore, which according to the revised estimates of 2022-23 has reached Rs 152.6 lakh crore. In Budget 2023-24, a provision of about Rs 10.8 lakh crore has been kept for interest and principal return, which is 24 per cent of the total expenditure of the government.
It can be understood that the repayment of interest and principal, which is increasing year after year, cannot be met with the current revenue of the government and hence more loans have to be taken for interest and loan repayment. But we need to understand that governments of all countries borrow. Therefore, it has to be seen what the position in comparison to other countries of the world is in terms of public debt.
According to the IMF, in the year 2021, the government debt in the US was 122 per cent of GDP, in Japan it was 221.3 per cent and in India it was only 54.3 per cent. Although the IMF does not publish figures for China, other global estimates put it at 79.2 per cent. Only Germany’s debt to GDP ratio was slightly less than that of India at 46.3 per cent.
The Government’s debt in the US in the year 2019 was only 93.1 per cent as a percentage of GDP, which increased to 122 per cent now.
The ratio of government debt and other liabilities to GDP remained around 50 per cent, but this ratio has increased recently, which may decrease again when the situation becomes normal.
The only way to reduce the burden of interest on government debt is by reducing interest rates. In India, the government has to pay about 7 per cent interest on government bonds. If the inflation rate comes down, the government can take new loans at low interest rate, which can reduce the burden of government debt.
In the past also, during the Atal Bihari Vajpayee government, when the inflation rate had reached around three per cent, bonds were sold at low interest and loans taken at very low interest rate for infrastructure construction. The debt burden on the government was reduced. It is imperative to reduce the interest rates by controlling inflation.
(The author is Professor, PGDAV College, University of Delhi)