public-debt-ratio-to-rise-to-90-of-gdp-on-covid

Context: India’s public debt ratio is projected to jump by 17 percentage points to almost 90?cause of an increase in public spending due to COVID-19.

Increasing public debt ratio

  • It has remained stable at about 70% of the GDP since 1991
  • However, the increase in public spending, in response to COVID-19, and the fall in tax revenue and economic activity are the main reasons behind the jump.
  • It is projected to stabilise in 2021, and slowly declining up to the end of the projection period, in 2025. 

Need for fiscal stimulus: Going forward, public finances should continue to support growth and development in India. 

  • The effects of COVID-19 on health, education, poverty and nutrition render progress towards the Sustainable Development Goals even more urgent. 
    • Macroeconomic and financial stability are important necessary conditions for sustainable development

In order to facilitate rebalancing of the economy, fiscal policy should shift its focus from infrastructure towards household support and green investment.

Public debt 

  • It includes the total liabilities of the Union government that have to be paid from the Consolidated Fund of India. This is as per Article 292 of the Constitution.
  • The Union government clearly distinguishes its debt liabilities from those of the states. 
  • It calls overall liabilities of both the Union government and states as General Government Debt (GGD) or Consolidated General Government Debt.
  • Almost a fourth of the government expenditure goes into interest payment.
  • As per Reserve Bank of India Act of 1934, the Reserve Bank is both the banker and public debt manager for the Union government.

Sources of Public Debt

  • Dated government securities or G-secs.
  • Treasury Bills or T-bills
  • External Assistance
  • Short term borrowings
  • Public Debt definition by Union Government
  • Internal debt constitutes more than 93% of the overall public debt.

Types of Internal debt

  • They are further divided into two broad categories – marketable and non-marketable debt.
  • Dated government securities (G-Secs) and treasury bills (T-bills) are issued through auctions and fall in the category of marketable debt. 
  • Intermediate treasury bills (with a maturity period of 14 days) issued to state governments and public sector banks, special securities issued to National Small Savings Fund (NSSF) are classified as non-marketable debt.

Types of Public Debt

  • The Union government broadly classifies its liabilities into two broad categories. 
  • The debt contracted against the Consolidated Fund of India is defined as public debt 
  • It includes all other funds received outside Consolidated Fund of India under Article 266 (2) of the Constitution. 
  • The second type of liabilities is called public account.

Public Debt versus Private Debt

  • Public Debt is the money owed by the Union government, while private debt comprises all the loans raised by private companies, corporate sector and individuals such as home loans, auto loans, personal loans.

Public Debt as a percentage of GDP

  • The Union government’s liabilities account for a little over 46% of the country’s GDP. 
  • However, if the public debt is calculated as general government liabilities, which also includes the liabilities of states then it goes up to 70% of the country’s GDP.

Image source: Business Standard