Is Declining Debt Enough?

Government meets fiscal deficit target but falling GDP growth puts a question mark over finances.

- PRASANNA MOHANTY

THE CENTRE has brought down its debt (internal and external), one of the key fiscal parameters, by a good 3.1 percentage points from last year's Budget promise of 59% of gross domestic product (GDP) to 55.9% (revised estimate or RE). In FY24, it is estimated to climb up marginally by 0.3 percentage points to 56.2%. This is commendable when compared with the 15th Finance Commission's "indicative" path of 61% for FY23. However, government has a long way to go before it can bring the number below the Fiscal Responsibility And Budget Management (FRBM) Act's cap of 40%.

This is not surprising. Central government's debt has traditionally remained high. It averaged 49.5% in seven fiscal years before Covid-19 forced government to borrow more to support the economy, taking it 10 percentage points up from 50.9% to 61% in FY21 and forcing the 15th Finance Commission to increase the target to 61% for FY23 and 60.1% for FY24. But external borrowings of 1.8% of GDP in FY23 remain a bright spot. These are estimated to touch 1.7% in FY24, way below 2% in FY21. This is a big relief given the depreciating rupee and rising interest rates in U.S.

India's debt surge in FY21, however, wasn't exceptional. It matched the global rise in debt in 2020 from 54% to 64% of GDP, the highest rise since World War II. In OECD countries, central government borrowings rose 16 percentage points as they spent more to support their population and businesses-their stimulus was nearly 24% of GDP compared with India's 1.6% of GDP.

However, a closer look at Budget numbers throws up several red flags.

Fiscal/Revenue Deficits