Ratio of India's public debt to GDP likely to scale a new high in FY21

The ratio of India’s public debt to GDP is expected to scale a new high at the end of FY21 due to record borrowing by the central and state governments and an expected contraction in the country’s gross domestic product (GDP) during the fiscal year.

According to the Reserve Bank of India (RBI) data, the combined liabilities of the Centre and the state governments were around Rs 147 trillion at the end of March 2020, and that translated into a public debt to GDP ratio of 72.1 per cent at the end of last fiscal year (given the nominal GDP of Rs 203 trillion). Economists now expect the ratio to cross 80 per cent as government borrowing is expected to be around Rs 25 trillion in in FY21. 

India’s public debt will be much higher if one includes the borrowing of public sector enterprises such as the National Highways Authority of India, Food Corporation of India, Indian Railways Finance Corporation, NTPC, Oil & Natural Gas Corporation, and Power Grid. The Central government has announced a 54 per cent increase in market borrowing in FY21 to Rs 12 trillion. In addition, the government is planning to borrow Rs 2.4 trillion from small savings also called post office deposits.

Last week, the Centre also raised the state government borrowing limit to 5 per cent of gross state domestic product (GSDP) from 3 per cent at present. This will translate into state borrowing of around Rs 10.2 trillion in FY21, based on the GDP figures for FY20.

In comparison, India’s GDP is expected to shrink at constant prices, may either grow in low single digits, or remain stagnant at current or nominal prices. The public debt to GDP ratio is calculated on the basis of nominal GDP.

“The fiscal deficit of the Centre alone will be over 7 per cent of GDP in FY21 because they have to maintain some of the expenditures which have been already budgeted. If you assume the states will have fiscal deficit of 5 per cent of GSDP, then the combined would be 12 per cent of GDP,” said C Rangarajan, former chairman of the Prime Minister's Economic Advisory Council. The deficit calculation excludes the borrowings of the public sector undertakings. Rangarajan expects the revenues of the Centre and the states will very much fall below what was projected.

“India’s public debt to GDP ratio is expected to rise by 800-1,000 basis points in FY21, given record borrowing by the government and poor GDP growth,” said Madan Sabnavis, chief economist CARE Ratings.

CARE Ratings expects 0-2 per cent growth in nominal GDP in FY21.

Economists, however, say this is not the time to worry about this ratio.

“We brought the debt to GDP ratio from nearly 84 per cent in 2004 to 66 per cent in 2016. Then, it rose. So rising debt to GDP is these circumstances is not a worrisome part, this can be brought down once crisis is over and the economy is back to normal. Then you can chalk out fiscal consolidation planning as we did it over 2004 to 2016,” said Pronab Sen, former chief statistician of India.