Raising receipts, accelerating economy's size key to address debt problem

Finance Minister Nirmala Sitharaman has said that the Centre is looking at ways to reduce government debt to ensure that future generations are not burdened. She said recently that the country's debt levels are not very high compared to the global average.

Since the Covid-hit year of 2020-21, India's (both the Centre and the states') debt has not come below 80 per cent of the gross domestic product (GDP). It touched nearly 90 per cent (89.45 per cent) during 2020-21. Of this, the Centre's liabilities were around 63 per cent and the state's at 31 per cent. These don't add to the total debt since there is some overlap.

The Centre's debt had risen by around ten percentage points of GDP during 2020-21 compared to the previous year, while the state's debt by little more than four percentage points of GDP.
 

The Centre took a wide range of social work and infrastructure projects to help out the vulnerable section and accelerate the pace of the economy during the nationwide lockdowns in the Covid-19 year.

Sitharaman had said the government wanted to follow the "bang for the buck argument", which it did during the pandemic when it chose to invest heavily for asset creating infrastructure rather than heed calls to put more money in the hands of people.

Many advanced countries chose to put more money in the hands of people and are now suffering from higher inflation and growth slowdown, she had said.

While the general level of debt was projected to come down to 85.21 per cent during 2021-22 (revised estimates), it was pegged at a higher level of 86.54 per cent in 2022-23 (budget estimates), according to data by the Reserve Bank of India (RBI).

According to data released by the International Monetary Fund (IMF), the general debt level of India is not going to come down below 80 per cent of GDP by 2028-29.
 

Among BRICS nations, the debt level of Russia is quite lower than India. It was just 19.16 per cent of GDP during 2020 and is projected to come down to 18.19 per cent by 2028. South Africa had less debt at 68.86 per cent of GDP during 2020 and is projected by IMF to have liabilities in proportion to its GDP less than India's till 2026. However, its debt is pegged at higher than India's in the next two years by the IMF.

China also had less debt than India in proportion to GDP during the Covid-19 year of 2020 till 2022. However, it is likely to incur higher debt than India's in the next six years, according to the IMF.

Brazil has always had higher debt than India's since 2019 and is projected to be so till 2028. 

Among economies larger than India's, the US, UK, and Japan had more debt than their GDPs since Covid year of 2020. It was only Germany, whose debt-to-GDP ratio never crossed or is projected to cross 70 per cent of its GDP from 2019 to 2028.

China's case is already cited above.

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The issue is how India will be able to reduce its debt, particularly in the election year.

So far as the Centre is concerned, its capital expenditure grew 48.14 per cent at Rs 3.73 trillion in the first five months of the current financial year against the Budget Estimates of 33.4 per cent, while the revenue expenditure rose 14.1 per cent against 9.6 per cent.

While part of the capital expenditure, particularly the loans given to the states was front-loaded and could be balanced out in the remaining period of the financial year, cutting revenue expenditure would be a challenge in the election year.

The solution may lie in increasing tax revenues and also the size of the economy to reduce the debt level in proportion to GDP.

Bank of Baroda chief economist Madan Sabnavis says that in an election year, the government may not be able to cut back on revenue expenditure, and hence the axe will be on capex if needed.

"So far tax collections have been good, and if sustained this conundrum will not arise. But if the government falls short on disinvestment, for example, then there will be some pushback on capex. This will pressurise the fiscal deficit," he argues.

 To a query on whether switching market borrowings with small savings to finance fiscal deficit would reduce debt level, he says the use of small savings is more to avoid pressuring the market.

"Small savings typically are more expensive as they are priced above the preceding average yield of the government securities. Further, when these funds are used, the governments- central and state -- pay a premium over the small savings rates," Sabnavis points out.

Hence, they are more expensive than market borrowings, but those only ensure that the government does not compete with the private sector for funds in the market, he explains. 

Anil K Sood, professor at the Institute for Advanced Studies in Complex Choices (IASCC), says India's debt burden as per cent of GDP has gone up during the post-Covid-19 period. It is not, however, as worrisome as it is made out to be, he points out.

He says the country's debt was 83.2 per cent of GDP in 2003-04. It rose from there by just 3.3 percentage points of GDP during 2022-23 (BE). 

He says the main reason behind the increase in debt burden is a slowdown in GDP growth during the pre-pandemic period, and the post-pandemic growth rate is lower than the earlier trend growth.

The decline in debt burden coincides with a high-growth period (2004 to 2014), he says, adding the question that we must ask ourselves: why is our GDP growth slowing down, and what would it take to accelerate it? 

The main reason for debt to increase is that the growth in the government revenue receipts has not kept pace with the growth in its borrowing.

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Earlier, it was the fiscal policy choice of reducing indirect taxes during the global financial crisis that caused revenue growth to collapse.

"During the recent years, decisions like demonetisation, hasty implementation of GST reforms and the reduction in corporate tax rate have caused the growth in tax revenue to decline," he points out.

Sood says the Central government tax to GDP ratio has decreased for many years. "The gross tax revenue at 11.14 per cent of GDP is yet to reach the peak of 11.89 per cent in 2007-08. Similarly, the non-tax revenue is down from 2.81 per cent in 2010-11 to one per cent in 2023-24," Sood points out.

As such, it is important to find effective ways to raise the tax-to-GDP ratio and accelerate GDP growth so that the government (central as well as the state) can raise greater resources for investing in economic and social infrastructure for rebuilding India's ability to grow, he says.

"Any innovatively raised debt has to be paid only through growth in tax and non-tax revenue of the government," Sood says.