India's public debt to GDP ratio may hit record high of 90% in 2020

This makes India most indebted major economy in the emerging markets after Brazil and Argentina and worse off than Bangladesh and Pakistan

India’s public debt to gross domestic product (GDP) is likely to increase to a record high of 89.3 per cent in 2020, breaking the previous high of 84.2 per cent in 2003.
 
The ratio was 72.3 per cent in 2019 and 68.8 per cent five years ago in 2015, according to the data from the International Monetary Fund World Economic Outlook (WEO).
 
This makes India the most indebted major economy after Brazil and Argentina among the emerging markets.
 
In South Asia, India now becomes the most indebted country after Bhutan and Sri Lanka and worse off than Bangladesh, Pakistan, and Nepal.
 
According to the WEO database, Pakistan’s public debt to GDP is likely to be 87.2 per cent in 2020 while the ratio will be around 40 per cent in the case of Bangladesh and Nepal (see the adjoining chart).
 
In per capita terms, every Indian has a debt of $1,674 against Bangladesh’s $748 and around $1,100 in the case of Pakistan.
 
Economists attribute the sharp rise in India’s public debt to the double whammy of GDP contraction and additional borrowing this year.
 
“The Covid-19 lockdown has created an unprecedented condition of a double-digit dip in GDP and tax revenues and sharp rise in government borrowing to fill the shortfall in revenues. The result is a record rise in the debt-GDP ratio,” said Madan Sabnavis, chief economist, CARE Ratings.
 
According to the International Monetary Fund (IMF), India’s government revenues, including those of the Centre, states and local bodies, are expected to decline by 12.3 per cent in rupee terms and 15.4 per cent in dollar terms in 2020, one of the worst dips in government revenues among major economies. In comparison, the agency expects a 6.3 per cent and 9.6 per cent decline in India’s GDP at current prices in rupee and dollar terms, respectively, in 2020.
 
In contrast, the IMF expects an 11.9 per cent year-on-year decline in tax revenues in Bangladesh and 8.9 per cent in China in 2020.

 
Experts say a sharp rise in public debt and additional debt servicing may complicate India’s growth plans.
 
“The incremental borrowings this year will lead to an additional interest burden of a minimum Rs 1.5 trillion every year for decades to come. This will reduce the resources available for discretionary spending, such as capital expenditure, which may have some impact on GDP growth,” said Madan.
 
The additional interest burden is equivalent to nearly 5 per cent all tax revenues and around 10 per cent of central government net tax revenues.
 
The share of capital expenditure in the Budget was 13.6 per cent, according to budget estimates for 2020-21. While higher than in the previous year, it was far from the 2004-05 peak of 19.3 per cent, since when there has been a declining trend.
 
Some also worry about India’s debt sustainability if GDP growth doesn’t recover fast enough in 2021. “Public debt and debt servicing become unsustainable if growth in nominal GDP stays below the interest on government borrowing for a few years as has been the case this year,” said Devendra Pant, head economist, India Ratings & Research.

 
Another variable to be kept in mind would be the primary fiscal deficit, which is the fiscal deficit net of interest payment.
 
“This has to be positive to keep public debt in check and reduce it over a period of time,” said Pant.
 
The government could attempt to push some capital expenditure through public sector companies, said Sreejith Balasubramanian, economist (fund management), IDFC Asset Management Company.
 
The important thing is to ensure minimal permanent damage to smaller businesses, employment, and wages, ensuring that they are in a position to bounce back whichever way the government manages to push growth.
 
“Growth takes care of a lot of things,” he said.
 
Market analysts are, however, are not worried about the public debt and its impact on India’s growth potential.
 
“Public debt is on the rise across the world and there is no direct connection between it and GDP growth. When GDP growth rebounds next year as expected, it will cease to be an issue,” said Dhananjay Sinha, head (research), Systematix Institutional Equity.