Context: 

• The International Monetary Fund(IMF) has raised concerns about the long-term sustainability of India’s debts. It also reclassified India’s exchange rate regime, terming it a “stabilised arrangement” instead of “floating”. At this juncture, understanding the debt burden of the Government of India becomes necessary.

Current Debt Situation:

• The Union government’s debt was ₹155.6 trillion, or 57.1% of GDP, at the end of March 2023 and the debt of State governments was about 28% of GDP. 
• As stated by the Finance Ministry, India’s public debt-to-GDP ratio has barely increased from 81% in 2005-06 to 84% in 2021-22, and is back to 81% in 2022-23. 
• This level of debt is far higher than the levels specified by the Fiscal Responsibility and Budget Management Act (FRBMA). 
• The 2018 amendment to the Union government’s FRBMA specified debt-GDP targets for the Centre, States and their combined accounts at 40%, 20% and 60%, respectively. 

Challenges due to high levels of Debt:

• The weight of debt can act as a drag on development due to, 
  • Limited access to financing due to the low sovereign ratings which scares away investors.
  • Rising borrowing costs also due to sovereign ratings as interest rates has to be increased to attract risk taking investors.
  • Currency devaluations which makes import of essential goods costly and exports less competitive. 
  • Limited employment generation as growth of the economy stagnates due to the above mentioned problems. 
  • Reduced social spending: To manage debt, the government may be forced to cut spending on critical social programs like healthcare and education, hindering human development.

Way forward:

• Fiscal consolidation measures to reduce the budget deficit and bring down debt levels over time. This may involve a combination of increased tax revenue, spending cuts, and reforms to improve fiscal efficiency.
• Rationalisation of subsidies can reduce burden on the public finances and at the same time ensures that the deserving people get Government support.
• Debt restructuring to use the cheaper sources of finances available at different situations.

Addressing India’s debt challenge requires a comprehensive and coordinated approach, in the long term,  that balances fiscal responsibility with long-term economic growth and social development goals.