As per SBI Report, India’s debt-to-GDP ratio will shoot up to 87.6 percent (Rs 170 trillion) at the end of the current financial year from 72.2 percent (Rs 146.9 trillion) in FY20 on the back of extra borrowing by the government in wake of the COVID-19 pandemic.
The debt-to-GDP ratio is the ratio between a country’s government debt and its GDP. This ratio is a useful tool for investors, leaders, and economists as it allows them to gauge a country’s ability to pay off its debt.
Let us explain
If a country were a household, GDP is like its income. Banks will give you a bigger loan if you earn more income and more money. In the same way, investors will be happy if the country produces more goods which will lead to more GDP
Whereas GDP refers to the total value of goods and services produced and a higher ratio is undesirable.
As per the study conducted by the World Bank, a ratio exceeding 77 percent may result in an adverse impact on economic growth, and concern for India is not only Debt to GDP ratio but also how quickly it will come down to more comfortable levels.
India Rating has been degraded to BBB- with a stable outlook, which is the lowest among countries rated in the investment-grade due to lack of growth and policy implementation by the government which will definitely impact additional FDI money from investors
India had a wild target of achieving Debt to GDP ratio to 60 percent by 2023. Clearly, we don’t take targets seriously. Well, this time pandemic is the excuse and as per the current forecast, it is going to take nearly 7-10 years to reach the target ratio. No questions asked to the government on this anymore
According to CARE Ratings, the aggregate amount raised by the central government during the current fiscal is Rs 4.5 trillion, 66 percent higher than the corresponding period last year which has clearly impacted the debt to GDP ratio as numerator has increased (Debt) with a decrease in the denominator ( Production of goods)
But there is a silver lining over here, “The current level of foreign exchange reserves is sufficient to meet any external debt obligations.”
India had hit jackpot with an all-time high reserve with $516.3 billion. Our Import bill has dropped due to lower oil demand and gold import and RBI has managed to build war chest against debt.
The big question is how soon can we achieve our ambitious target of Debt to GDP ratio of 60%, 5 Years, or 15 Years…
Small Trivia for our readers
How about Debt to GDP ratio of more than 100%, will it lead to a bankrupt or insolvent country?
Well, 16 Countries have a debt to GDP ratio of more than 100% with Japan on top of the league with a ratio of 237.5%. However, a high ratio is acceptable if a country is able to pay interest on its debt without refinancing or adversely impacting its economic growth and in case of Japan, government bonds are held by the country’s citizens, resulting in extremely low-interest rates