Prof. D. Mukhopadhyay
Debt to Gross Domestic Product (GDP) ratio is used to assess stability and soundness of economic health of a nation. The Debt-to-GDP ratio is the measure for comparing a country’s public debt to its GDP. By comparing what a country owes with what it produces, the Debt-to-GDP ratio indicates that particular country’s ability to pay back its debts in time. A general hypothesis is that the nations with low debt-to-GDP ratios are able to repay their public debts and the economies struggling to generate revenue with an oversized debt face economic adversary.External public debt can have nonlinear impacts on economic growth if it is invested with an intent for generating employment. Thus, at low levels of indebtedness, an increase in the proportion of external public debt to GDP could promote economic growth; however, at high levels of indebtedness, an increase in this ratio could badly hurt economic growth. High public debt can negatively affect capital stock accumulation and economic growth through high long-term interest rates, higher distortionary tax incidence,unbridled inflation and a general constraint on countercyclical fiscal policies that leads to an increased volatility and the lower economic growth.Therefore, an obvious query may peep in the minds of the readers as to what is the ideal Public Debt to GDP ratio. According to the International Monetary Fund (IMF) guidelines, Debt-to-GDP ratios above 77% maybe vulnerable to economic growth and consequently expose a country to riskof servicing its debt leading to causing havoc on its economy in general and financial markets in particular.The Debt-to-GDP ratio assists the investors, decision makers, policy formulators leaders, finance managers and economists in taking decisions at micro and macro levels. It allows them to gauge a country’s ability to pay off its debt. A high ratio exceeding 100% implies that a country isn’t producing enough to service its debt.Generally, a low Debt-to-GDP ratio indicates economic soundness of a nation that produces and sells goods and services without accumulating future debts. However, a rise in public debt may sound to be justified given the nature of the economic crisis and once crisis is controlled and recoveryis in place, high debt over the mid-term still remains vulnerable to the economy. Countries with high rate of indebtedness are unable to with stand future asymmetric shocks in absence of effective monetary policy. High debt economies become victim of oversized fiscal deficit and face large sovereign risk and use of most distortionary type of taxation to finance the additional debt burden in the future. In market driven private sector-based economy, credit facility is sine qua non for investment and growth over time. Both the public and private sectors become beneficiary of smoothing consumption and financing productive investment.
The 2008-2009 global economic crisis contributed to high levels of public debt in economically advanced nations which was observed to have been a shock absorber for output. The ongoing pandemic affected global economic activities. Inflated fiscal deficit is the outcome of the crisis caused by automatic stabilisers and discretionary fiscal measures. India’s Debt to GDP ratio is about 90%. The target fiscal deficit before the pandemic was 3% of GDP for 2020-21 and the same is projected at 6.4% for 2022-2023. Rise in fiscal deficit during the Pandemic was beyond control and almost every country had to experience the same worldwide. India’s target Debt to GDP was 60% which appears to be quitenormal and the current 90% Debt to GDP is the cause of worry and it likely is to increase further if Government India alongwith the respective State Governments remain indifferent to sluggish economic activities. As mentioned elsewhere that Debt-to-GDP ratio above the threshold 77%, each incremental percentage point of debt would cost 0.017 percentage points of annual real growth. It is noteworthy that the threshold is 64 % Debt-to-GDP ratio for the emerging economies and 60% Debt to GDP ratio is justified forIndia. It is worth mentioning that a low Debt-to-GDP ratio is generally desirable which does not necessarily indicate soundness of economic of a nation. Many stagnant economies have a low Debt-to-GDP ratio because of the fact that both the levels of public Debt and GDP are low in those countries and it is an indicator of stagnant economic activities. In fact, aneconomy could be financially sound in the long run if borrowing economy invest in economic growth promising sectors and this would contribute to inflated Debt to GDP ratio of the borrowing nation for the time being but could eventually assist GDP to grow to a desired magnitude and enable the borrowing nation to pay off the Debt and continue earning increased gain in the future. On the contrary, increase in public Debt-to-GDP ratio is quite likely to incline to higher tax incidence, lower future revenue and itculminates to ‘intergenerational inequity’ which acts as in hindrance in promoting egalitarian society. The top five highest public Debt to GDP ratio countries are Venezuela, Japan, Sudan, Greece and Lebanon are attributed with public Debt to GDP ratios of 350%, 266%, 259%, 206% and 172% respectively and the top lowest public Debt to GDP ratio counties are Brunei, Afghanistan, Kuwait, Congo (Democratic Republic) and Eswatini attributed with 3.2%, 7.8%, 11.5%, 15.2% and 15.5% respectively as on December, 2020. As long as the economy continues to grow, a high debt-to-GDP ratio may not be all that a problem and in this context, some of provinces such as the Bihar, Kerala, the Punjab, Rajasthan, West Bengal are observed to be at the forefront of alarming rate of borrowing. Recently, it came to the public domain that an amount to the tune of 2.5 lakh crore is due to the power generating and distribution companies and it is reported that ‘the politics of populism and patronage has undermined the viability of India’s power sector’. To go beyond economics is the same as to set the clock to opposite direction. Every provincial government is constitutionally, morally and ethically responsible to generate sufficient revenue so that it can meet its expenses and contribute to the general fund of the country. The federal government is to facilitate the provincial governments and it should not solely be held responsible to place the public Debt to GDP ratio at the threshold or below the parameter of 60% Debt to GDP ratio. Moreover, some researchers observed that a maximum debt threshold of about 94% of GDP may be tolerated and beyond this threshold public debt may negatively affect the economic growth due to higher interest rates, uncertainty of public debt sustainability and tight budgetary consolidation measures. The researchers also found that the mentioned threshold of public Debt to GDP ratio is more than twice lower in developing countries compared to the developed ones, as the former enjoy lower credibility, higher vulnerability to shocks and depend more on external capital transfers.
Therefore, higher public Debt to GDP ratio is certainly an alarm to the economy managers and they should exercise the act of balancing and strive not to cross the limit. In general, GDP for a particular period of time should not be allowed to be lower than the external debt. Further, the external debt needs to be invested in capital stock in order to generate employment, income, savings and contribute to capital formation. Keynesian theory macroeconomics seems tobe highly relevant guide to economies that experience the burn of high public Debt to GDP ratio. India should take the corrective measures to arrest the negative impact of high public Debt not supported by the GDP and this period is very fragile in terms of economy management. Many countries are observed to have been failed to protect their economies from the negative impact of uncontrolled high public Debt to GDP ratio. Of late India witnesses the unearthing of cores and crores of unaccounted money in the coffers of the politicians and unscrupulous business tycoons and these mountainous chunks of money also contribute to the oversized fiscal deficit of the country. Moreover, this kind of unearthed hoarding of taxpayers’ money is not used for the purpose of economic development and contrarily the Government has been in the trap ofbailing the organizations outof such kind of financial insolvency from the resource generated from the taxpayers. It is therefore, suggested that government should not keep any stone unturned to unearththe money hoarded by financial frauds and scams on continuous basis and the resources in cash and kinds should be channelised and used for economic development besides exposing the unscrupulous business tycoons and politicians to exemplary punishment in the best interest of nation building.
Moreover, the Government should not wait forfixing fiscal target for say next 2 to 3 years besides continuing reforms in direct and indirect tax laws and regulations with regard to tax levying and collection procedures. The policy makers should keep in view that the countries with the tag of emerging markets are observed to have been vulnerable to economic stability and no proximate reason can make India an exception. Sri Lanka is a glaring example of economic collapse and the Indian establishment and economy regulatory agencies may take a lesson from the case of our neighbouring island country. A robust Fiscal policy in conjunction with of monetary policy may help reduce economic crisis.
(The author is former Interim Vice Chancellor, SMVD University, Katra)
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