Budget 2024: Elevated public debt levels are here to stay

India’s general government debt is expected to remain around 85 percent of its GDP for the next few years.

The coronavirus pandemic resulted in governments across the world taking on a pile of debt to support their economies. India was no different, with its total debt — Centre plus states — rising to 89.5 percent of the GDP in 2020-21 from 75.3 percent in the previous year.

Since then, the debt has come down as growth has rebounded. In 2022-23, India's general government debt was 86.5 percent of GDP. The problem is that it is not seen falling much in the medium term.

"We forecast overall net general government debt will stabilise just below 85 percent of GDP over the next three years," S&P Global Ratings said in May 2023 as it affirmed its BBB- rating on India.

Reducing debt levels is crucial to India securing a better credit rating, which would allow it and Indian companies get access to finances at cheaper rates. And the "government's weak fiscal performance and burdensome debt stock" are a counterbalance to the country's strengths, S&P said

It is not as if the government does not recognise the gravity of the matter. In October, Finance Minister Nirmala Sitharaman said the ministry is looking at ways to reduce the level of debt of the government.

"Compared to many others (countries) it might not be as high as it is. But even there, we are consciously looking at experiments in different parts of the world," the minister had said.

Debt can be reduced in two ways. One, there are no incremental additions to the stock of debt. This would reduce debt in absolute terms. However, with the government spending more than it earns, this is unlikely to occur for India.

The other route to reduce debt – as a percentage of GDP – is to have a high rate of nominal growth. The issue here is that while India's real growth rate has exceeded expectations recently, the nominal rate of growth – or growth without adjusting for inflation – has been lower than expected.