India’s debt high, but sustainable, NCAER Director General Poonam Gupta says

Debt high but sustainable

India’s general government debt remains high at 82 percent, but is sustainable owing to high growth and a larger share of local currency debt, Poonam Gupta, Director General, NCAER said on July 2.

Even though the debt levels of states are expected to increase further, Gupta noted that the most indebted states, like Punjab and Himachal Pradesh, do not face debt sustainability issues as the guarantor of debt, and cannot hold debt in foreign currency or floating rate.

“In a handful of states like Punjab and Himachal, Debt to GDP ratio could increase to 50 per cent,” Gupta noted.

Punjab, Himachal, and Bihar were the most indebted states in 2022-23.

“More prudent states need a better deal. They are de facto subsidising the more indebted states. The Finance Commission may reward such states for their fiscal prudence, and incentivise the profligate ones to become fiscally more responsible,” she added.

M Govinda Rao, councilor, Takshashila Institution, noted that subsidies to exact political gains were one of the reasons for the rising indebtedness of states.

Rao highlighted the need for a different approach to deal with the situation.

“Interest payments of profligate states are still taken as legitimate,” he pointed out.

Parties have been promising loan waivers to farmers, benefit transfers to women, and free electricity to entice voters. Some of the states have also implemented such guarantee schemes.

Higher debt levels compared with other similarly placed economies is one of the reasons for rating agencies to not consider a ratings upgrade for the country.

Data shows that states together hold a third of India’s debt.