Managing Public Debt

Context: Rising fiscal deficit and public debt due to the economic downturn even before the pandemic needs structural changes in economic management in India.

Economic impact of COVID:

• Declining economic indicators: 

• Global government debt will cross 100% of gross domestic product (GDP) in 2020, compared to 83% in 2019. – International Monetary Fund.
• Higher government borrowing in the current fiscal year will push gross debt to 87.6% of GDP. – Reserve Bank of India study.
• The collapse in GDP growth will push up the debt-to-GDP ratio by at least 4 percentage points.
• The target of bringing down the debt to 60% of GDP by 2022-23 will be pushed by about seven years.

Issues of public debt in India: 

• Rising public debt: even before the pandemic:

• It increased from about 67% of GDP in 2011-12 to 72% in 2019-20.

• States as the potential risk to debt sustainability – noted by the Reserve Bank of India.
• Shifting of liabilities to public sector banks by the Union government.
• Insistence on debt monetization: The idea of debt monetization through RBI is a sound idea but is risky on the grounds of sustained inflation even during disrupted economic activity.

Way Forward: 

• Prepare a roadmap for large structural changes: The government would need to evaluate what all it can afford, and what it needs to do in terms of policy changes.

• Reversing recent policy decisions: such as in the area of trade.

Conclusion: It is clear that testing and tracking are critical in containing the pandemic.