DEBT TO GDP RATIO (Syllabus: GS Paper 3 – Economy)

Context: The Union finance ministry noted that the general government debt, comprising both central and state debt, as a share of gross domestic product declined from about 88 per cent of gross domestic product (GDP) in 2020-21 to 81 per cent in 2022-23.

Debt to GDP Ratio

• About: It represents the relationship between a country's government debt and its gross domestic product (GDP). 

oThis metric serves as an indicator of the extent of a nation's indebtedness relative to its economic output and its capacity to generate income for servicing the debt.

• Formula: Debt to GDP Ratio = Total Debt of the Nation / Total GDP of the Nation

How Does the Debt to GDP Ratio Work?

• Calculation of the Debt-to-GDP Ratio: It  involves dividing a nation's total debt by its gross domestic product (GDP).
• Lower Debt-to-GDP Ratio: It signifies that the country is generating sufficient income through its economic activities to meet its debt obligations.
• High Debt-to-GDP Ratio: It suggests that the country may encounter challenges in repaying its debts and covering the associated interest payments.
• According to the World Bank and IMF, a sustainable debt-to-GDP ratio falls within the range of about 150-250% of a country's exports or revenues.
• The optimal debt-to-GDP ratio varies across countries, taking into account factors such as their economic growth rate, revenue generation capacity, and other relevant considerations.