Discussion on problems related to rising public debt.

Discussion on problems related to rising public debt

Discussion on problems related to rising public debt.


Global financial services company ‘Morgan Stanley‘ has estimated in a recent report that India will be included in ‘global bond indices‘ by early 2022 and as a result 170-250 billion in Indian sovereign bonds over the next decade. There will be an investment inflow of US dollars.

Global Bond Indices

This includes emerging debt markets that oversee local currency bonds issued by the governments of developing countries. India has been present in most of the ‘Benchmark Equity Indices‘ but has been absent in the bond index market so far.

More recently, the ‘Indian bond market‘ has been in the news for various reasons. Among these, the sustainability of public debt is a major issue from the point of view of policymakers.

Public Debt/Lending Objectives

Income and Revenue: The goal of public debt is generally to cover the gap caused by the imbalance between the proposed expenditure and the expected revenue.

Often due to an increase in administrative expenditure or due to unforeseen problems like floods, famines, earthquakes, and communicable diseases, the income of the government decreases, because they have to spend a lot to overcome these problems.

Useful in times of recession: A recession refers to a situation when costs are reduced and the ability of people to spend money or invest in industries is reduced, with no prospect of getting profit in the future.

To curb inflation: Inflation refers to a situation of increased costs. In such a situation, the government can often limit the working power or spending power of a large number of people by taking loans.

For financing development plans: There is always a shortage in a developing economy. Also, in such economies, the government cannot take shelter from heavy taxation. But to remove poverty from the country, it is necessary and important to carry forward the development plans.

In such a situation, public debt is the only solution. That’s why the government takes loans from within the country or from foreign governments or from the common people to raise finances.

Extension of education and health services: The government also takes loans for construction activities and expansion of services like education and health.

To make public decisions friendly: Even when the citizens of the country are not able to pay taxes, the government has to take loans. Sometimes, despite people having the ability to pay taxes, the government follows a populist policy, never raising taxes, as a result of which it needs credit.

Rising public debt

According to the Reserve Bank of India data, the ratio of India’s public debt (combined liabilities of the central and state governments) to gross domestic product (GDP) has risen to a record high of 100.86 percent in 2020, up from a record high of 100.86 percent in 2014. was at 76.86 percent.

At present, India is the most indebted country among the developing economies after Brazil and Argentina. Even in South Asia, India is the second-largest debtor country after Bhutan and Sri Lanka. Significantly, the debt-GDP ratio in Brunei, United Arab Emirates, and Russia is only 2.46 percent, 19.35 percent, and 19.48 percent respectively.

because of the high public debt

Bank recapitalization: Due to the recapitalization of public banks in the year 2017-18, there has been a significant increase in the total debt of the central government in terms of volume and as a percentage of GDP.

In the year 2017-18, Rs 80,000 crore ‘recapitalization bonds’ were used to finance state-owned banks.

‘UDAY’ bonds: After the issue of bonds related to ‘Ujwal Discom Assurance Yojana- UDAY’, there has been an increase in the liability of the states during the year 2015-16 and the year 2016-17.

Small Share of Taxes in National Income: The national income has increased four times since the independence of India.

The tax-GDP ratio in India in the year 2021 is around 10.2%.
Most of the tax income comes from indirect taxes.

Unbalanced Tax System: There are many flaws in the Indian tax system. The problem of tax evasion in India is quite serious, as the country’s tax system is flawed.

Misuse of public income: A major part of government expenditure is spent on those public departments, where there is an environment of corruption, bribery, and red tape. As a result, production is decreasing.

Effect of rising public debt

It is well known that excessive public debt leads to a high ‘risk premium’ in interest rates, resulting in a reduction in private investment as well as a GDP contraction in the long run.
Although an increase in public debt stimulates aggregate demand and production in the short run, economic growth will turn negative in the long run if the debt-GDP ratio exceeds 90%.

way ahead

Privatization of loss-making PSUs: The government may consider privatization of loss-making PSUs like Air India.

In addition, the principle of ‘Minimum Government, Maximum Governance‘ can be adopted in the privatization of a PSU.

Prudential Approach: As per the ‘Fiscal Responsibility and Budget Management (FRBM) Act, 2003, it is primarily the responsibility of the government to achieve fiscal consolidation and achieve long-term economic stability through transparently implemented prudent debt management and effective implementation of monetary policy.

In line with this, the Reserve Bank of India is sensitizing the states like Chhattisgarh, Goa, Manipur, etc. about prudent measures for cash and debt management.

Leveraging PFMS: The central government through its various ministries is implementing more than a thousand social welfare schemes with an annual outlay of about Rs 3 lakh crore.

Maximizing the use of ‘Public Financial Management System‘ (PFMS) through timely, consolidated, and granular data on transfer and utilization of funds, as a part of better management of fiscal deficit, while maintaining greater transparency and accountability Need.

PPP model in social schemes: The government may consider a ‘Public-Private Partnership‘ (PPP) model in social schemes like ‘Deen Dayal Upadhyaya Grameen Kaushal Yojana (DDU-GKY).

Harmonization of tax regime: Although the Goods and Services Tax (GST) has subsumed almost all indirect taxes, it is still not applicable to alcohol, petroleum products, electricity, etc.

Thus, there is a need to harmonize GST and expand it to other sectors to achieve national consensus with a view to improving the tax-GDP ratio.

In addition, the government should also create an investor-friendly environment for additional sources of financing for the transfer of high public debt.

Emphasis on renewable energy: India imports about 80% of its domestic requirement of crude oil. India can become a US$ 5 trillion economy by 2025 if it reduces its dependence on fossil fuels and puts more emphasis on renewable energy, which will save foreign exchange.

In addition, the government should increase the efficiency of public debt management by following principles such as low cost, risk mitigation, and market development.

0 Response to "Discussion on problems related to rising public debt."

Post a Comment

Article Top Ads

Central Ads Article 1

Middle Ad Article 2

Article Bottom Ads