Debt-to-GDP ratio
Why in news?
India's debt-to-GDP ratio has declined from over 60% post-COVID to around 57.1% in 2023-24 and an estimated 56.1% for 2025-26, with Finance Minister Nirmala Sitharaman prioritizing further reduction starting FY 2026-27. This focus aims to ensure fiscal discipline under the FRBM framework and support long-term growth toward Viksit Bharat by 2047.​
About Debt-to-GDP ratio
- The debt-to-GDP ratio measures a country's total government debt relative to its gross domestic product (GDP), expressed as a percentage.
- It indicates the economy's capacity to manage and repay debt using annual output.
- A lower ratio suggests stronger fiscal health, while a higher one signals potential repayment risks.​
When a Low or Moderate Ratio is Good
- Fiscal Stability: Ratios below ~60% are often seen as sustainable benchmarks (e.g., EU Maastricht criteria).
- Investor Confidence: Lower debt means governments can borrow at cheaper interest rates.
- Policy Flexibility: Governments have room to increase spending during crises without alarming markets.
- Growth Support: If debt is used for infrastructure, education, or innovation, even moderate levels can boost long-term GDP.
When a High Ratio Becomes Bad
- Debt Servicing Burden: High ratios mean more tax revenue goes to interest payments instead of development.
- Crowding Out: Excessive borrowing can reduce private investment.
- Risk of Default: If debt grows faster than GDP, repayment becomes unsustainable.
- Investor Fear: Rising ratios can trigger capital flight or higher borrowing costs.
- Intergenerational Burden: Future taxpayers may face higher taxes or reduced services.
Context Matters
- Advanced Economies: Countries like Japan sustain debt ratios above 200% because of strong domestic savings and investor trust.
- Developing Economies: Ratios above 60–70% often trigger concern, as external lenders demand higher interest rates.
- India’s Case: India’s debt-to-GDP ratio crossed 60% during Covid but is now being reduced, with a target of ~56% by FY26. Lowering it is seen as crucial for fiscal consolidation and long-term resilience.
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