What is debt-to-GDP ratio?
Historical Background
Key Points
9 points- 1.
Calculated as: (Total Government Debt / GDP) * 100
- 2.
Expressed as a percentage
- 3.
A lower ratio is generally better, indicating a stronger ability to repay debt
- 4.
A higher ratio can suggest a risk of debt distressdifficulty in paying back debt
- 5.
Used by international organizationsIMF, World Bank to assess a country's economic health
- 6.
Influenced by government spending, tax revenues, and economic growthGDP growth
- 7.
Nominal GDP growth helps in reducing the debt-to-GDP ratio
- 8.
India's debt-to-GDP ratio has fluctuated over time due to various economic factors
- 9.
Sustainable levels are often debated, but generally below 60% is considered healthy for emerging economies
Visual Insights
Understanding Debt-to-GDP Ratio
Key aspects and implications of the debt-to-GDP ratio.
Debt-to-GDP Ratio
- ●Definition & Calculation
- ●Significance
- ●Factors Influencing
- ●FRBM Act
Evolution of India's Debt-to-GDP Ratio
Key events and policy changes affecting India's debt-to-GDP ratio over time.
India's debt-to-GDP ratio has fluctuated due to economic reforms, global events, and policy changes. The government is now focusing on fiscal consolidation and sustainable growth.
- 1991Economic Liberalization: Led to increased borrowing and initial rise in debt-to-GDP.
- 2003FRBM Act Enacted: Aimed at fiscal consolidation and debt reduction.
- 2008Global Financial Crisis: Increased government spending to stimulate the economy.
- 2016Implementation of GST: Impacted tax revenues and government finances.
- 2020COVID-19 Pandemic: Significant increase in borrowing to address the crisis.
- 2023Post-Pandemic Recovery: Focus on fiscal consolidation and economic growth.
- 2026FY27 Capex Target: ₹12.22 Lakh Crore, Debt-to-GDP at 55.6%.
Recent Developments
5 developmentsIndia's debt-to-GDP ratio increased during the COVID-19 pandemicdue to increased borrowing
Government is focusing on fiscal consolidation to reduce the ratio
Nominal GDP growth is crucial for bringing down the debt-to-GDP ratio
The 15th Finance Commission recommended a debt-to-GDP ratio target for the central and state governments
Global economic conditions and interest rate movements affect the debt-to-GDP ratio
Frequently Asked Questions
121. What is the debt-to-GDP ratio and why is it important for UPSC GS Paper 3?
The debt-to-GDP ratio compares a country's total government debt to its Gross Domestic Product (GDP). It's important for UPSC GS Paper 3 (Indian Economy) because it indicates a country's ability to repay its debts and reflects its economic health. A high ratio can signal potential economic problems.
Exam Tip
Remember that a lower debt-to-GDP ratio is generally considered better.
2. How is the debt-to-GDP ratio calculated?
The debt-to-GDP ratio is calculated as (Total Government Debt / GDP) * 100. The result is expressed as a percentage.
- •Total Government Debt is the total amount of money owed by the government.
- •GDP is the total value of goods and services produced in a country.
3. What are the key provisions related to debt and fiscal responsibility in India?
Key provisions are found in the Fiscal Responsibility and Budget Management (FRBM) Act 2003, which sets targets for debt reduction. Article 293 of the Constitution deals with state government borrowings.
4. What does a high debt-to-GDP ratio indicate?
A high debt-to-GDP ratio can suggest a risk of debt distress, meaning the country may have difficulty in paying back its debt. It can also indicate underlying economic problems.
5. How does India's debt-to-GDP ratio compare with other countries?
The concept data does not provide specific comparisons. However, it's important to note that international organizations like the IMF and World Bank use this ratio to assess a country's economic health.
6. What role do international organizations play in monitoring a country's debt-to-GDP ratio?
International organizations like the IMF and World Bank use the debt-to-GDP ratio to assess a country's economic health and the sustainability of its debt. They may provide recommendations or assistance based on their assessment.
7. What are the challenges in reducing India's debt-to-GDP ratio?
Challenges include balancing economic growth with fiscal consolidation, managing unexpected economic shocks (like the COVID-19 pandemic), and maintaining investor confidence.
8. How did the COVID-19 pandemic affect India's debt-to-GDP ratio?
India's debt-to-GDP ratio increased during the COVID-19 pandemic due to increased government borrowing to finance relief measures and stimulate the economy.
9. What is the significance of nominal GDP growth in the context of the debt-to-GDP ratio?
Nominal GDP growth is crucial for bringing down the debt-to-GDP ratio. Higher nominal GDP means a larger denominator in the ratio calculation, which can lower the overall ratio even if the debt remains constant or increases slightly.
10. What are some common misconceptions about the debt-to-GDP ratio?
A common misconception is that a high debt-to-GDP ratio automatically means a country is on the brink of collapse. While it signals risk, other factors like the country's economic stability, growth potential, and debt management strategies also play a crucial role.
11. What reforms have been suggested to improve India's fiscal health and manage its debt-to-GDP ratio?
The concept data does not provide specific reform suggestions. However, generally, reforms could include measures to boost economic growth, improve tax collection, and prioritize government spending.
12. What are frequently asked aspects of debt-to-GDP ratio in UPSC exams?
Frequently asked aspects include its significance for the Indian economy, factors that influence it, its impact on economic growth and stability, and government policies aimed at managing it. Questions can appear in both Prelims and Mains.