Introduction
India’s economic aspirations rest heavily on sound fiscal management. The fiscal deficit and public debt are critical indicators of a nation’s financial health. While these are not inherently problematic, their sustained rise poses significant challenges for macroeconomic stability, inflation control, and long-term growth. Over the past few years—especially post-COVID-19—India has witnessed a marked increase in both fiscal deficit and public debt levels due to increased government expenditure and subdued revenues.
This article explores the challenges posed by rising fiscal deficit and public debt in India, examines the causes behind their growth, and recommends policy measures for achieving fiscal prudence in a sustainable manner.
Understanding Fiscal Deficit and Public Debt
- Fiscal Deficit: It refers to the difference between the government’s total expenditure and its total revenue (excluding borrowings). A high fiscal deficit indicates that the government is spending beyond its means.
- Public Debt: This is the total amount borrowed by the government to finance its deficits over time. It includes both external debt (borrowed from foreign sources) and internal debt (borrowed within the country).
Current Scenario of India’s Fiscal Deficit and Public Debt
1. Rising Fiscal Deficit Trends
India’s fiscal deficit has been under pressure due to large-scale spending programs. Key developments include:
- In 2020–21, due to COVID-19 relief measures, the fiscal deficit shot up to 9.2% of GDP.
- For 2023–24, the government aimed to reduce it to 5.9% of GDP, with a target of bringing it down to 4.5% by 2025–26.
- However, recurring demands for welfare spending, infrastructure development, and subsidies continue to challenge this consolidation roadmap.
2. Mounting Public Debt
According to the RBI and IMF, India’s public debt is around 85–90% of GDP, one of the highest among emerging economies. A large part of this debt is owed to domestic institutions, making India less vulnerable to foreign exchange volatility but more dependent on internal financial institutions like banks, EPFO, and insurance firms.
Challenges of Rising Fiscal Deficit and Public Debt
1. Crowding Out of Private Investment
When the government borrows heavily from the domestic market, it leaves fewer resources available for private enterprises. This is known as the crowding-out effect and results in higher interest rates, making it difficult for private businesses to access affordable credit.
2. Inflationary Pressures
High fiscal deficits financed through borrowings can be inflationary, especially if a portion of the deficit is monetized by the central bank (printing money). Excess money supply without matching production increases demand, thus driving prices up.
3. Unsustainable Debt Servicing
As public debt increases, a significant portion of government revenue goes toward interest payments, reducing the fiscal space for productive expenditures like health, education, or infrastructure. In FY 2023–24, interest payments accounted for nearly 25% of total government expenditure.
4. Sovereign Credit Ratings
High fiscal deficit and debt levels raise concerns about the government’s creditworthiness. Global credit rating agencies such as Moody’s, Fitch, and S&P use these metrics to assess sovereign risk. Downgrades in ratings can deter foreign investments and increase borrowing costs.
5. External Vulnerability
Though most of India’s public debt is internal, any rise in external borrowing (in foreign currencies) increases the vulnerability to exchange rate fluctuations and external shocks like oil price hikes or global financial crises.
6. Intergenerational Burden
Persistent deficits and debt accumulation mean future generations inherit a burden of repayment. This intergenerational equity issue undermines the principles of sustainable development and fiscal justice.
Reasons Behind the Rise in Fiscal Deficit and Debt
1. Pandemic Expenditure
The COVID-19 pandemic necessitated massive spending on healthcare, welfare schemes, and economic stimulus. At the same time, tax revenues collapsed, resulting in a sharp increase in fiscal deficit and public debt.
2. Populist Schemes and Subsidies
Successive governments have introduced large-scale subsidies (food, fertilizer, LPG) and income support schemes (PM-KISAN, MGNREGA) to garner electoral support. While socially necessary, these are often poorly targeted and fiscally burdensome.
3. Weak Tax Base
India’s tax-to-GDP ratio remains low (around 11%–12%) compared to the OECD average (over 30%). High informal sector activity, tax evasion, and policy gaps result in low direct tax collections.
4. Public Sector Inefficiencies
Many state-owned enterprises (SOEs) are loss-making but continue to receive budgetary support. Disinvestment targets are routinely missed, adding further pressure on the government’s finances.
5. Interest Payments
As debt accumulates, interest payments themselves contribute to rising deficits. This is a self-reinforcing debt trap, where the government borrows just to service existing debt.
Policy Measures to Ensure Fiscal Prudence
Ensuring fiscal sustainability requires a mix of short-term measures and structural reforms aimed at improving revenue, rationalizing expenditure, and enhancing fiscal discipline.
1. Fiscal Responsibility and Budget Management (FRBM) Act Reforms
- The FRBM Act, introduced in 2003, aimed to institutionalize fiscal discipline by setting targets for deficit and debt.
- However, these targets have often been relaxed or postponed.
- A recalibration of the FRBM framework is necessary to account for current realities while enforcing medium-term fiscal discipline through independent monitoring (e.g., a Fiscal Council).
2. Tax Reforms for Revenue Mobilization
- Broaden the Tax Base: Encourage compliance through digitization, AI-driven audits, and formalization of the economy.
- Rationalize GST: Simplify the multi-rate GST structure and resolve disputes between the Centre and States to improve indirect tax buoyancy.
- Plug Tax Leakages: Address loopholes in corporate taxation and tackle base erosion and profit shifting (BEPS) by multinationals.
3. Expenditure Rationalization
- Targeted Subsidies: Improve targeting through Aadhaar-linked DBT and sunset clauses for certain subsidies.
- Outcomes-Based Spending: Link budgetary support to performance metrics for schemes and ministries.
- Control Revenue Expenditure: Limit non-productive expenses like bureaucratic overheads, and increase capital expenditure which boosts long-term growth.
4. Disinvestment and Asset Monetization
- Expedite strategic disinvestment in non-core PSUs and monetize underutilized public assets.
- Use proceeds not for consumption but for debt repayment or capital formation, ensuring long-term sustainability.
5. Strengthening Federal Fiscal Relations
- Encourage states to adhere to fiscal discipline while giving them flexibility under Article 293 of the Constitution.
- Revise the Finance Commission formula to ensure equitable resource distribution and accountability.
6. Managing Interest Payments
- Resort to long-tenure debt instruments at lower interest rates.
- Consider innovative instruments like sovereign green bonds and infrastructure investment trusts (InvITs) to reduce reliance on traditional borrowings.
7. Promoting Economic Growth
- Ultimately, the best way to reduce fiscal deficit and debt is to expand the GDP.
- Investments in infrastructure, education, health, and digital economy can lead to higher growth and, hence, improved revenue collections.
Global Comparisons and Lessons
- Countries like Germany follow a “debt brake” rule which limits structural deficits.
- New Zealand and Sweden have successfully implemented fiscal responsibility laws coupled with independent fiscal institutions.
- India can learn from such models by setting realistic targets, ensuring transparency, and establishing enforcement mechanisms.
Conclusion
India’s rising fiscal deficit and public debt represent both a challenge and an opportunity. While large deficits have allowed the country to navigate the pandemic and support inclusive welfare programs, their sustained rise risks undermining macroeconomic stability. Policymakers must strike a balance between supporting growth and maintaining fiscal prudence.
The path forward lies in revenue-enhancing reforms, efficient public spending, transparent budgeting, and a renewed commitment to the FRBM principles. With prudent management and structural reforms, India can ensure long-term fiscal sustainability while meeting the developmental needs of its population.
