By CA  A. K. Jain

Government borrowing plays a pivotal role in shaping a nation's fiscal landscape. It is a mechanism through which governments acquire funds to fuel their various expenditures, from public services to infrastructure development. The need for government borrowing arises when the revenue generated from taxes and other sources falls short of covering the expenses outlined in the government's budget. Consequently, the government announces an annual borrowing programme in its budget to bridge this fiscal gap.

"In the year 2014, the size of the Indian economy was 2.05 trillion dollars and the total debt of the government of India was Rs 55,87,149.33 crore. In the year 2024, India is a 3.75 trillion economy. But the debt has trebled. In 10 years, the debt has gone up three times. High debt accompanied by low employment and high food inflation is the worst possible scenario for an emerging economy.

Recent observations by the International Monetary Fund (IMF) sparked reactions from the Indian Government. First, the IMF has raised concerns about the long-term sustainability of India’s debts. Second, it reclassified India’s exchange rate regime, terming it a “stabilised arrangement” instead of “floating”.

These obsevations emerged from the annual Article IV consultation report, which is part of the Fund’s surveillance function under the Articles of Agreement with member countries. The report also acknowledged India’s effective inflation management and projected a balanced outlook for India’s economic growth. While the remark on the exchange rate can be viewed as comments on ‘excessive management’, as the rupee moved in a narrow band due to Reserve Bank of India interventions, the concerns on debt sustainability can be construed as a call for more prudent management of debt in the medium term.

The IMF, in the report, states that India’s general government debt, including the Centre and States, could be 100% of GDP under adverse circumstances by fiscal 2028. According to them, “Long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets and improve resilience to climate stresses and natural disasters. This suggests that new and preferably concessional sources of financing are needed, as well as greater private sector investment and carbon pricing or equivalent mechanism.” The Finance Ministry refutes IMF projections as this is “a worst-case scenario and is not fait accompli”.

The IMF team notes: “India’s economy showed robust growth over the past year. Headline inflation has, on average, moderated although it remains volatile. Employment has surpassed the pre-pandemic level and, while the informal sector continues to dominate, formalisation has progressed”. The report further highlights growing debt, accompanied by a “volatile inflation” spell, lower employment (dominated by the informal sector), and a potential disruption of global supply chain resulting in “increasing fiscal pressures for India”.

The Indian government’s response to the IMF report, particularly concerns about debt, was unsurprisingly aimed at refuting the institution’s word of caution. While the IMF highlighted a need for substantial investment especially from India’s private sector to enhance the nation’s capacity to withstand climate stresses and natural disasters, the GOI’s own response stressed that its sovereign debt risks are limited as it is primarily denominated in domestic currency.

These numbers of course rely upon data sourced by the IMF from India’s government. There is always the possibility of ‘hidden debt’ arising from fiscal deficit that’s ‘silently hidden’ and ‘not accounted for’ in official data. In times of crisis, ‘hidden debt’ numbers can wreck an economy. India isn’t there yet, but a large enough shock to the economy, amidst alarming government debt numbers, could take it there.

India’s executive director at the IMF, challenged its claim, stating that despite historical shocks, India’s public debt-to-GDP ratio has shown minimal fluctuations. The disagreement centres on the IMF’s reclassification of India’s exchange rate regime to a “stabilised arrangement”. The IMF data indicates how government debt has increased to alarming levels of 82.4% (anything over 80% of GDP is a red risk marker, in economic crisis terminology).

There isn't a universally accepted "good" ratio of foreign debt to GDP. It depends on various factors specific to a country's situation. However, some benchmarks are used to assess sustainability:

Lower is generally better : A lower ratio indicates a country's debt burden is smaller relative to its economic output. This makes it easier to service the debt and reduces vulnerability to external shocks.

Eurozone convergence criteria : Previously, the European Union had a criterion for member states to maintain a government debt-to-GDP ratio below 60%

According to World Bank data (2021), India's external debt to GDP ratio is around 20%. This is considered a moderate level by international standards. India's national debt (which includes domestic and external debt) is around 80% of GDP (2021). This is a higher figure, but it's important to consider India's developing economy and ongoing infrastructure investments.

The ratio of foreign debt to GDP is an important indicator of a country's ability to manage its debt obligations. However, what constitutes a "good" ratio can vary depending on factors such as the country's economic stability, growth prospects, and the structure of its debt. However, a commonly cited guideline is to keep the foreign debt-to-GDP ratio below 40% to ensure sustainability and mitigate risks associated with external debt.

It's essential to interpret these ratios in the context of each country's specific circumstances, including factors such as economic growth, inflation, exchange rates, and the structure of the debt (e.g., maturity, interest rates). Additionally, countries with higher foreign debt ratios may face increased vulnerability to external shocks, such as fluctuations in global interest rates or exchange rates.

It is noticed that in developed countries with sound financial management the ratio of debt to GDP a generally very high. Some of the examples are United States- 121.31 , France- 111.8 • Japan- 261.29, United Kingdom - 101.36, Sweden- 32.69 , Spain- 111.6, Italy- 144.41.

The justification forwarded is, developed countries are in advantages position from stability point of view and therefore various governments, business institutions and individuals from all over the world park / invest their surplus funds in these countries as deposits. These deposits are mentioned as debt. As a matter of fact, funds parked in developed countries are not actually debt but voluntary deposits. These deposits may be at times from legitimate or illegitimate sources. The GDP and debt ratios of developed and developing countries are not analogous. Any evaluation will be flawed and meaningless.

Debt - GDP ratios of a few well-managed developing economies are worth mentioning. The examples are, Thailand - 54.3 %, Malaysia - 64.3 %, Mexico - 48.3%, Iran 34.8% & Middle East & North Africa 39.2%.



External Debt (US$ billion)

Ratio of External Debt to GDP

Debt Service Ratio

Ratio of Foreign Exchange Reserves to Total Debt










































































































The tabulated figures indicate, apart from rising general government debt in the last 10 year period, there is a sustained rise in external debt, too, along with a gradual but persistent rise in household debt levels, at a time when real incomes / wages have been regressively stagnant and consumer prices / inflation has remained high.

Rising external debt requires a greater robustness of dollar/reserve currency balance for a given country, which has been a concern for India’s balance of payment position in recent times. The RBI has done everything possible to exercise dollar selloffs for maintaining exchange rate stability in the currency market for a depreciating rupee, and if one looks at the incoming flow mechanism of forex into the country, macro-FDI levels have remained more or less the same, even though foreign portfolio numbers have remained extremely volatile for India (signalling a rise in hot money inflow/outflow and a loss in credibility of an emerging market to attract long term stable investment via FDI).

The capex-fuelled government spending spree in the last three years hasn’t allowed for greater capital formation (to attract private capital investment for growth). The weak Gross Fixed Capital Formation numbers reflect this. That’s an even bigger concern. If the government is spending big and doing so by borrowing more to attract/progressively push for growth via private investment, and none of that is happening (private investment remains woefully weak), the government is basically accruing more debt at the cost of spending to waste and endangering the possibility of future usefully borrowing for crisis or large-scale credit needs.

High debt accompanied by low employment and high food inflation is the worst possible scenario for an emerging market, particularly one that boasts of a demographic dividend in its working age population composition. India’s growth story is one of jobless growth anchored by higher in formalisation of work, in absence of ‘good jobs’.

Manufacturing production is still weak and where the potential for jobs is higher, in services, the nature of competitiveness (in a worker surplus economy) does not yield higher wages. Workers are settling for low-value service work, much of it at the intersection of ‘informal’ and ‘formal’ work.

Learning from the higher growth episodes of China from the 1980s, it is evident that for any large emerging market to progress and aspire to higher growth while drawing people out of poverty, having a larger credit expansion plan in its financial sector is vital, along with a larger borrowing space for crisis/exogenous shocks/disruptive responses.
If we consider, the bank credit trend accompanying the rise in government debt level, one sees that even as credit is growing in India’s financial sector (which is vital for growth prospects) a higher debt level, amidst a lower growth cycle, will leave less space for both long-term credit expansion or borrowing to happen. One is quite sure that the RBI would be aware of this.


The impact of a country's GDP debt ratio on its foreign exchange rate is a complex dance with no guaranteed steps. Here's a breakdown with examples and statistics to illustrate the potential cause-and-effect:

Japan : Despite having the world's highest debt-to-GDP ratio (over 230% in 2021), Japan's Yen hasn't necessarily depreciated significantly. This is because a large portion of the debt is held domestically, and Japan's strong economy inspires investor confidence. However, concerns about future debt sustainability can still weigh on the Yen.

Greece : Greece's debt crisis in the late 2000s provides a stark example. A soaring debt ratio (over 170% of GDP in 2011) eroded investor confidence, leading to capital flight and a significant devaluation of the Euro within Greece (since the Euro is a shared currency).

China : China's debt ratio has been rising (around 60% in 2021), but its managed exchange rate system and continued economic growth have helped maintain a relatively stable Yuan. However, long-term debt sustainability remains a concern.

United States : The US has a high debt ratio (over 100% of GDP in 2021). However, the US Dollar remains the world's reserve currency, and the US economy is still considered large and relatively stable. However, the long-term impact of high debt on the Dollar's future dominance is a topic of debate.

The examples are just snapshots, and the situation can evolve over time. A country's overall economic health, political stability, and global economic conditions all play a role in shaping the relationship between debt and foreign exchange rates.


Several historical examples illustrate how high levels of debt can contribute to the collapse of a country's economy:

Republic of Germany : After World War I, Germany was burdened with massive reparations payments to the victorious Allied powers. In an attempt to meet these obligations, the German government printed vast quantities of money, leading to hyperinflation. This destroyed the value of the German currency, the Mark, and caused widespread economic chaos.

Mexico (1980s) : Mexico faced a debt crisis in the 1980s known as the "Lost Decade." High borrowing to finance ambitious development projects, coupled with falling oil prices, led to a debt crisis and a severe economic downturn. Mexico eventually had to undergo structural adjustment programs under the guidance of international financial institutions.

Malaysia : Malaysia's economy faced challenges related to high levels of debt . Like many countries, Malaysia has experienced fluctuations in its economic performance due to various factors including debt levels, global economic conditions, and domestic policies. In the late 1990s, Malaysia faced a severe financial crisis triggered by a combination of external factors such as the Asian financial crisis and internal issues like high levels of debt and currency speculation.

Russia (1998) : Russia experienced a major financial crisis in 1998, triggered in part by high levels of debt. The government had accumulated significant foreign debt, much of it denominated in U.S. dollars, and when the Russian ruble depreciated rapidly, the country defaulted on its debt obligations. This led to a sharp economic downturn and widespread financial instability.

These examples demonstrate the risks associated with high levels of debt and the potential for it to contribute to the collapse of a country's economy if not managed effectively.

Zimbabwe (late 2000s) : Zimbabwe's economy collapsed in the late 2000s due to a combination of factors, including excessive government spending, hyperinflation, and political instability. The government's reckless fiscal policies, including printing money to finance its budget deficits, led to hyperinflation reaching astronomical levels, rendering the currency virtually worthless. The collapse of the economy resulted in widespread poverty, unemployment, and social unrest.

Argentina (2001) : Argentina experienced a major economic collapse in 2001 following a decade of economic mismanagement and excessive borrowing. The country's debt reached unsustainable levels, and it defaulted on its debt obligations, causing widespread financial panic and social unrest. The Argentine government implemented a series of devaluations and austerity measures, leading to a deep recession and a sharp increase in poverty and unemployment.

Iceland (2008) : Iceland's economy collapsed in 2008 due to a combination of factors, including excessive borrowing by its banking sector, a housing bubble, and a reliance on foreign debt. The collapse led to a banking crisis, currency depreciation, and a deep recession.

Venezuela (2010) : Venezuela's economy has been in a state of collapse for several years, largely due to mismanagement, corruption, and excessive borrowing. The government's heavy reliance on oil revenues, coupled with declining oil prices, resulted in fiscal imbalances and unsustainable debt levels. Hyperinflation, shortages of basic goods, and a sharp decline in living standards have plagued the country, leading to a humanitarian crisis.

Greece (2010) : Greece faced a severe debt crisis in 2010, which led to an economic collapse. The country had accumulated high levels of debt due to years of government overspending, tax evasion, and corruption. Greece's debt reached unsustainable levels, and it was unable to meet its repayment obligations. This led to a bailout package from the International Monetary Fund (IMF), the European Central Bank (ECB), and the European Commission (EC), which came with stringent austerity measures. The Greek economy contracted significantly, and unemployment soared.

These examples demonstrate the devastating consequences of high levels of debt when coupled with economic mismanagement, corruption, and external shocks. Economic collapse can result in widespread suffering, including unemployment, poverty, and social unrest, and it often takes years for affected countries to recover.

Looking at these numbers, one thing is clear: India is experiencing a ‘debt crisis problem’. ‘Crisis’ needs to be viewed not in terms of present debt volume but in the larger trend and macroeconomic connection observable between rising government debt and other macro aggregates (from growth, employment, inflation, to financial credit expansion). The government would need to take serious fiscal consolidation measures to address these challenges, rather than living in denial and refuting mode.

Under the umbrella of market borrowing, the Indian government also issues special securities to entities like oil marketing companies, fertiliser companies, and the Food Corporation of India. These are often referred to as oil bonds, fertiliser bonds, and food bonds, respectively. These securities serve as compensation to these entities in place of cash subsidies and are typically long-dated with slightly higher coupons than regular securities. While they do not qualify as statutory liquidity ratio (SLR) securities, they are eligible as collateral for market repo transactions.

State Governments participate in market borrowing by issuing State Development Loans (SDLs). These securities, issued through auctions, serve as a means for state governments to raise funds. Like central government securities, SDLs qualify for SLR and can be used as collateral for market repo transactions.

The Centre is planning to raise Rs 7.5 trillion through market borrowing in the April-September period of 2024-25 to fund the revenue gap to push economic growth. Out of gross market borrowing of Rs 14.13 trillion estimated for 2024-25, Rs 7.5 trillion, or 53 per cent, is planned to be borrowed in the first half (H1).

This borrowing includes the issuance of Sovereign Green Bonds (SGrBs) worth Rs 20,000 crore. The government aims to meet its fiscal deficit primarily through market borrowings. Weekly borrowing through the issuance of Treasury Bills in the third quarter of the fiscal is expected to be Rs 24,000 crore, with net borrowing of Rs (-)52,000 crore during the quarter. The ministry said that the Reserve Bank of India has fixed the Ways and Mean Advances (WMA) limit for the October-March period of 2023-24 at Rs 50,000 crore to take care of temporary mismatches in Government accounts. India will spend almost 25% of national budget towards debt management.
The Department of Expenditure under the Ministry of Finance handles the Government of India borrowing programme. The borrowing programme is finalised by the Government of India in consultation with the Reserve Bank of India.

Government borrowing has a dual impact on the economy. Firstly, when the government borrows extensively from the market, it leaves limited space for private sector entities and corporations to access the market for their financing needs. This can crowd out private investment. Secondly, substantial government borrowing can lead to increased interest rates across the board. This, in turn, raises the debt repayment burden of the government and drives up the cost of borrowing for other entities. High-interest rates can also hamper economic growth by discouraging investment.

April 27th 2024

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