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Context:

Recent reports from the International Monetary Fund (IMF) indicate that global public debt is expected to surpass 100% of GDP by 2029. Countries borrow to cover the difference between their spending and revenue, known as a fiscal deficit. Each year’s deficit adds to the total public debt, which is expressed as a percentage of a country’s GDP.  

Current Status:

• Projected Growth: The International Monetary Fund (IMF) forecasts that global public debt will exceed 100% of global GDP by 2029, marking the highest level since 1948 (Source: The News Market)

• Debt Composition: As of mid-2025, global debt reached a record $337.7 trillion, with emerging markets accounting for over $109 trillion. The global debt-to-GDP ratio stands at approximately 324%, while emerging markets' ratio is around 242.4% (Source: Reuters)  

• Contributing Factors: Increased government spending on defence, climate change, social welfare, and technology, coupled with rising interest rates, has led to higher borrowing costs 

• Central Government Debt: India's central government debt was approximately ₹63 lakh crore (USD 736.3 billion) at the end of FY25, accounting for about 57.1% of GDP. The government has set a target to reduce this ratio to 47.5–52% by FY31 (Source: Business Standard) 

• State Government Debt: The combined debt of all 28 states rose from ₹17.57 lakh crore in 2013–14 to ₹59.6 lakh crore in 2022–23, increasing from 16.66% to nearly 23% of Gross State Domestic Product (GSDP) (Source: Reddit) 

• External Debt: India's external debt stood at ₹63.03 lakh crore (USD 736 billion) at the end of FY25, representing 19.1% of GDP (Source: The Times of India) 

• FY25: The fiscal deficit for FY25 was ₹15.77 lakh crore (4.8% of GDP), slightly exceeding the target of ₹15.70 lakh crore (Source: mint) 

• Q1 FY26: In the first quarter of FY26 (April–June 2025), the fiscal deficit reached ₹2.81 lakh crore, accounting for 17.9% of the full-year target (Source: Business Standard) 

• Debt Reduction Plan: The government aims to reduce the debt-to-GDP ratio to 47.5–52% by FY31, with a target of 56.1% for FY26 (Source: Business Standard) 

What is public debt?

Public debt (also called government or national debt) is the total amount of money a government owes to domestic and foreign lenders. It arises when government spending exceeds revenue, creating a fiscal deficit that is financed through borrowing. Public debt includes:

• Internal Debt – Borrowed from domestic sources such as banks, financial institutions, and citizens (via government bonds).
• External Debt – Borrowed from foreign governments, international organizations, or foreign investors.

Positive Implications

• Finances Development Projects: Enables government to invest in infrastructure, healthcare, education, and social welfare.
• Economic Stimulus: Borrowed funds can boost economic growth during downturns.
• Smooths Revenue Gaps: Helps governments meet expenditure commitments when revenue is insufficient.

Negative Implications

• High Interest Burden: More debt → more interest payments → less money for developmental expenditure.
• Tax Burden on Citizens: Government may raise taxes to repay debt, reducing disposable income.
• Crowding Out Private Investment: Excessive borrowing may increase interest rates, discouraging private sector investment.
• Economic Vulnerability: High debt-to-GDP ratios limit fiscal flexibility during economic shocks.
• Inflation Risk: Financing debt by printing money can lead to inflation. 

Implication of High Public Debt:

Economic Implications

• Interest Burden: High debt increases government spending on interest payments, reducing funds for development.
• Crowding Out Private Investment: Heavy borrowing can raise interest rates, discouraging private sector investment.
• Inflationary Pressures: If debt is monetized (financed by printing money), it may trigger inflation.
• Reduced Growth Potential: Excessive debt can slow down long-term economic growth by diverting resources from productive investment.

Fiscal Implications

• Limited Fiscal Space: Governments have less flexibility to increase spending during economic crises.
• Higher Taxes: To service debt, governments may raise taxes, affecting disposable income and consumption.
• Austerity Measures: High debt may force spending cuts in welfare, healthcare, and infrastructure.

Social Implications

• Impact on Welfare: Reduced fiscal space may affect subsidies, pensions, and social safety nets.
• Income Inequality: Tax increases and spending cuts can disproportionately affect lower-income groups.

Political and Governance Implications

• Policy Constraints: High debt limits governments’ ability to introduce new reforms or stimulus packages.
• Risk of Public Unrest: Austerity or higher taxes can lead to social dissatisfaction and protests.

Global/Geopolitical Implications

• Dependence on Foreign Lenders: High external debt increases vulnerability to global financial conditions.
• Sovereignty Risks: Excessive reliance on foreign borrowing can limit a country’s policy autonomy.
• Credit Ratings: High debt may lower credit ratings, increasing borrowing costs and affecting foreign investment. 

Challenges:

Fiscal Deficit Targets and Borrowing

• FY25 Fiscal Deficit: India's fiscal deficit was approximately 4.8% of GDP, slightly above the target of 4.7%–4.8% due to reduced capital expenditure and an unexpected ₹2.1 lakh crore dividend from the Reserve Bank of India. (Source: Reuters)
• FY26 Target: The government aims to reduce the fiscal deficit to 4.4% of GDP. However, challenges such as slower economic growth and potential external shocks may hinder this goal. (Source: Business Standard) 

Revenue Shortfalls and Expenditure Pressures

• Revenue Shortfalls: As of February 2025, the government had achieved 80.9% of the full-year revenue target, indicating potential shortfalls in tax receipts and capital receipts. (Source: India Infoline)
• Expenditure Pressures: The government reduced its total expenditure target for FY25 to ₹47.16 trillion, reflecting efforts to control spending amidst revenue shortfalls. (Source: India Infoline) 

State-Level Debt Concerns

• State Debt Growth: The combined public debt of all Indian states tripled from ₹17.57 lakh crore in 2013–14 to ₹59.6 lakh crore in 2022–23, increasing from 16.66% to nearly 23% of Gross State Domestic Product (GSDP). (Source: Reddit)
• High Debt States: States like Punjab (40.35% of GSDP), Nagaland (37.15%), and West Bengal (33.70%) exhibit particularly high debt burdens. (Source: Reddit) 

Risks to Fiscal Consolidation

• Economic Growth Risks: External factors, such as increased U.S. tariffs on Indian goods, could slow economic growth and reduce revenue collection, complicating fiscal consolidation efforts. (Source: Reuters)
• State-Level Fiscal Health: States like Rajasthan have overspent by 16% over revenue in 2023–24, leading to a fiscal deficit of ₹31,491 crore, primarily due to expansive welfare schemes. (Source: The Times of India) 

Government Measures:

Way Forward:

Fiscal Deficit Reduction

• Target: Reduce fiscal deficit to 4% of GDP in FY26, down from 4.8% in FY25.
• Strategy: Shift focus from annual fiscal targets to a debt-to-GDP ratio, aiming to lower it to 50% by FY31 from the current 1%. (Source: CNBC) 

Revenue Enhancement

• Tax Reforms: Implement a new tax regime with a 100% rebate up to ₹12 lakh, aiming to increase household disposable income and stimulate consumption. (Source: Reddit)
• Corporate Tax Incentives: Enhance tax incentives for MSMEs and startups to encourage investment and economic activity. 

Expenditure Optimization

• Capital Investment: Prioritize capital expenditure to stimulate economic growth, with a focus on infrastructure development.
• Subsidy Rationalization: Revised subsidy allocations to ensure targeted and efficient use of resources. 

Debt Management

• Bond Switch Operations: The Reserve Bank of India plans to switch ₹32,000 crore worth of bonds for longer-tenure securities to ease redemption burdens over the next three fiscal years, thereby helping to better manage the government's fiscal deficit. (Source: Reuters) 

Global Confidence

• Credit Rating: Moody's has affirmed India's sovereign ratings, reflecting confidence in India's robust and fast-growing economy, substantial foreign reserves, and dependable domestic funding for its budget deficits. (Source: Reuters) 

Source: Indian Express