National Debt: How It Affects Your Economy (India)

National debt is a major factor influencing the economic stability and growth of a country, including India. India’s national debt is a complex mix of external and internal borrowings, and its impact can be seen in various aspects of the economy such as inflation, interest rates, government spending, and economic growth.?

Let’s break down how national debt affects India's economy, with relevant statistics and numbers.

1. Impact on Interest Rates

India’s national debt affects the country’s borrowing costs and, consequently, interest rates across the economy.

India’s Debt: As of 2023-2024, India's total debt stood at approximately ?161.6 trillion (around $2 trillion), or approximately 89.6% of GDP. Interest Payments: In 2023-2024, the Indian government is expected to spend ?9.6 trillion on interest payments alone, which is about 29% of total government expenditure. This large expenditure on interest payments can limit the government’s ability to invest in development projects and welfare schemes, potentially stunting economic growth. Moreover, high debt leads to higher interest rates, which may crowd out private investment.

2. Economic Growth and Debt-to-GDP Ratio

A country's debt-to-GDP ratio is a critical indicator of its economic health. India’s rising debt impacts its growth prospects. As mentioned, India’s national debt is approximately 89.6% of GDP (in 2023-2024), which is high compared to global standards. A high debt-to-GDP ratio could indicate that the government is borrowing heavily, which might lead to concerns about fiscal sustainability.

While moderate levels of debt can stimulate economic growth (especially if used for productive investments), excessive debt can harm long-term growth prospects.

Despite a high debt burden, India remains one of the fastest-growing major economies. In 2023, India’s GDP growth rate was estimated at around 5.9%, one of the highest in the world. However, long-term growth may be hindered if the debt continues to rise faster than the economy.

3. Inflationary Pressures

A significant amount of government borrowing can put pressure on inflation, which can erode purchasing power and affect the cost of living. If the government borrows excessively, the Reserve Bank of India (RBI) may raise interest rates to control inflation, impacting the cost of loans and reducing consumer spending.

In 2023, India's inflation rate was around 6.7%, above the RBI’s target range of 2-6%. High inflation can be partly attributed to fiscal policies, including high government borrowing. Additionally, inflation erodes the real value of the country’s debt, but it can also lead to higher costs for households and businesses.

4. Government Spending and Fiscal Deficit

The level of national debt directly influences government spending and fiscal policy. India’s fiscal deficit (the gap between its total expenditure and revenue) is another key indicator of the country’s debt levels. In 2023-2024, the fiscal deficit is expected to be around 6.4% of GDP, a bit higher than the government's target of 4.5% by 2025-2026. High fiscal deficits mean higher borrowing, which increases the national debt.

A significant portion of India's government spending is directed towards debt servicing. In the 2023-2024 Union Budget, ?41.6 trillion (around 22% of total spending) is allocated to interest payments. This leaves less room for investment in infrastructure, healthcare, education, and social welfare.

5. Debt Sustainability and Credit Rating

A country’s debt levels also affect its credit rating, which determines the cost of borrowing in international markets. India currently holds a BBB- rating with a stable outlook from agencies like Standard & Poor’s and Fitch, reflecting concerns over its fiscal deficit and rising debt levels.

A downgrade in credit rating due to high debt levels can raise borrowing costs, making debt servicing more expensive. For example, a downgrade from BBB- could push India into a higher risk category, causing foreign investors to demand higher interest rates.

6. Global Trade and Foreign Investments

National debt also affects India’s position in global markets, impacting trade and foreign investments. If investors are concerned about India’s fiscal health and rising debt levels, they may reduce their investments in Indian government bonds or equities.

In recent years, India has attracted significant foreign direct investment (FDI), with FDI inflows reaching about $84 billion in 2022-2023. However, concerns about high public debt may cause a slowdown in investment if not managed effectively.?

7. Impact on Future Generations

A rising national debt means future generations may face higher taxes or lower public spending, which could affect their quality of life. If India continues to accumulate debt without addressing its fiscal deficit, future generations may be burdened with higher taxes to service this debt. In 2023-2024, India’s revenue as a percentage of GDP was about 11-12%, which is low compared to other major economies. This low revenue generation combined with rising debt could result in significant tax hikes or reductions in public services in the future.

Conclusion

India’s national debt is growing, and it is expected to reach approximately ?161.6 trillion by 2024, which is 89.6% of GDP. While this debt has helped fund critical infrastructure, defense, and welfare programs, the rising burden of debt servicing (around ?9.6 trillion in 2023-2024) limits the government’s ability to invest in the economy and improve public services. Moreover, the fiscal deficit, which stands at 6.4% of GDP, remains high and may impact economic growth if not controlled.