India’s Debt Numbers at the Union and State Level Indicate a Brewing Crisis

Rising spending is leading to higher growth but at the cost of essential welfare expenditure.

The International Monetary Fund (IMF) recently concluded its Article IV consultation with India and published its executive board’s report that highlighted the latter's growing debt problem.

This, accompanied by a "volatile inflation" spell, a "lower employment rate" (dominated by the informal sector), and a potential disruption of the global supply chain "increasing fiscal pressures for India," is concerning for the economy. The government’s response to the report was unsurprisingly aimed at refuting the institution’s warning.

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 government's response stressed that its sovereign debt risks are limited as it is primarily denominated in domestic currency.

K V Subramanian, India's executive director at the IMF, challenged the IMF's 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."

Government Debt-GDP Growth Rate

India’s growth position has remained relatively weak and stagnant in its 2016-2020 timeline. The macro-growth rate crashed during the 2020 lockdown and then gradually found its way up in a nominal sense once COVID restrictions were lifted.

On average, the real growth rate remains still sub-optimal to the demographic and investment potential. However, the macro-government debt to GDP levels, already rising from 2015, have ballooned since 2018.

With a lower denominator (GDP level), one can expect the net debt effect to rise even if the borrowings were left the same, which isn’t the case. The IMF data (see Table 1 above) indicates how government debt has increased at alarming levels of 82.4%, and any government debt number that’s greater than 80% of the GDP signals a 'red’ risk marker in economic crisis terminology.

These numbers are reliant upon data that is sourced by the IMF from India’s own government sources.

There is always the possibility of a 'hidden debt' volume emerging from the source of rising 'fiscal deficit’ that’s 'silently hidden’ and 'not accounted for' in official data.

The emergence of 'hidden debt' numbers can often wreck a given economy. India isn’t there yet, but it could be if a large enough external shock hits the economy at any point of time amidst alarming government figures.

Government Debt-External Debt-Household Debt

It’s not as if the general government debt alone has risen in India over the last 10 years.

There is a sustained rise observed in external debt levels too (contradicting KV Subramanian), as seen below, 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 (which accrues higher indebtedness, particularly among lower/middle-income earners).

Rising external debt requires a greater robustness of 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.

If one looks at the incoming flow mechanism of forex into the country, macro-FDI levels have remained (as per IMF data in Table 1) 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 the credibility of an emerging market to attract long term stable investment via FDI.

Government Debt-Government Spending-Higher Military Expenditure

If one looks at the correlative mapping of trends (over the last 10 years) in the rising government debt levels with macro-government spending one sees two things

• A rising government spending level justified for 'capital formation’ (which now will be inhibited by a constrained borrowing power level as debt continues to rise)

• How much of the (rising) spending is proportionately linked to a persistently growing military expenditure

The problem is that rising spending is leading to higher growth but at the cost of essential social and welfare expenditure for human capital development.

The Capex-fuelled government spending spree in the last three years hasn’t been allowed for greater capital formation (to attract private capital investment for growth). The weak GFCF (Gross Fixed Capital Formation Numbers) reflect this, and that is a bigger concern.

If the government is spending big and doing so by borrowing more to push for growth via private investment, and there is none of that happening (as private investment still remains woefully low and weak), the government is then basically accruing more debt at a cost of spending to waste and endangering the possibility of a future government to not be able to more ‘usefully borrow’ in times of crisis.

Government Debt-Employment and Inflation Woes 

A high debt level accompanied with a lower employment rate and a higher food inflation level is the worst possible scenario for any emerging market economy, particularly one that boasts of experiencing a ‘demographic dividend’ in its working age population composition.

India’s growth story so far in the last decade and a half has been one of ‘jobless growth’, anchored by a broadened phase of higher informalisation and casualisation of work happening by a process where workers are circumventing the constraints of a low-organised work availability scenario across sectors (i.e. in absence of ‘good jobs’).  

Manufacturing production is still weak and where the potential for jobs is more i.e. in services, the nature of competitiveness, in an abundant labor/worker surplus economy, yields little opportunities in terms of higher wages.

Workers then are settling for low-value service work, a lot of which happens at the intersection of ‘informal’ and ‘formal’ work. 

How is this all related to rising government (or macro) debt?

For any large emerging market country to progress and have higher growth aspirations while driving people out of poverty, having a larger credit-expansion plan in its financial sector is vital along with a larger borrowing space for crises, exogenous shocks, or disruptive responses. 

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 lesser space for both: a long term credit expansion or borrowing to happen.

State-Wise Internal Debt  

Mizoram currently grapples with the highest debt-to-GDP ratio among the Indian states, standing at 53%, according to recent budget estimates.

Following closely are Punjab and Nagaland with ratios of 44% and 47%, respectively.

Odisha maintains a low level of accrued debt by adhering to a stricter fiscal discipline. The state abides by annual budget deficit targets, averting elevated interest rates and decreasing borrowing expenses. Odisha's performance is primarily ascribed to its savvy control of expenditures rather than its ability to generate money, considering the limited opportunities for the latter.

Although the state is a key producer of paddy, it manages to avoid incurring a substantial subsidy cost, unlike Punjab, which has unpredictable rainfall patterns while producing a substantial amount of India's wheat.

As observed for Assam, increasing debt has been driven by loans for development projects, sourced from financial institutions and the Central government.

(Deepanshu Mohan is a Professor of Economics and Director, the Centre for New Economics Studies (CNES), Jindal School of Liberal Arts and Humanities, O P Jindal Global University. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)