India’s public debt ratio, which remarkably remained stable at about 70% of the GDP since 1991, is projected to jump by 17 percentage points to almost 90% a/c to IMF.

Try this PYQ:

Q.Consider the following statements:

1. Most of India’s external debt is owed by governmental entities.
2. All of India’s external debt is denominated in US dollars.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Why such a spike?

• The increase in public spending, in response to COVID-19, and the fall in tax revenue and economic activity, will make public debt jump by 17 percentage points to almost 90% of GDP.

What is Debt-to-GDP Ratio?

• The Debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP).
• It measures the financial leverage of an economy.
• A country able to continue paying interest on its debt-without refinancing, and without hampering economic growth, is generally considered to be stable.
• A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called “public debts”), which are any balances owed to outside lenders.
• In such scenarios, creditors are apt to seek higher interest rates when lending. Extravagantly high debt-to-GDP ratios may deter creditors from lending money altogether.
• A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.
• Geopolitical and economic considerations – including interest rates, war, recessions, and other variables – influence the borrowing practices of a nation and the choice to incur further debt.

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