From UPSC perspective, the following things are important :
Prelims level : Debt-GDP ratio
Mains level : Not Much
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:
- Most of India’s external debt is owed by governmental entities.
- 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.