Debt-to-GDP Ratio

In News

• The IMF has projected that India will grow at 9.5% and 8.5% this fiscal year and next after a contraction of 7.3% last year in its latest World Economic Outlook report.
• India’s debt to GDP ratio increased from 74% to 90% during the COVID-19 pandemic.
  • It is a cause of concern.

Debt to GDP Ratio

• The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP).
• By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.
• Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.
• As per FRBM Act, the Debt to GDP ratio should be around 60%.
  • 40% for Central Government
  • 20% for the State Government.

Impact of High Debt to GDP ratio on Economy

• Crowding Out Effect.
• Major Part of Budget going to Interest Payments.
• Poor ratings by Credit Rating Agencies.
• Higher Borrowing Cost.

Source: TH