About public 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 and is used to gauge a country’s ability to repay its debt.
• Public debt consists of external debt (which has been borrowed from foreign lenders) and internal debt (like government securities, treasury bills, and short-term borrowings).

Impacts of public debt- to-GDP ratio

A high debt-to-GDP ratio is undesirable for a country, as a higher ratio indicates a higher risk of default. In such scenarios, creditors seek higher interest rates during lending. A very high debt-to-GDP ratio may deter creditors from lending money altogether. It,

1. a) Deprives the government of its ability to undertake development and welfare measures,
2. b)Impacts the outlook of rating agencies for the country,
3. c) Widens fiscal deficit and creates pressure on the market interest rate.

• This impacts private firms, thereby increasing per unit cost that is passed on to consumers. It results in cost-push inflation.

What debt- to-GDP ratio is considered stable?

• A country able to continue paying interest on its debt-without refinancing, and without hampering economic growth, is generally considered to be stable.
• 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.
• According to the recommendations of theK. Singh Committee (2016), Debt-to-GDP ratio should have been 38.7% for the Centre and 20% for states by 2022-23 (FY23).

Source: Indian Economy (core)