Debt-to-GDP ratio measures how much a nation owes in relation to its GDP. It is a trustworthy predictor of a nation’s ability to pay down its debts.
- A healthy economy is one that produces and sells goods and services without accruing more debt. A low debt-to-GDP ratio is a sign of that.
- If a portion of the country experiences a debt default, both local and foreign markets will experience a financial panic. A greater debt-to-GDP ratio increases the likelihood of default.
- External debts, often known as “public debts,” are any sums owing to foreign lenders. These are generally difficult for a country with a high debt-to-GDP ratio to pay off.
- In these situations, lenders frequently ask for higher interest rates. Extremely high debt-to-GDP ratios may discourage creditors from making any loans at all.
Sustainable Debt-to-GDP Ratio: According to IMF: “a country can achieve sustainable external debt if its future and current external debt service obligations are met in full, without accumulating more debt and without compromising growth”.
Currently, India’s debt to GDP ratio is 84%. Economic Survey 2022-23 opines that a positive growth-interest rate differential helped keep government debt-to-GDP ratio at sustainable levels.
