Debt-to-GDP Ratio

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    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