Amid ongoing debate about India's fiscal health, Prasanna Tantri, an associate professor of finance at the Indian School of Business (ISB), has highlighted a critical distinction: while India's public debt-to-GDP ratio appears reasonable, the cost of servicing that debt is a significant concern.
India's Debt-to-GDP Manageable, But Interest Payments Are Not
Professor Tantri noted that India's public debt stands at approximately 80% of its GDP, a figure he describes as broadly stable. For the central government, this ratio is projected to be 56.1% in 2025-26, a notable decrease from 62.8% post-COVID, although state debt has recently increased.
The core issue, according to Tantri, lies in the interest payments. These amount to 3.7% of GDP for the Centre alone, rising to around 5.5% when state obligations are included. He pointed out that India's debt-to-GDP ratio is lower than that of countries like the US and UK, yet it allocates a larger share of its GDP to debt servicing. This pattern also holds true when compared to many nations with higher debt ratios, with only a few exceptions such as Brazil and Egypt.
Tantri emphasized the need for rigorous analysis to understand why India faces such high servicing costs for what he considers a manageable debt stock, stating, “The debt ratio looks reasonable. Its cost does not.”
The Broader Fiscal Debate
The discussion gained wider traction after author Anand Ranganathan raised concerns about India's overall debt. Ranganathan highlighted that the Centre's debt alone is approximately ₹201 lakh crore, with the general government debt (including states) exceeding 80% of GDP. He also drew attention to the Centre's interest bill, budgeted at over ₹14 lakh crore for FY27, noting it consumes 40% of the Centre’s revenue.
Ranganathan further argued that a growing portion of state borrowing is being used for recurrent expenses like salaries, power subsidies, and cash transfers, rather than for creating assets that could service the debt.
Government Rebuttal and Fiscal Space
Kanchan Gupta, a senior adviser at the Ministry of Information and Broadcasting, countered these assessments. He argued that the debt stock alone is not a sufficient indicator of sustainability and pointed to the declining central debt ratio since the pandemic, asserting that claims of a worsening fiscal trajectory are “simply false.”
Gupta cited the government's FY27 budget, which projects a fiscal deficit of 4.3% of GDP and central debt at about 55.6%. He also noted that effective capital expenditure is projected at 4.4% of GDP. Furthermore, Gupta mentioned that the International Monetary Fund (IMF) projects India's debt ratio to decline over the medium term and assesses its sovereign-stress risk as moderate.
Regarding the interest/revenue ratio, Gupta clarified that while ₹14.04 lakh crore of interest against ₹35.33 lakh crore of revenue receipts is indeed about 40%, this ratio measures fiscal space, not insolvency. He also stated that spending on welfare schemes does not automatically imply that borrowing financed those specific transfers, as government budgets are fungible.
The debate underscores the complexity of assessing a nation's fiscal health, requiring a nuanced understanding of debt ratios, interest burdens, and revenue utilization.