World Economic Forum warned that the global rise in public debt was a ‘fiscal ticking bomb’. The sudden increase in indebtedness was driven by two developments. First, governments around the world unleashed fiscal stimuli to support their economies during the pandemic.
Second, as the pandemic receded, a steep rise in interest rates increased the costs of servicing debt. Advanced countries were the most affected, as they spent relatively more on covid-19 relief, and also because many had steadily leveraged up in the easy money years. India falls in the middle of the ranks of indebted countries—better than debt-heavy US or Japan, but worse than comparable emerging economies.
In 2020, total liabilities of the Centre and states hit an all-time high of 89.3% of GDP, mainly due to central spending on covid-19 relief. It declined in the following years, but remains around 84% of GDP, which is fairly high for an emerging economy. Here’s the interesting thing about India’s debt position.
The country’s public debt is not expected to fall in the medium term, because budgetary revenues are unlikely to meet its growing funding needs, thus ensuring that the government will remain a large and consistent borrower. Yet India’s debt is considered to be sustainable, meaning that it is expected to meet its current and future debt obligations without default. What gives markets and institutions this confidence? The answer lies in the unique structure and market features of our public debt.
India’s public debt is dominated by loans with long tenor and fixed rate coupons. The maturity profile of government debt has lengthened in the last decade. Between March 2013 and March 2023, the weighted average maturity of outstanding central government
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