Mukul Asher

This column examines India’s total nominal debt to nominal GDP ratio in the first quarter of 2022 from various segments from an international perspective. The debt analysis is not confined to the general government sector debt, as is often the case, but also includes household and corporate sector debt.

Managing debt is emerging as an important policy issue in the fragile global social and economic environment, with slower growth and tightening of monetary and/or fiscal policies. In its World Economic Outlook for October 2022, IMF has noted that- “Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook”.

Global growth is forecast to slow from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023. This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the COVID-19 pandemic. Global inflation is forecast to rise from 4.7 per cent in 2021 to 8.8 per cent in 2022 but to decline to 6.5 per cent in 2023 and to 4.1 per cent with slower growth by 2024.

Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy… Risks to the outlook remain unusually large and to the downside1.

IMF also reports that several G20 countries will tighten monetary and fiscal policies, while several countries are expected to tighten monetary policies. These policy stances will have implications for interest rates at which debt could be rolled over, complicating debt management, and for inflation. High food and natural gas price inflation, though easing, is expected to have serious adverse impacts on low- and middle-income households in many countries. (See Figure 1)

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https://www.imf.org/en/Blogs/Articles/2022/10/11/policymakers-need-steady-hand-as-storm-clouds-gather-over-global-economy -Accessed on 19 November 2022.

Figure 2 provides total nominal debt to nominal GDP ratios for India and select countries, divided into household, government, and corporate debt for the first quarter of 2022. It should be noted that debt is a stock concept while GDP is a flow concept. Variability in data quality among countries suggests a cautious nuanced interpretation of numbers in Figure 2. It should also be noted that debt is only one component of the balance sheet, particularly government debt. Governments, for example, have various types of physical and monetary assets and tax powers over income and expenditure flow. Thus, debt ratios should not be interpreted mechanically.

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Figure 2: Total Debt to GDP Ratios of India and the Selected Countries, 2022, Quarter 1

The data in Figure 2 suggest the following.

(1)    Total Debt: Japan, at 418 per cent of GDP, has by far the highest total debt to GDP ratio among the sample countries. As Japan’s medium-term growth prospects are very subdued, such a high ratio in the environment of rising interest rates, and a lower than past average ratio of world GDP growth over the global volume of trade in goods and services, may pose serious policy challenges to all its stakeholders. Indonesia has the lowest ratio at 82 per cent, with its relatively less developed capital markets and its conglomerates relatively more focused abroad among the contributory reasons. India has the second lowest ratio at 178 per cent of GDP.

There are several other countries whose total debt-to-GDP ratio may be high. These are China (292 per cent), the United States (276 per cent), South Korea (268 per cent), and European Union group (265 per cent). In the current low growth and rising interest rate environment, stakeholders in these countries will face complex trade-offs as they adjust to the new global environment. They moved towards both fiscal and monetary tightening. However, as data in Figure 1 suggest, only Spain (part of the EU) and South Korea continue with fiscal loosening. The others have moved towards both fiscal and monetary tightening.

(2)     Household Debt: Since the 2008 financial crisis, several countries, such as Canada. Have introduced macroprudential policies designed to regulate household debt. Overleveraging by households and its negative impact on other sectors and on macroeconomic policies have motivated these policies. More frequently used rules relate to loan-to-value ratios and debt-to-income ratios.

 Among the sample countries, Australia exhibits the highest household debt to GDP ratio of 118 per cent, closely followed by South Korea at 105 per cent.  The other countries with high ratios are Thailand (90 per cent) and Malaysia (72 per cent). Households in these four countries need to begin deleveraging to make an orderly transition to a more manageable household debt profile. The countries with the lowest household debt to GDP ratio are Indonesia (17 per cent), and India (37 per cent). Households in these two countries should continue to nurture their frugal habits and aversion to excessive debt-financed expenditure.

(3)    Government Debt: The focus of debt analysis is on this component. Fiscal Rules often revolve around government debt-to-GDP ratios and fiscal deficit-to-GDP ratios. The Covid-19 Pandemic and heterogeneity of countries, and wide variations in development levels and fiscal capacities have made it more difficult to set national level broadly uniform Fiscal Rules across countries.

Data in Figure 2 suggest that the highest general government debt to GDP ratio is by high-income countries, such as Japan (231 per cent), the USA (118 per cent), and European Union (96 per cent). This is due to significantly loose monetary policy by their central banks over a prolonged period and aggressively expansionary fiscal policy to manage the Covid-19 pandemic.

India’s government debt comprises the debt of both the central and 28 state governments. India’s government debt is high at 85 per cent of GDP. A realistic medium-term target for India is progressing towards a 70 per cent ratio. Both the central and state governments in reaching this target would need to contribute to this target. The most critical factor is to persistently exhibit as wide a gap as possible between the nominal rate of GDP growth and the rate at which borrowing takes place. In the current era of cooperative and competitive federalism, those states unable to perform in this direction will find it difficult to provide needed infrastructure, amenities, and quality governance.

RBI (Reserve Bank of India) has identified a core subset of highly stressed states from among the ten states identified by the necessary condition, i.e., the debt/ GSDP ratio. Bihar, Kerala, Punjab, Rajasthan, and West Bengal are highly stressed states. If interest payments to revenue receipts of the State’s ratio are used, highly stressed States are Punjab, Tamil Nadu, Haryana, and west Bengal. If the Gross Fiscal Deficit to GDP ratio is used, highly stressed states are Bihar, Rajasthan, Punjab, Uttar Pradesh, Kerala, and Madhya Pradesh2.

That many of the same states appear as highly stressed under different criteria is noteworthy. Different states also are classified as stressed under different criteria. The overall strong inference is that states in the above lists should focus on fiscal consolidation, improve public financial management, including better expenditure management, and refrain from any policy measures that adversely affect fiscal space.

Corporate Debt: Among the sample countries, the most highly leveraged corporate sectors, measured by debt to GDP ratio, are China (157 per cent), Japan (117 per cent), South Korea (115 per cent), and the European Union (110 per cent). China appears vulnerable to slow growth due to its high corporate debt.

In the current global environment, highly leveraged corporations will face challenges in continuing with high-leverage policies. India’s ratio at 54 per cent appears manageable, provided strong corporate financials are maintained. 

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Figure 3 Change in Total Debt to GDP ratio, Select Countries, between 4th Quarter 2019 and First Quarter 2022

Data in Figure 3 suggest that during the Covid-19 Pandemic period, Thailand added the most debt, 43 per cent of GDP, followed by South Korea (32 per cent) and China (28 per cent). Australia added the least (3 per cent), due to its corporate deleveraging, but the government added to its debt stock. Indian households and corporates were deleveraged, but the government added significantly to its debt stock. The change in managing high government debt in India has been discussed earlier.

Concluding Remarks

It is essential to examine household, government, and corporate debt trends to assess a country’s total debt profile and design specific policy measures. In this sample, many high-income countries and countries in East Asia exhibit elevated debt profiles. Significant adjustments will be required in these countries if there is a prolonged period of slow growth in GDP, a subdued rise in wages and salaries, and a modest rise in corporate earnings.

In general, Indonesia and India have a relatively low total debt-to-GDP ratio. They also have added only moderately to their debt during the Covid-19 Pandemic. But India’s government debt to GDP ratio requires a focus on fiscal consolidation, improving expenditure management, and focusing on high growth. Several states in India are highly stressed, and they need to pursue even more fiscally responsible policies.

This article was first published in MyIndMakers as Observations on India’s Debt Profile: An International Perspective.

About the Author

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Prof Mukul AsherFormer Professor, Lee Kuan Yew School of Public Policy, National University of Singapore.

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