Causes of National Debt in INDIA: An In-depth Analysis

National debt, also known as public debt, is the total amount of money that a country owes to its creditors. In India, the national debt has been a growing concern in recent years, as it has risen steadily over the past few decades. High levels of national debt can have significant implications for a country’s economic growth and stability. It is therefore essential to understand the causes of national debt in India and explore potential solutions.

In this article, we will conduct an in-depth analysis of the factors that have contributed to the rising national debt in India and discuss their implications for the country’s economic future.

Causes of National Debt in INDIA
Causes of National Debt in INDIA

Causes of National Debt in INDIA

Fiscal Deficit

One of the primary causes of national debt in India is the fiscal deficit. A fiscal deficit refers to a situation where a government’s total expenditures exceed its total revenues within a specified period. This essentially means that the government is spending more money than it is earning through taxes, fees, and other sources of revenue. When this happens, the government has to borrow money to finance its expenses, which adds to the national debt. India has struggled with a high fiscal deficit for many years, and it has contributed significantly to the country’s debt levels. For example, in 2020-21, India’s fiscal deficit was estimated to be around 9.5% of its GDP, which is one of the highest among major economies.

Government Spending

Another significant cause of national debt in India is government spending. The government’s expenditures on various programs, such as infrastructure development, social welfare schemes, and defense, require substantial funding. While these programs are essential for the country’s growth and development, they also add to the national debt. For example, the government’s spending on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which provides employment to rural households, has increased over the years, contributing to the country’s debt levels.

Subsidies

Subsidies provided by the government to various sectors, such as agriculture, energy, and transportation, also contribute to national debt in India. These subsidies are meant to support these sectors and provide relief to consumers, but they require significant funding. Over the years, the government has had to borrow money to finance these subsidies, adding to the country’s debt levels. For example, the government’s fuel subsidy, which is provided to keep fuel prices low, has contributed significantly to the country’s debt levels.

Interest Payments

Interest payments on existing loans are another significant cause of national debt in India. As the country borrows money to finance its expenses, it incurs interest on these loans. These interest payments can add up over time and become a significant portion of the country’s debt. For example, in 2020-21, India’s interest payments on its debt were estimated to be around 23% of its total expenditures.

Inflation

Inflation is another factor that can contribute to national debt in India. When inflation is high, the value of money decreases, and the government may have to borrow more money to finance its expenses. Additionally, inflation can lead to higher interest rates, making it more expensive for the government to borrow money. For example, in the 1990s, India experienced high inflation rates, which contributed to the country’s debt levels.

Economic Downturns

Economic downturns can also contribute to national debt in India. During times of recession or slowdown, tax revenues decrease, and the government may have to borrow more money to finance its expenses. Additionally, the government may have to spend more on social welfare programs to support those affected by the downturn, adding to the national debt. For example, during the COVID-19 pandemic, India’s economy contracted significantly, leading to lower tax revenues and higher government spending on social welfare programs.

Tax Evasion

Tax evasion occurs when individuals or businesses do not pay their taxes or underreport their income to the government. This results in lower tax revenues for the government, which can lead to a higher fiscal deficit and more borrowing to finance the government’s expenses.

Subsidies and welfare schemes

India has a wide range of subsidies and welfare schemes for its citizens, which are aimed at promoting social welfare and providing basic necessities such as food, housing, and education. However, these schemes also put a significant burden on the government’s finances, leading to increased borrowing and debt. For example, the government’s food subsidy program, which provides food grains at subsidized rates to the poor, has been a major contributor to the national debt. In the fiscal year 2021-22, the government allocated Rs 2.42 lakh crore ($32.5 billion) for food subsidies, which is nearly 1.2% of India’s GDP.

Defense spending

India is one of the largest arms importers in the world and has a significant defense budget to maintain its military strength. While defense spending is essential for national security, it is also a major cause of national debt. In the fiscal year 2021-22, India’s defense budget was Rs 4.78 lakh crore ($64.3 billion), which is around 2.3% of India’s GDP. The government’s focus on modernizing the military and acquiring advanced weapon systems has also led to increased spending and borrowing.

Infrastructure development

India has been investing heavily in infrastructure development in recent years, including projects such as highways, airports, and railways. While such investments are necessary for the country’s economic growth, they also come at a high cost and can contribute to national debt. For example, the government’s ambitious Bharatmala project, which aims to develop 34,800 km of highways, is estimated to cost Rs 5.35 lakh crore ($71.9 billion) and is expected to be financed through a combination of budgetary allocations, borrowings, and private investment.

Economic slowdown

A slowdown in the economy can also contribute to national debt, as it reduces the government’s revenue and increases its spending on welfare measures. For example, during the COVID-19 pandemic, India’s economy contracted by 7.7% in 2020-21, leading to a sharp decline in tax revenue and increased spending on healthcare and welfare schemes. The government had to borrow heavily to meet its expenditure, leading to an increase in national debt.

Conclusion

National debt in India is a complex issue that is caused by a combination of factors such as fiscal mismanagement, low revenue, high expenditure, and external factors such as global economic conditions. Addressing these causes will require a multi-pronged approach that includes improving fiscal discipline, increasing revenue through tax reforms and asset sales, reducing expenditure on non-essential items, and promoting economic growth through investments in key sectors. Only through concerted efforts can India hope to bring down its national debt and achieve sustainable economic growth.