Can India escape the debt trap that rich economies are staring at?
Governments across the world see debt-funded public spending as an easy way to overcome economic slowdowns. But the costs it imposes—especially on unborn taxpayers—mustn’t slip out of consideration. Does the West need a sharper reminder of it than we do?
As countries stare at the prospect of slower economic growth in the post-Trumpian world, the Keynesian answer of fiscal support—financed through additional public debt—is a vanishing option, given the reality of payback burdens reaching unsustainable levels.
Ironically, it is not the usual suspects that are guilty of living far beyond their means by taking the easy way out of borrowing more. More than emerging-market economies, it is advanced countries—the US, UK, Germany and France, to name a few—that are struggling with rising debt and its corollary, higher interest payments.
Unfortunately, debt-financed spending is one of the easiest options for fiscal authorities to tackle growth slowdowns. But it comes at a cost. Both immediate and in the future. The initial impact is in the form of a higher cost borne by the government for the money it borrows. The long-range effect is the repayment burden it places on successive generations, which sets back inter-generational equity.
The Bank for International Settlements (BIS), a financial institution owned by central banks, has long been urging governments to curb the ‘relentless’ rise in public debt, as higher rates of interest make fiscal paths for some countries ‘unsustainable.’
According to the BIS, a phase of low rates after the financial crisis of 2007-09 has lulled many administrations into complacency over hard choices. They must reduce expenditure or raise taxes, both of which are anathema in electoral democracies.
Agustin Carstens, governor of the Bank of Mexico and a former BIS general manager, issued a prescient warning earlier this year: “Fiscal consolidation in many economies needs to start now. Muddling through is not enough."
Sadly, his words seem to have fallen on deaf ears, going by rising budget deficits, public debt levels and bond yields, globally. As public spending is ramped up in response to the very real threat of a slowdown, investors worried by bloating debt have begun to exit bond markets or demand higher yields.
This problem afflicts rich and poor economies alike. The only silver lining is that, for once, advanced countries cannot lecture the rest of us about poor finances. Their own numbers are in no better shape.
In fact, given their adverse demographic profiles, with a growing share of ageing folks who are not at work, their problems of enlarged debt and the transfer of this burden to unborn citizens are even more acute. After all, today’s debt has to be repaid by tomorrow’s taxpayers. If each successive generation is smaller, as in most rich countries, it makes for an unhappy scenario.
Luckily, we in India are better placed. And thankfully, successive governments have been alive to the need to keep an eye on public debt. Sure, the Centre still has some way to go before it attains its debt goal of about 50% of GDP by the end of 2030-31 announced in this year’s budget speech, a step-down from the earlier goal of 40% by 2025-26.The fiscal stimulus necessitated by the covid crunch had gotten in the way. But the good news is that progress has been made.
The Comptroller and Auditor General’s latest report of July 2025 shows that the Centre’s debt fell from 61.4% of GDP in 2020-21 to 57.9% in 2022-23. Will the ongoing global slowdown push us back again? If the past is any indication, the government is committed to fiscal consolidation. That, together with favourable demographics, means India might have less to fear than advanced countries.
topics
