India’s Debt Problem: Can Careful Spending Prevent Trouble?

India’s mounting public debt has reached critical levels, posing significant economic, social, and political challenges. This detailed article examines the causes, risks, and potential policy solutions, exploring whether India can avoid a looming fiscal crisis while maintaining stability and growth.

Introduction: Debt Pressures Mount

India’s public debt profile has become a matter of serious concern. By 2025, the combined debt of the central and state governments is estimated at nearly 82 percent of GDP, a substantial rise over the past decade and a level that dwarfs most emerging market peers. The International Monetary Fund (IMF) ranks India 31st globally in debt-to-GDP, with the government committing to reducing this metric but facing an uphill task. Recent fiscal years have witnessed rapid government borrowing, broadening welfare commitments, and episodes like the COVID-19 pandemic that widened the deficit to 9.2 percent of GDP in 2020–21 before improving in later years.

Historical Perspective: Two Decades of Escalating Debt

India’s public debt has more than quadrupled in absolute terms since the early 2000s. Two decades ago, debt hovered near 50 percent of GDP, before expanding sharply in the aftermath of the global financial crisis and during the pandemic. The rise was especially steep during 2020–21, reflecting stimulus packages and collapsed tax revenue. While the 2018 debt ratio dipped below 45 percent for the central government alone, combined central and state debt steadily grew, reaching 81.9 percent of GDP in 2024–25. Off-budget borrowings and new welfare initiatives have continued to add pressure.

Current Situation: Recent Data on India’s Debt Burden

For 2024–25, India’s total public debt is estimated at 185 trillion rupees, projected to rise further to nearly 197 trillion rupees by March 2026. Central government liabilities represent roughly 57 percent of GDP; state government liabilities add almost 29 percent more. In dollar terms, India’s central government debt reached 2.14 trillion USD in September 2024. The fiscal deficit reflecting new borrowing is officially targeted at 4.8 percent of GDP for 2024–25, with an ambitious aim of reducing this to 4.4 percent in 2025–26. However, surging welfare spending and cyclical revenue pressures have already put these targets at risk.

Drivers of India’s Rising Debt

India’s debt build-up is the result of several persistent and structural factors:

• Chronic Fiscal Deficits: High annual deficits have forced repeated borrowing. Even with strong GDP growth projections, the government continues to spend more than it collects in taxes and non-tax revenues.
• Subsidies and Welfare Schemes: Expansive social schemes (e.g., food, fertilizer, rural employment guarantees) and large fuel and commodity subsidies remain major fiscal outflows. Reforms often stall due to political economy constraints, making rationalization difficult during election years.
• Defence Expenditures and security outlays have risen steadily, reflecting both strategic imperatives and inflation in military costs.
• Low Tax Revenues: India’s tax-to-GDP ratio is about 11–12 percent well below developed economies’ norms. A large informal economy and regular tax evasion limit direct tax mobilization.
• Off-Budget Borrowing: State-owned enterprises and delayed payments have led to rising “hidden” liabilities, not immediately reflected in headline deficit figures.
• Interest Payments: Rising debt increases annual interest obligations, which now account for about a quarter of total government spending.

Economic Risks: Growth, Inflation, and Investment

High public debt presents several dangers to macroeconomic stability:

• Interest Rates: Heavy government borrowing can “crowd out” private credit, driving up interest rates and making it more expensive for firms to invest.
• Inflation: Fiscal deficits, especially if financed by central bank money creation fuel inflationary pressures, raising the cost of living and eroding savings.
• Reduced Fiscal Space: Interest payment obligations eat into funds available for infrastructure, healthcare, and education.
• Lower Growth: Excessive debt can limit investment and lower potential GDP growth, risking a “debt trap” where new borrowing only pays for old interest.

Political Dimension: Populism and Fiscal Stress

Populist schemes and the cycle of elections play a key role in India’s debt dynamics. Successive governments, at both central and state levels, have announced ambitious subsidies, farm loan waivers, free utilities, and direct transfers during election years to secure voter support. These outlays are rarely rolled back, even as fiscal pressures mount. The challenge is compounded by competitive federalism, where rival states mirror or exceed central giveaways, resulting in spiraling fiscal commitments.

Comparison: India and its Peers

India’s debt ratio is substantially above other large emerging markets. In 2025, India stands at 80–82 percent of GDP, while China (96 percent) is higher, but Indonesia (41 percent), Brazil (87 percent), and Russia (16 percent) remain substantially lower. Among G20 nations, only Brazil, Italy (135 percent), and Japan (over 230 percent) have higher debt-to-GDP ratios. Advanced economies typically carry larger debt, but combine this with higher per capita income, deeper financial markets, and stronger institutional stability.

Future Outlook: Crisis or Correction?

If left unchecked, India’s debt could rise to unsustainable levels, risking sovereign rating downgrades, capital flight, and heightened vulnerability to global shocks. However, some buffers exist: most of India’s debt is owed domestically, limiting immediate currency risk. The government targets reducing its debt-to-GDP ratio to around 50 percent by 2031, but sustained primary surpluses and robust GDP growth are essential for this scenario. Any global crisis, oil shock, or deep slowdown may quickly unravel fiscal plans. The risk of fiscal dominance, where deficits drive monetary policy accommodation, threatens macroeconomic stability.

Policy Recommendations: Navigating the Debt Trap

Several realistic strategies could ease the debt pressures while supporting growth:

• Enhance Tax Compliance: Broaden the tax base through GST reform, better digital tracking, and stricter enforcement.
• Rationalize Spending: Focus subsidies and welfare spending on the most needy, cut waste in public schemes, and improve targeting.
• Disinvestment and Asset Monetization: Accelerate the sale and monetization of underperforming state enterprises.
• Fiscal Rules: Strengthen independent fiscal oversight and enforce medium-term fiscal anchors for both central and state governments.
• Boost Growth: Invest in infrastructure, education, and health to lift GDP and thereby improve the debt-GDP dynamics.
• Reduce Off-Budget Borrowing: Bring all contingent liabilities onto the budget and increase transparency.
• Interest Cost Management: Lengthen debt maturities and exploit low global rates for prudent refinancing where possible.

Fiscal Discipline or Fiscal Crisis?

India stands at a crossroads. The country’s expanding public debt may boost short-term political gains, but without determined reforms and fiscal discipline, it risks derailing long-term economic prospects. Runaway debt undermines developmental spending, crowds out private investment, and burdens future generations. Implementing credible fiscal correction, while protecting the vulnerable, is paramount if India wishes to escape a debt trap and ensure genuine, sustainable growth.

Conclusion

India’s growing public debt reflects both structural weaknesses and policy choices made over decades. While short-term measures and welfare commitments have provided relief to millions, they have also stretched fiscal limits and narrowed room for productive investment. The country now faces the difficult task of balancing social needs with long-term economic stability. Without serious fiscal consolidation, debt could rise to levels that erode investor confidence, strain public finances, and threaten macroeconomic stability.

The path forward demands a combination of discipline and reform. Sustained high growth alone cannot solve the problem unless accompanied by better tax compliance, tighter expenditure control, and greater fiscal transparency. Both the central and state governments must commit to medium-term targets that prioritize capital formation and curb unproductive spending. Strengthening institutions such as fiscal councils and improving coordination between monetary and fiscal authorities would also help restore credibility.

India’s debt challenge is not insurmountable. Its strong domestic investor base, improving financial inclusion, and ongoing structural reforms offer a foundation for recovery. However, political will is crucial. Policymakers must resist populist pressures and focus on reforms that expand revenues, rationalize subsidies, and channel resources into productivity-enhancing sectors. By doing so, India can gradually reduce its debt burden without stifling growth or social progress. The coming decade will determine whether the country chooses prudent fiscal stewardship or risks sliding into a cycle of chronic deficits and constrained development.

Source: General government gross debt & Central and State Government Debt

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