Debt to GDP ratio is an important indicator of the country's fiscal health. This ratio indicates how strong is the country's balance sheet. A high ratio indicates the higher risk of debt default by a country.
As per the leading financial daily, the Finance Ministry expects this ratio to come down to 42.3% in FY16 from 65.6% in FY12. However given the current economic situation of the country, will the government achieve its target? Also, are our fiscal policies in place to tackle the current high debt to GDP situation?
Increasing debt burden has been a challenge for government and the major cause of this problem has been the failed efforts to control the fiscal deficit. Growing current account deficit (CAD) and its financing remains major concern for policymakers. On the top of this, the country is already under pressure of weak GDP, declining IIP, and growing inflation rate.
Over and above, the depreciating rupee is an added worry. This has not only widened the fiscal gap but also impacted various corporates. Their performances have also been impacted due to depreciating rupee, on back of increasing foreign borrowing and un-hedged foreign exposures. This has resulted into fall in profitability of the companies and thus lower contribution to GDP.
One should note that, fiscal management plays an important role for any country's growth. Thus the fiscal policies and planned and unplanned expenditures should be such that they could lead to sustainable and balanced growth of the country. The fiscal profligacy of the current government has hardly managed to address the stated concerns. As per the Finance Ministry's report, just interest payments on government borrowings averaged at 45% of tax revenue over the last 5 years! Thus reduction in borrowings remains a far-fetched target. We thus stay skeptical about the government's target to bring down the ratio at the stated level of 42.3% by FY16.