The government debt burden has been a challenge that has ravaged both developed and developing economies. The major cause of this problem has been the efforts by respective governments to bridge the fiscal budget deficit experienced by many economies.
The Indian government has perceived the global debt crisis in a light hand, saying that India is strong enough and they are prepared to face any kind of situation that will arrive in global scenario. However the response misses the fact. The fact is that Indian currency and its inflation remained the worst performers among the Asian peers during 2011 and the first half of 2012. Also, unlike China, India doesn't own enough reserves that can be used to ensure growth during the time of crisis.
Indian economy which is already under pressure of weak GDP, poor IIP and elevated inflation rate, is also weighed down by its increasing government debt. The debt to GDP ratio is a key indicator of the fiscal health of the government. India's fiscal capacities have been shrinking since 2008, along with other Asian emerging markets. This is more of a threat, as India's gross public debt to GDP ratio is still among the highest in the region as it increased from 66.2% to 70% between 2007 and first half of 2012. The average government debt levels of the top 10 emerging market economies, including China, Russia and Indonesia, has halved to 25%, from 50% of GDP since 2000. Brazil and India are the two countries with the highest government debt ratios at almost 70% of GDP, which is however, still lower than the developed countries' average.
High debt to GDP ratio tends to dampen the credit worthiness of the Indian economy. Viewing its increasing debt, Fitch and S&P (Standard and Poor) have cut India's outlook to negative from stable. The government has laid out a five-year roadmap to reduce the fiscal deficit. But doubts remain about the credibility of the plan and whether the government will be able to stick to it.