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UNCTAD Report on Public Debt
Context:
According to the recent report by United Nation Trade and Development (UNCTAD) the alarming surge in global debt burden calls for urgent reforms to the international financial systems to safeguard a prosperous future for both people and the planet.
Key Findings of the Report:
- Report titled ”A world of debt 2024: A growing burden to global prosperity”.
- The debt reached an all-time high of $97 trillion in 2023, marking a significant increase of $5.6 trillion from the previous year.
- India ranks 2nd after China in terms of ion the developing world.
- Particularly in Africa, struggling economies due to multiple global crises have led to an increased debt burden.
- The number of African countries with debt-to-GDP ratios exceeding 60% has risen from 6 in 2013 to 27 in 2023.
- Repaying debt has become more expensive, disproportionately affecting developing countries.
- The rapid increase in interest costs is constraining budgets in developing countries.
- Currently, half of these countries allocate at least 8% of government revenues to debt servicing, a figure that has doubled over the past decade.
- In 2023, a record 54 developing nations, nearly half of them in Africa, allocated at least 10% of government funds to debt interest payments.
- The report revealed that 3.3 billion people live in countries where interest payments are higher than spending on either education or health.
- In Africa, the average per capita spending on interest payments ($70) exceeds that of education ($60) and health ($39).
- A significant 769 million Africans reside in countries where interest payments surpass investments in either education or health, representing nearly two-thirds of the continent’s population.
- Averting the worst impacts of climate change requires urgent actions to limit global warming to 1.5°C.
- Developing countries need to increase climate investments from their current level of 2.1% of GDP to 6.9% by 2030 to meet the Paris Agreement targets.
Public Debt in India:
- According to the Finance Ministry, India’s public debt-to-GDP ratio has only slightly increased from 81% in 2005-06 to 84% in 2021-22, and is back to 81% in 2022-23.
- The central government’s debt was ₹155.6 trillion, or 57.1% of GDP, at the end of March 2023.
- State governments’ debt was about 28% of GDP.
- These levels exceed the targets set by the Fiscal Responsibility and Budget Management Act (FRBMA).
- The 2018 amendment to the Union government’s FRBM Act specified debt-GDP targets for:
- The Centre: 40%
- The States: 20%
- Combined Centre and States: 60%
Concern Regarding Rising Public Debt in India:
- IMF report flags concerns: Increasing debt, volatile inflation, low informal sector employment, and potential global supply chain disruptions pressure India’s fiscal situation.
- Elevated debt levels and high servicing costs impact credit ratings negatively.
- Rising external debt raises concerns over the balance of payments, necessitating a strong dollar/reserve currency balance.
- RBI intervenes: Selling dollars to stabilise exchange rates amid rupee depreciation.
- Increased government debt prioritises spending, notably on military, at the expense of social and welfare sectors.
- High debt, low employment, and food inflation pose challenges.
Call to Action for Financing Sustainable Development:
- Enhance Governance Participation: Strengthen the effective involvement of developing countries in the governance of global financial systems.
- Address Debt Costs and Risks: Implement an effective debt workout mechanism to tackle the rising cost of debt and the risk of debt distress.
- Expand Contingency Finance: Increase contingency finance to provide greater liquidity during crises, preventing countries from resorting to debt as a last resort.
- Scale Up Affordable Financing: Significantly increase affordable and long-term financing by mobilising multilateral development banks and private resources.
Public Debt Overview:
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- Public debt is the total amount borrowed by the government to meet its development budget, to be repaid from the Consolidated Fund of India.
- It refers to liabilities of both central and state governments, with the Union government distinguishing its debt from state liabilities.
- Constitutes Internal Debt and External Debt.
- Liabilities Classification:
- Debt against the Consolidated Fund of India
- Public account
- Sources of Public Debt:
- Dated government securities (G-Secs)
- Treasury bills
- External assistance
- Short-term borrowings
- RBI Role: According to the RBI Act, 1934, the RBI is the banker and public debt manager for the government, handling money, remittances, foreign exchange, and banking transactions. The Union government deposits its cash balance with the RBI.
Debt-to-GDP Ratio
- The debt-to-GDP ratio compares a country’s public debt to its gross domestic product (GDP), indicating the country’s ability to repay its debts.
- Expressed as a percentage, it shows the number of years needed to repay debt if the entire GDP is used for repayment.
- Implications:
- A higher ratio suggests a lower likelihood of repaying debt.
- Increased risk of default can lead to financial panic in domestic and international markets.