Why in the News?
Reserve Bank of India (RBI) in its Biannual Financial Stability Report (FSR) 2025 found rising public debt in the Indian economy.
More on the news
- FSR presents the Sub-Committee of the Financial Stability and Development Council's (FSDC) assessment of the strength of India's financial system and risks to its stability.
- FSDC, established in 2010, is chaired by Finance Minister and includes heads of regulators like RBI, SEBI, PFRDA, and IRDA.
- It is responsible for ensuring financial stability and coordination among regulators.
Key highlights of the report
- India still driver of Global Growth
- Resilience of Indian Economy: India's real GDP is projected to grow at 6.5% in 2025–26, driven by strong domestic demand and an uptick in investment activity.
- Strong Financial Institutions: E.g.,gross non-performing asset ratio (GNPA) ratio and Net NPA (NNPA) of Scheduled Commercial Banks (SCBs) declined to multi-decadal lows of 2.3% and 0.5% respectively.
- Strong corporate sector performance: Large borrower cohort's GNPA ratio declined from 3.8% in September 2023 to 1.9% in March 2025
- Inflation Trends
- Domestic inflation: CPI inflation dropped to a 6-year low of 2.8% in May 2025.
- Imported Inflation: Slower global growth may ease commodity and oil prices, though tensions in the Middle East add some uncertainty.
- Rising Public debt: India's Public Debt as a percentage of GDP in 2024 have remained relatively on higher side (More than 80%) compared to peer Emerging Market Economies (EMEs).
- According to IMF, global public debt is projected to reach above 95% in 2025 and 100 % by the end of 2030.
About Public Debt in India
- Public debt, also known as 'national debt', is the accumulated amounts of borrowing that government, and other public sector bodies, owe to the private sector and foreign governments.
- It includes debt of Central Government and State Governments, excluding inter-Governmental liabilities.
- Public debt can be internal (borrowed within India) and external (borrowed from foreign sources).
- Internal debt is 96.59% and external debt is 3.41% of total public debt of 18,174,284 crore (Union Budget 2025-2026).
- Potential impact of High Public debt: Increased interest costs, limited fiscal space, potential inflationary pressures, crowding out of private investment and impact growth and intergenerational equity.
Legal framework for management of public debt in India
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Reasons of high Public Debt in India
- Persistent Fiscal Deficits: Central Government gross fiscal deficit stood at ₹15.77 lakh crore for FY 2024-25, against revised estimates of ₹ 15.69 lakh crore (Controller General of Accounts)
- High Revenue Expenditure: Total expenditure stood at ₹46.56 lakh crore, with revenue expenditure recorded at ₹36.04 lakh crore.
- Large outgo on subsidies (food, fertilizer, fuel), Salary and pension obligations etc.
- External Debt Growth: India's external debt rose 10% to $736.3 billion at the end of March 2025 from $668.8 billion a year earlier. (RBI)
- Pandemic-Era Spending: Central government debt rose driven by Covid-related healthcare and welfare spending.
Way Forward to manage and reduce Public Debt in India
- Shift towards "debt-GDP ratio" as the fiscal anchor: Beginning 2026-27 financial year, central government has targeted a declining debt-GDP ratio to 50±1 % by March 31, 2031.
- Active Debt Management via Bond Switching: A bond switch is a mechanism through which the government replaces existing shorter duration sovereign bonds with long-duration papers.
- The weighted average maturity of outstanding stock of central government market borrowings has risen from 10.4 years in 2018-19 to 13.2 years in 2024-25.
- Subsidy Rationalization & Tax Reforms: E.g., Over 4 Crore duplicate LPG Connections deactivated to Curb Misuse under PAHAL scheme; GST compliance drives (e-invoicing, AI-based analytics etc.) etc.
- Establish Public Debt Management Authority: It would enable RBI to focus on its core function of monetary policy (flexible inflation-targeting) and regulating banks.
Conclusion
India's high public debt, driven by persistent fiscal deficits and elevated expenditure, has helped sustain growth and welfare but now constrains fiscal space and raises sustainability risks. Going forward, targeted fiscal consolidation, improved revenue mobilisation, and efficient spending will be essential to reduce debt levels while supporting long‑term growth.