The public debt in India is currently at nearly 82% of the GDP. However, NCAER Director General Poonam Gupta believes that the country is not facing a debt sustainability issue due to its high growth rate and the higher share of local currency debt. She mentioned that India’s high debt levels are sustainable for now because of the higher real or nominal GDP, and as most of the debt is held in rupees.
Gupta also noted that the states collectively hold one-third of the total debt, and under normal circumstances, their debt levels are expected to increase further over the next five years. She warned that in states like Punjab and Himachal Pradesh, the Debt-to-GDP ratio could increase by 50%. Despite this, she added that the states, even the most indebted ones, do not face sustainability issues as they have the implicit guarantee of the Centre and cannot hold debt in foreign currency or floating rate.
Comparing Punjab, one of the most indebted states, with Gujarat, which has low debt, Gupta highlighted that the most indebted states are ironically better off, as the interest rate is similar for all, and in fact, more indebted states hold longer maturity and pay little premium. She also emphasized that more prudent states deserve a better deal, as they are effectively subsidizing the more indebted states. She suggested that the Finance Commission may consider rewarding such states for their fiscal prudence and incentivizing the profligate ones to become more fiscally responsible.