Bypassing the Debt Trap â Indian Perspective

Over the last two decades, India has been running deficits in both revenue account and overall budget adding to the public debt each year. Fiscal profligacy of many state governments has added to the woes of the center by further raising the combined debt burden. External debt becomes another worrisome aspect especially when crossborder flows become volatile during crises and rating agencies are waiting in the wings with a downgrade threat. As soon as the debt crosses a certain threshold level, the financial markets become unwilling to buy government bonds and suddenly the deficit starts appearing unsustainable, bonds get junked, further lowering sovereign ratings and a debt crisis can emerge. Evidently, precaution is better than cure and it’s essential to foresee a debt trap and bypass; escape or circumvent it by fiscal prudence. Fiscal prudence is not just about reducing deficit numbers; it’s about quality of government expenditure reflected in generation of productive assets and elimination of revenue deficit. This paper attempts to assess India’s fiscal situation particularly by identifying the possibility of a debt trap and suggests ways and means to improve the situation.