Debt to GDP Ratio of States Worrying as per Reserve Bank of India (RBI) Report


 According to the latest RBI report  ‘State Finances: A Study of Budgets of 2021­-22’", the Combined Debt ­to GDP ratio of states is expected to remain at 31% by end­ March 2022.

The target was 20% for 2021-22, way above the target..

Due to the Corona virus  the economic growth has suffered leading to a shortfall in the revenue collection through taxes .

The Government welfare expenditure has also increased leading to a wide deficit in their budget . To meet the revenue shortfall the State government had to increase their borrowing leading to increase in their overall debt and increase in the debt to GDP ratio. 

, the 15th Finance Commission expects the Debt to ­GDP ratio to peak at 33.3% in 2022­-23 (in view of the higher deficits in 2020-­21, 2021­-22 and 2022­-23), and gradually decline thereafter to reach 32.5% by 2025­-26.

Debt to GDP Ratio

Debt to GDP= Total Debt of State or Country / Total GDP of State or Country

The debt-to-GDP ratio is the metric comparing public debt to its gross domestic product (GDP). It’s the comparison of what a state/country owes and what it produces or what is its output(measured in GDP). Thus the debt-to-GDP ratio reliably indicates that particular state’s/country’s ability to pay back its debts.

It is one of the most important factor to gauge that whether a country/state is moving towards economic turmoil or not

It's a useful tool for investors, leaders, and economists. A high ratio means a state/country isn't producing enough to pay off its debt. A low ratio means there is plenty of economic output to make the payments. Thus, a low debt-to-GDP ratio is a measure of a healthy economy that produces and sells goods and services without accumulating future debts. Whereas, extravagantly high debt-to-GDP ratios deter creditors from lending money creating financial panic in the market..

Although governments strive to lower their debt-to-GDP ratios, this can be difficult to achieve during periods of unrest, such as wartime, or economic recession or pandemic. In such challenging climates, governments tend to increase borrowing to stimulate growth and boost aggregate demand. 

GDP and Slowdown - 

An economic slowdown occurs when the rate of economic growth slows in an economy. Countries usually measure economic growth in terms of gross domestic product (GDP), which is the total value of goods and services produced in an economy during a specific period of time.For example if the Growth of GDP falls from 5% to 3%, we call it slowdown. It's not a fall in actual GDP but a slight fall in the growth rate of GDP.

How is recession different from slowdown?

An economic recession signifies a drop in the gross domestic product (GDP), while a slowdown is merely a decline in the growth rate of the GDP. It’s the difference between a salary cut and a smaller increment. While one reduces an individual’s actual income, the other is merely a drop in the growth of that income.

15th Finance Commission

Constituted by the President of India in November 2017, under the chairmanship of NK Singh. Its recommendations will cover a period of five years from the year 2021-22 to 2025-26.

Finance Commission is a constitutional body (constituted by President of India under Article 280), that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements. It is setup at an interval of five years


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