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Media spreads half-truths about central government debt under Modi

When it comes to external debt (borrowings from foreign governments and institutions), the figure saw an increase of 443% under UPA-I, 60% under UPA-II and 0.04% under the Modi government.

On January 19th 2018, several media houses reported how the central government debt had increased massively under the Modi government. India Today headline screamed how central debt under the Modi government had surged by a whopping 50%, and Economic Times reported how India’s debt is up by 50% under the Modi era according to the 8th Edition of the Status Paper on Government Debt that was released on Friday.

Soon, the anti-Modi brigade latched on to the report and started using it to deride the Modi government.

While there is nothing factually wrong in these reports, the real mischief lies in what these reports don’t tell you.

What the reports don’t clarify:

The increase in debt is perfectly normal, in fact, India is doing better than many major economies on this parameter

The central government borrows money (from internal and external sources) to fund the fiscal deficit. Govt debt is nothing but an accumulation of fiscal deficits over the years. Government debt over the years has always increased. The important factor here is the sustainability of the debt, and the most important parameter to evaluate sustainability is the Debt to GDP ratio (because as the GDP increases, govt’s revenue increases and thus its ability to service debt enhances). In India’s case, the Central government debt to GDP ratio has been hovering around 44-47% since 2010 and has shown improvement under the Modi government.

 

Central Government Debt to GDP (%)

The above chart shows that the ratio has improved from 46.98% in 2013 to 45.11% in 2017. Similarly, the gross general government debt, which includes borrowings of both Central and State governments has hovered between 67-72% since 2010 and is expected to steadily decline until 2024.

Gross debt position (% of GDP)

Finance ministry, in a recent press release, commented on the government debt –

The overall liabilities of the Central Government are on a medium-term declining trajectory and Government’s Debt Portfolio is characterised by prudent risk profile. Government is primarily resorting to market-linked borrowings for financing its fiscal deficit. Conventional indicators of Debt sustainability, i.e., Debt/GDP ratio, interest payment to revenue receipts, shares of short-term Debt/External Debt/FRBs in total debt indicate that the debt profile of the Government is comfortably placed in terms of debt sustainability parameters and is consistently improving.

Under UPA, central government debt increased at a much higher rate

 While all reports and tweets by opposition leaders harped on the 49% increase in central government debt under Modi government, they conveniently forgot to compare it with what happened during UPA government. OpIndia analysis shows that the central government debt increased by 68% under UPA-I and 89% under UPA-II. Cumulatively, the debt more than tripled in 10 years of UPA. But why show the complete picture when half of it helps your propaganda?

Central government debt

When it comes to external debt (borrowings from foreign governments and institutions), the figure saw an increase of 443% under UPA-I, 60% under UPA-II and 0.04% under the Modi government. This underscores the statement from the Finance Ministry that the government is primarily resorting to market-linked borrowings to finance the fiscal deficit.

Thus, the number 49% is more hype and less substance. But it’s election season, so expect much more misleading news based on half-truths.

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