Amid record-breaking GST (Goods and Services Tax) collections, corporate growth, unicorns, and more, another major story is the unprecedented growth in the debt of the government of India within the past nine years.

The government of India's (GoI's) debt has trebled in the last nine years. Between FY48 and FY14, in the first 66 years of India’s existence, the government of India had amassed a debt of ₹55 lakh crore. However, from FY15 till FY 23, the central government borrowed another ₹100 lakh crore to hit ₹155 lakh crore at a CAGR of 12.2%.

Debt is a double-edged sword. Poor management of debt makes it a destroyer of wealth; competent servicing of debt turns it into a great enabler of growth.

In these 9 years, growth in gross tax collection has also nearly trebled from ₹11.39 lakh crore to ₹30.43 lakh crore, though at a slower pace (11.53% CAGR) than the rise in public debt & liabilities of the central government (12.20% CAGR). At the same time, the central government has reduced the tax burden on corporations by slashing the tax rate from 33% to 25% and enhanced the income-tax slab, which has shrunk the number of direct-tax payers.

In comparison, between FY15 and FY23, India's real GDP grew from ₹105.27 lakh crore to ₹159.71 lakh crore at a CAGR of 4.74% while nominal GDP went up from ₹124.67 lakh crore to ₹272.04 lakh crore — a CAGR of 9.06%.

Central government debt moved up from 49.9% of GDP in FY 14 to 55.2% by September 2022. Meanwhile, between 2014 and September 2022, the Core debt of the Government sector in G-20 nations moved up from 76.1% to 89.2% while in Emerging Market Economies it went up from 39.2% to 61.8%, as per the Bureau of International Settlement (BIS).

India's General Government debt (Centre and states) to GDP rose from 67.1% in FY14 to 83.1% in FY23.

In the last decade though India's balance sheet enjoyed the benefit of lower interest rates on the back of Quantitative Easing by Global Central Banks. Between March 2014 and March 2023, the 10 Year G-Sec declined from 8.82% to 7.32%, a full 1.5% that had lessened the burden on India by reducing the interest outgo.

Yet, as much as one-fourth of the central government budget goes into Interest payment, which leaves it with no options but to go for fresh borrowing to meet its needs for capital expenditure and welfare spending.

As per revised estimates of FY23, central government borrowing and other liabilities stood at ₹17.55 lakh crore whereas net tax collection is estimated at ₹20.86 lakh crore or approx. 19% above the total liabilities of the central government. On the other hand, India’s direct tax collection is ₹16.50 lakh crore which includes corporate tax of ₹8.35 lakh crore and income tax of ₹8.15 lakh crore. This means that India's borrowings et al exceeded its direct tax earnings by ₹1 lakh crore!

But debt has to be seen in the context of the capacity to earn and pay. The government of India's total receipts (excluding borrowings) were ₹24.31 lakh crore in FY23. That included net tax revenue of ₹20.86 lakh crore, non-tax revenue of ₹2.61 lakh crore, and capital receipts of ₹83,500 crore. To meet the total expenditure of ₹41.87 lakh crore, the government of India borrowed ₹17.55 lakh crore or 42% of India’s FY23 budget.

Will such high borrowing push India into a vicious cycle where the Union government has to keep borrowing more to pay off its existing debts?

Shrinking share of Manufacturing and Declining Labour Force Participation

It's the shrinking share of manufacturing and the rising bill of welfare schemes that have a direct bearing on the country's debt and its serviceability.

In the last fiscal, the government of India spent a record $48 billion on welfare schemes as per Arvind Subramanian, former chief economic adviser to the government of India. Currently, the Indian government is providing subsidised food to over 81 crore or approx. 60% of its population. In the midst of the Revdi-Gajak debate in the political arena, how much the welfare schemes will expand will define the additional burden?

Meanwhile, earnings will also depend significantly on India's ability to grow manufacturing. Between 1979 and 2014, manufacturing contributed to 16%-18% of India's GDP. In 2015, its contribution started declining and reached 13% by 2019, the lowest since 1960. But in 2022 with a 17% contribution to GDP, the manufacturing sector came back to the long-term range of 16%-18%.

By contrast, in Bangladesh, manufacturing rose from 15% in 2006 to 21% in 2021, and in Vietnam from 17% in 2010 to 25% in 2021.

The SME sector was reeling from the onslaught of demonetisation in 2016, when the introduction of the GST regime in July 2017 destabilised it further. And when the pandemic era ended in 2022 this already bleeding sector bled further due to the high cost of raw material and high interest rates. India's anemic SME sector is pivotal to the loss of jobs among low-skill workers.

Growth in manufacturing will directly influence labour force participation, which has been under stress. The April 2022 CMIE report highlights that between 2016-17 and 2021-22, labour force participation in India shrank to 40% from 46%.

One of the major reasons for this phenomenon was that the lower class that migrated back to their villages during the pandemic are reluctant to return to the cities. Welfare schemes that provide free food and electricity etc., are adding to the resistance of migration from villages to cities.

The CMIE report of April 2023 states that India's unemployment rate is 8.1% and the urban unemployment rate is 9.8% – almost one in every ten employable persons in urban India is without paid work.

Pre-Covid India had 30 million unemployed, which has moved up to 40 million now, says Prof. Santosh Mehrotra, a former member of the Planning Commission of India. "No country in the world has managed to reduce poverty consistently or sustain GDP growth without a strong manufacturing base," he says.

Employment in manufacturing as a share of the total workforce had risen from 10.5% in 2004-05 to 12.8% in 2011-12. The numbers have now reduced to 11.6%, or less, between 2019 and 2022.

For a low-skill, labour-surplus economy like India, growth in the IT & BS sectors does little to alleviate the woes of the unemployed masses that lack the skills required for the service sector.

Even as the Centre adds debt it has to keep an eye on its earning capacity and the widening bill from welfare schemes. For, debt can be a boon and curse, depending on how it's handled. Economic growth is essential to alleviate the middle class from the stress of high prices, indirect taxes, and the looming threat of job losses.

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