Union Budget 2019: Debt-to-GDP ratio helps determine economic health of countries, their ability to service debts
Often the debt-to-GDP ratio increases during times of extraordinary emergencies like financial downturn or war, when the government needs additional funds to manage the economy.
The indicator is also used by foreign investors to determine whether a country is suitable for investments
The higher the ratio, the more likelihood of a country of defaulting on its payment
According to a February 2019 report, India’s debt to-GDP ratio is second worst among emerging markets
Every country, whether developing, under-developed or developed, holds significant sovereign debts in order to finance its government and economy. However, debts borrowed in moderation can bolster the economy while excess debts can hamper its growth.
A country’s financial and economic potential is often gauged by its ability to service its debts. The debt-to-Gross Domestic Product (GDP) ratio is one such frequently used indicator, especially by credit rating agencies, which gauges the economic health of a country. The indicator is also used by foreign investors to determine whether a country is suitable for investments.
In simple terms, debt-to-GDP ratio is the ratio of country’s government debt (measured in currency terms) and its GDP, which is the market value of all the final goods and services produced in a financial year. The ratio is often expressed in percentage terms and also gives a hint regarding the time a country will take to repay its debts.
The ratio is calculated in the following manner: Debt to GDP= total GDP of country/total debt of country. The higher the ratio, the more likelihood of a country of defaulting on its payment. Defaulting on repaying debts can make the domestic economy vulnerable to foreign flows and global uncertainties.
Often the debt-to-GDP ratio increases during times of extraordinary emergencies like financial downturn or war, when the government needs additional funds to manage the economy. With the rise of Keynesian economics, the macroeconomic strategy of pumping additional funds for stimulating the economy contributed to the increase in government debts.
According to a World Bank study, if a country’s debt-to-ratio crosses 77 percent for a considerable amount of time, it would hamper economic growth. According to the study, every percentage point increase in debts slows economic growth by 1.7 percentage. For emerging economies like India and China, the problem takes a more acute turn. In such countries, any percentage point increase in debt above 64 percent could slow down the economy by two percentage.
Debt-to-GDP ratio in India and the world
According to a February 2019 report, India’s debt to-GDP ratio is second worst among emerging markets. According to the report, India's government debt-to-GDP ratio is 68.4 percent, second only to Brazil. Asian counterparts like Indonesia, Thailand and China have a better ratio than India.
According to the International Monetary Fund (IMF), advanced economies of North America, Europe, Korea and Japan have a very high debt-to-GDP ratio. The average debt-to-GDP ratio in these economies stands at 103 percentage. Japan has a debt-to-GDP ratio of over 200 percent – the world’s highest. The United States, the world’s sole superpower, has a debt-to-GDP ratio of 106 percent.
Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.
The large backlog of pending ration card applications and the return of more than 30 lakh migrant workers to Uttar Pradesh during the COVID-19-induced lockdown is a worrying combination, especially when many have lost their means of livelihood
Parliament Updates: Epidemic Diseases Bill introduced in Rajya Sabha; House adjourned till 9 am tomorrow
Parliament Updates: On the first day of the Monsoon Session, the Salaries and Allowances of Ministers (Amendment) Bill and the Indian Medicine Central Council (Amendment) Bill were also introduced in the Upper House.
84% construction workers in Pune, Ulhasnagar not paid in lockdown: Survey shows devastating impact of GDP contraction on migrant labourers
The construction industry in India is the second largest employer after agriculture and has an industry size of Rs 10.5 trillion. According to the Confederation of Real Estate Developers Association of India, prior to the lockdown, there were 20,000 ongoing construction projects in the country and work was being undertaken in as many as 18,000 sites.