Roadmap for Answer Writing

1. Introduction

• Define Public Debt: Briefly introduce the concept of public debt. Public debt refers to the total amount borrowed by the government to finance its budget deficit, often expressed as the debt-to-GDP ratio.
  Fact: The General Government Debt to GDP ratio increased from 75.7% in March 2020 to 89.6% at the end of FY21 due to the pandemic (Source: Ministry of Finance, Government of India).
• Importance of the Question: Mention why understanding the impact of rising public debt on the economy is crucial, especially in the context of fiscal health and economic stability.

2. How Rising Public Debt Burdens the Economy

Discuss the key economic consequences of rising public debt:

• Burden on Future Generations:
  Public debt burdens future generations who will need to pay back the debt through higher taxes or reduced public services. Borrowing now may lead to long-term fiscal challenges.
  Fact: Public borrowing is often repaid in the future, potentially leading to higher taxes for future generations (Source: Economic Survey 2020-21).
• Increase in Interest Payments:
  As debt increases, the government needs to allocate a larger portion of its budget to pay interest on the debt, diverting resources from essential services such as education, healthcare, or infrastructure.
  Fact: A rise in public debt leads to higher interest payments, reducing fiscal space for productive investments (Source: RBI Reports).
• Inflationary Pressures:
  High government borrowing may lead to increased demand for funds, pushing up interest rates and causing inflation. Moreover, government spending increases aggregate demand, which can also contribute to higher inflation.
  Fact: Increased borrowing and spending can drive inflation, particularly in an economy nearing full capacity (Source: Economic Survey 2020-21).
• Crowding-Out Private Investment:
  The government’s borrowing may crowd out private sector investment by competing for the same pool of savings. This can result in higher borrowing costs for businesses and reduced private sector activity.
  Fact: As government borrowing rises, private investors may face higher interest rates, limiting their investment capacity (Source: Economic Survey 2020).

3. Measures Under the Fiscal Responsibility and Budget Management Act (FRBM), 2003

Discuss how the FRBM Act was introduced to mitigate the burden of rising public debt and ensure fiscal discipline.

• Objective of FRBM Act:
  The primary goal of the FRBM Act is to ensure that the government adopts a disciplined fiscal policy, reducing fiscal deficits and controlling public debt.
• Target for Fiscal Deficit:
  The Act mandates that the fiscal deficit should be reduced to 3% of GDP, ensuring that the government does not overborrow. This limit helps in maintaining fiscal discipline.
  Fact: The FRBM Act mandates a fiscal deficit target of less than 3% of GDP to avoid excessive borrowing (Source: Ministry of Finance).
• Elimination of Revenue Deficit:
  The government is required to eliminate the revenue deficit, meaning that regular income must cover regular expenditure, thereby reducing reliance on borrowings for recurrent spending.
  Fact: The Act mandates the elimination of revenue deficit to ensure fiscal sustainability (Source: FRBM Act, 2003).
• Restriction on Borrowing from RBI:
  The Act restricts borrowing from the Reserve Bank of India, limiting the government’s ability to print money to finance its debt. This helps to prevent inflationary pressures.
  Fact: The FRBM Act restricts direct borrowing from the RBI except for short-term advances (Source: FRBM Act, 2003).
• Transparency and Accountability:
  The government is required to present three key statements annually — the Medium-term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, and the Macroeconomic Framework Statement. This ensures transparency and accountability in fiscal policy.
  Fact: The FRBM Act requires the government to lay out detailed fiscal policy documents before Parliament (Source: Ministry of Finance).

4. Conclusion

• Summarize the Impact of Rising Debt: Conclude by reiterating how rising public debt can harm the economy by increasing future liabilities, inflating costs, and crowding out private investment.
• Importance of FRBM Act: Emphasize the significance of the FRBM Act in ensuring fiscal discipline, controlling the fiscal deficit, and promoting long-term economic stability.
• Call for Sustainable Debt Management: Conclude by stressing the need for continued focus on managing public debt in a sustainable way to protect future economic growth.

Additional Facts and Data to Support Your Answer

• General Government Debt to GDP: The debt-to-GDP ratio of India increased from 75.7% at the end of FY20 to 89.6% in FY21 due to the pandemic (Source: Ministry of Finance, Government of India).
• Fiscal Deficit Trends: The government has struggled to meet the 3% fiscal deficit target outlined in the FRBM Act, especially during periods of economic downturns such as the COVID-19 pandemic (Source: Economic Survey, 2020-21).
• Impact on Inflation: Studies show that higher government borrowing can increase inflation by raising aggregate demand and leading to higher interest rates (Source: RBI reports, Economic Survey).