Debt-to-GDP ratio

Also called: Public debt ratio · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT

Meaning

The debt-to-GDP ratio (also called the public debt ratio) is the total debt a government still owes at a point in time, divided by the country's GDP (the value of everything the country produces in a year), shown as a per cent.

Debt-to-GDP ratio = (Outstanding government debt ÷ Nominal GDP) × 100

It matters because it shows whether the government can service its debt (pay the interest) and repay it. A rupee amount of debt means little by itself. The ratio compares the debt with the size of the whole economy that must carry it. Union Budget 2026-27 uses this ratio as India's main fiscal anchor (the main target that guides fiscal policy). [1]

Explanation

How it works: the stock, the flow and the base

• Numerator = public debt, which is a stock. It is the total borrowing the government still owes on a given date.
• Fiscal deficit is a flow. It is the extra borrowing in one year. Each year's deficit adds to the stock of debt.

• Example: debt at the start of the year = ₹100 lakh crore. Fiscal deficit that year = ₹15 lakh crore. Debt at year-end ≈ ₹115 lakh crore.

• Denominator = GDP. The same debt is easier to carry in a bigger economy, because a bigger economy produces more income and more tax revenue.

• Debt is a burden only if it reduces future growth (NCERT). This is why debt is judged against the growth of the whole economy and not by its rupee amount.

• Levels of government:

• Central government debt is what the Centre alone owes.
• General government debt is what the Centre and the states owe together, leaving out the debt they owe each other.

What makes the ratio rise or fall: the debt dynamics equation

Δd ≈ [(r − g) / (1 + g)] · d + primary deficit

• d = debt-to-GDP ratio
• r = nominal interest rate on the debt
• g = nominal GDP growth rate
• Δd = change in the debt ratio in one year. The primary deficit is also taken as a % of GDP.
• Primary deficit = fiscal deficit − interest payments. It is the borrowing needed for current spending only, leaving out interest on old debt.
• Two things decide where the ratio goes:
• The primary balance. A primary deficit pushes the ratio up. A primary surplus pulls it down.
• The growth-interest gap (r − g):
  • If g > r, GDP grows faster than the interest on the debt, so the ratio tends to fall. This is the Domar condition, named after Evsey Domar.
  • If r > g, interest piles up faster than the economy grows, so the ratio tends to rise.

Worked examples

• Case 1: g > r (the ratio falls)
• d = 56%, r = 7%, g = 10%, primary deficit = 1% of GDP.
• (0.07 − 0.10) ÷ 1.10 × 56 = −1.53 points.
• Δd ≈ −1.53 + 1.0 = −0.53.

• The ratio falls to about 55.5%, even though the government still runs a primary deficit.

• Case 2: r > g (the ratio snowballs)

• r = 10%, g = 7%, with the same d and the same primary deficit.
• (0.03 ÷ 1.07) × 56 = +1.57 points.

• Δd ≈ 1.57 + 1.0 = +2.57, so the ratio climbs.

• Debt snowball (debt feeding on itself):

• Old debt means interest must be paid.
• Interest counts as spending, so the deficit rises.
• The government borrows more, the debt grows, and next year's interest is even larger.
• Example: debt of ₹100 at 8% needs ₹8 of interest. If that ₹8 is borrowed, debt becomes ₹108, and next year's interest is ₹8.64.

When debt is not a burden, and when it is

• Productive debt pays for itself. Suppose the government borrows ₹100 at 7%, so it owes ₹7 a year in interest. If the project yields 12% (₹12 a year) through higher GDP and tax revenue, the debt covers its own cost.
• "We owe it to ourselves." Domestic debt is held by Indian citizens, banks and institutions. When it is repaid, money moves from Indian taxpayers to Indian bondholders, and the purchasing power stays inside the country.
• The burden argument:
• Future generations pay. Bonds sold today are repaid years later through taxes on the young of that time. Their disposable income (income left after tax) falls.

• Crowding out. Government borrowing uses up savings that companies could have borrowed. Interest rates rise and private capital formation (new factories, machines, roads) falls.

• There is a threshold. An RBI Occasional Paper (2014) estimated a threshold of 61% of GDP for India's general government debt. Above this level, more debt starts to lower growth. Actual debt was 66.0% in March 2013, which was above the threshold. [3]

In India

• The law: FRBM Act 2003.
• The Fiscal Responsibility and Budget Management Act makes intergenerational equity (fairness between today's and future generations) an explicit objective.
• The FRBM Review Committee (Chair: N.K. Singh, 2017) recommended debt as the anchor.
• The 2018 amendment set general government debt at 60% of GDP and central government debt at 40% of GDP, both by 2024-25. [4]

• These targets were missed. The Centre's debt was still about 56% in 2025-26 RE. [1][4]

• The current framework, Union Budget 2026-27:

• Debt-to-GDP ratio = fiscal anchor. This is the main target.
• Fiscal deficit = operational target. This is the number managed year to year. It is 4.3% of GDP (2026-27 BE), down from 4.4% (2025-26 RE). [1]
• Centre's debt: 55.6% of GDP (2026-27 BE), down from 56.1% (2025-26 RE). [1]

• Glide path: a planned year-by-year path to 50 ± 1% of GDP by 2030-31. [1]

• Centre + states together: the 16th Finance Commission projects combined debt falling from 77.3% (2026-27) to 73.1% (2030-31).

• Why the plan relies on r < g:
• India has had r < g in most recent years.
• The IMF (2025 Article IV) expects this favourable gap to continue. It says debt stability rests on a largely unchanged primary deficit and a favourable r − g. [5]
• Caution from the RBI: the gap has "gradually narrowed down", and there were only two years of primary surplus (2006-07 and 2007-08) in its study period. [3]

Don't confuse with

• Fiscal deficit: this is a flow (new borrowing in one year, 4.3% of GDP in 2026-27 BE). The debt-to-GDP ratio measures a stock (all borrowing still owed, 55.6% in 2026-27 BE). [1]
• External debt-to-GDP ratio: this covers what all Indian borrowers owe to foreigners: US$ 762.8 billion, 20.8% of GDP at end-March 2026. Only 22.0% of it is owed by the general government. The other 78.0% is owed by non-government borrowers such as companies and banks. [2]
• Primary deficit: this is the fiscal deficit minus interest payments. It is one of the drivers of the debt ratio, not the ratio itself.
• Debt service ratio: this is repayments plus interest on external debt as a share of current receipts. It was 5.8% in 2025-26, down from 6.6% in 2024-25. It measures the yearly payment load, not the stock of debt. [2]

Prelims Hooks

• Formula: Δd ≈ [(r − g)/(1 + g)]·d + primary deficit. If g > r (the Domar condition), the debt ratio can fall even with a small primary deficit.
• Budget 2026-27: debt-to-GDP is the anchor and the fiscal deficit is the operational target. Centre's debt is 55.6% (BE), with a target of 50 ± 1% by 2030-31. [1]
• FRBM 2018 amendment (N.K. Singh Committee): general government debt 60% and Centre 40% of GDP by 2024-25. Neither target was met. [4]
• RBI Occasional Paper (2014): threshold of 61% of GDP for India's general government debt. Actual debt was 66.0% in March 2013. [3]
• Trap: "India's external debt is mostly sovereign debt" is wrong. The general government's share is only 22.0% (end-March 2026). [2]
• Trap: "A falling debt ratio needs a primary surplus" is wrong. With g > r, the ratio can fall even while the government runs a primary deficit.

Mains Points

• Sustainability rests on r < g.
• India's glide path to 50 ± 1% by 2030-31 assumes growth stays above borrowing costs. [1][5]
• Risks:
  • a global interest-rate shock;
  • a growth slowdown;
  • primary deficits that never end. The RBI study period had only two surplus years. [3]

• Way forward: build primary surpluses, deepen the bond market, and move spending towards capital expenditure (spending on assets such as roads and ports) that earns more than the interest rate.

• Quality of debt matters more than its size.

• Debt that funds infrastructure can crowd in private investment, meaning public spending pulls in more private investment.
• Debt that funds consumption, or that pushes up long-term interest rates, crowds out private investment. [3]

• The 1991 crisis shows the danger. Borrowing in the 1980s, including foreign borrowing, was used for consumption. By 1991, forex reserves covered only about two weeks of imports, and India had to take a US$ 7 billion loan from the IMF and World Bank.

• Fiscal rules and intergenerational equity (GS-II/III).

• The missed FRBM 2024-25 targets show that fiscal rules need credible anchors and clear escape clauses. [4]
• Moving from fixed targets to a debt-anchored glide path gives more flexibility. The cost is less certainty about when each step will be reached. [1]
• Twin deficit link: government dissaving lowers national saving, so the country must borrow abroad to fund investment. This connects the debt ratio to the current account deficit (buying more goods, services and income from abroad than the country earns), through the identity (S − I) + (T − G) = (X − M).

Related concepts

• Public debt
• Burden of debt
• Intergenerational equity
• Ricardian equivalence
• Crowding out
• Crowding in
• Inflationary effect of deficits
• Debt sustainability
• Interest rate-growth differential
• Twin deficit

Read more

• Public debt: burden, Ricardian equivalence, crowding out and sustainability