Context:
United Nations Conference on Trade and Development (UNCTAD) Released ‘A World of Debt Report 2024
Key Findings of the Report:
- Global Debt Surge – Public debt reached $97 trillion in 2023.
- Debt in developing nations grew twice as fast as in developed countries.
- India’s Public Debt – Stands at 2.9 trillion US dollars.
- Debt Servicing Strains – 54 developing nations spend more on interest payments than on their social sectors.
- Developing nations pay 2 to 12 times more in interest compared to developed countries.
- Challenges from Rising Global Public Debt –
- Debt Overhang: High debt discourages investment and consumption, hindering economic growth.
- Liquidity Issues: Private creditors withdrew nearly $50 billion from developing nations, worsening liquidity constraints.
- Costly Debt Restructuring: Reliance on West-dominated institutions (private, multilateral, bilateral) makes restructuring expensive.
- Recommendations:
- Develop effective debt restructuring mechanisms to address coordination issues.
- Expand contingency financing to avert future debt crises.
- Enhance participation of developing nations in global financial governance.
Understanding Public Debt:
- Also called Sovereign Debt
- It is the total financial obligation of a government borrowed to fund expenditures exceeding revenue.
- India’s Public Debt Overview:
- General Government Debt to GDP Ratio – ~81%.
- External Debt to GDP Ratio – ~18.6% (2nd lowest among the top 6 global economies).
- Governed by the FRBM Act, which sets a limit of 60% of GDP.
Source: TH
Previous Year Question
Which one of the following is likely to be the most inflationary in its effect?
[UPSC Civil Services Exam – 2021 Prelims]
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit
Answer: (d)