What is Public Debt, and how does the Debt-to-GDP Ratio work?

The government requires funds to finance developmental projects across the country. Public debt comes into play when the government's earnings, such as revenue from taxes and other sources, fall short of funding these projects, necessitating borrowing from various sources. Public debt, also known as national debt, government debt, or sovereign debt, represents the gap between the government's earnings and expenses, reflecting the amount owed to creditors.

The government raises funds domestically and internationally, primarily by issuing government bills and bonds. It can also borrow from organisations, banks, institutions, and individuals. Borrowing within the country is termed "internal debt," while borrowing from foreign sources is called "external debt." Internal debt is further divided into marketable and non-marketable securities.

Government securities such as G-secs and T-Bills are auctioned to interested parties to raise funds, while non-marketable securities are issued to state governments. Additionally, special securities are issued for the National Small Savings Fund.

Public debt is categorized based on repayment duration: short-term debt (repayable within one year), medium-term debt (1–10 years), and long-term debt (around 10 years).

What is the size of India's public debt?
According to a Reserve Bank of India (RBI) report released in June, India's external debt stood at $663.8 billion, reflecting an increase of $39.7 billion over its March 2023 level. Excluding valuation effects, external debt would have risen by $48.4 billion. Valuation effects account for changes in the value of assets held abroad compared to domestic assets owned by foreign investors, providing insights into a country's net foreign assets (NFA).

In July, Minister of State for Finance Pankaj Chaudhary informed the Lok Sabha that the government estimates its total debt, including external borrowing, at Rs 185 lakh crore (56.8% of GDP) by FY25.

Understanding the debt-to-GDP ratio
The debt-to-GDP ratio measures a country's debt as a percentage of its gross domestic product (GDP), indicating its ability to service debt. A high debt-to-GDP ratio can create economic challenges, as seen during the European debt crisis. To mitigate risks, governments must adopt prudent policies to keep this ratio under control.

Sometimes, economic crises offer opportunities for governments to invest in capital assets that create long-term value and stimulate private investment, driving economic growth. For instance, during COVID-19, India made significant infrastructure investments, generating jobs and contributing to the country's progress.

As per RBI data, India’s external debt-to-GDP ratio fell to 18.7% in March 2025, down from 19% in March 2023. This includes both government and non-government debt. Of this, government debt accounted for 4.2% of GDP, while non-government external debt stood at 14.5%.

Government's efforts to manage the Debt-to-GDP ratio
The NK Singh Committee on the Fiscal Responsibility and Budget Management (FRBM) Act recommended that India should aim for a general government debt-to-GDP ratio of 60%, with 40% allocated to the central government and 20% to the states. To achieve this, former Finance Minister Arun Jaitley proposed establishing the Public Debt Management Agency (PDMA) in the 2015 Budget. The PDMA was envisioned to holistically manage internal and external debt and devise strategies to reduce it.

However, due to differing opinions, the PDMA was not established. Instead, an interim Public Debt Management Cell was created, which currently oversees public debt management. The government continues to strategise to control the debt-to-GDP ratio, recognising its importance for the country's progress.