Fiscal Deficit (Centre + States) has come down from 13.3% in 2020-21 to 8.9% (5.9% + 3%) in 2023-24
Debt (Centre + States) has come down from 89.6% in 2020-21 to 85.7% (56% + 29.7%) in 2022-23
If economic growth rate is higher than interest rate (cost of borrowing) on Govt. borrowings then debt declines [in terms of lower Debt/GDP ratio] because higher growth increases the GDP (denominator) … [Assuming that we have paid all previous borrowings as it may have higher interest rate]
But it may be possible that Govt.’s cost of borrowing may be less than economic growth rate just because:
1. Banks are forced to keep 18% SLR, so they will purchase more G-Sec (forced money to Govt.) resulting in lower interest rate
2. When Govt. has to borrow then around that time RBI does Open Market Operations and it purchases G-Sec to keep the interest rate less on Govt. borrowing
This leads to:
(a) Distortion of financial market. [Distortion means either the price of money is impacted in the market or the availability of money itself gets impacted]
(b) Financial Repression which occurs when Governments implement policies to channel the financial resources to themselves which in a deregulated market would go somewhere else (may be to private sector)
Redistribution of Resources (by Govt.) is necessary but it should redistribute the hard earned taxpayers money through cash transfers (Income Support) rather than subsidizing the prices of goods and services which results in market distortion (Govt. intervention/interference leading to either change in price or quantity of products produced/traded).
Macroeconomic Stabilization is mainly Central Govt. responsibility so it should restrict itself in reckless spending and enforce that States also don’t spend unnecessarily on populist measures. (Already Central Govt. is doing this by allowing the increased debt limits to States linked with performance of States in certain sectors like Power etc.)