GST Impact on Debt to GDP Ratio

Introduction

Debt to GDP ratio is the ratio between a nation’s government debt and its GDP. It is calculated cumulatively. Lower the debt to GDP ratio; sounder is the economy. More the debt to GDP ratio, the more country gets into the debt trap. The practical example of debt trap is Greece.

Indian government debt to GDP ratio is constantly on a declining trend since 2006. From 77.1% in 2006 to 66.4% in 2014, the path of fiscal consolidation looks more reachable. However, at 66.4% of the GDP, Debt to GDP ratio is still on a higher side.

As per Crisil report, the introduction of GST will further curtail the India’s debt to GDP ratio. It writes as;

“Going ahead, as inflation is expected to moderate and upside to growth will be limited, a strong commitment to fiscal consolidation will be necessary for lowering India’s debt burden. We estimate that progress on fiscal consolidation, as envisaged in our base scenario, will lower India’s debt to GDP ratio to 45% of GDP (currently 48.2) by fiscal 2017.”

The reason behind

There may be many reasons behind the estimation of lower debt to GDP ratio. To understand any of the reason, we must understand as to why government borrows which ultimately adds to debt to equity ratio. When government’s expenditure crosses over the total revenue, a deficit arises. This deficit is then plugged by borrowings which add to the debt to GDP ratio.

Under GST regime, total government revenue will increase, and inversely proportional debt to GDP ratio will fall. As logically, when your income increases your borrowing is set to reduce until and unless you revise your expenditure to further increase.

Conclusion

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