Taxation & Revenue Mobilisation: Borrowings continue to fund 24 paise of every rupee collected by the government. What are the long-term macroeconomic risks of this structural dependence on debt financing?

Question

PocketIAS · Accepted Answer

Introduction:

When 24 paise of every rupee is financed through borrowings, it reflects a structural gap between revenue and expenditure, raising concerns about long-term sustainability.

Body:

A key risk is debt accumulation and sustainability. With general government debt around ~80% of GDP, continued borrowing increases future repayment burdens and constrains fiscal flexibility. This leads to a rising interest burden, already consuming over 40% of revenue receipts, crowding out productive expenditure on infrastructure and social sectors.

Second, excessive government borrowing can crowd out private investment by pushing up interest rates and absorbing financial savings, especially in a bank-dominated system like India. This can dampen long-term growth.

Third, it creates macroeconomic vulnerabilities. High fiscal deficits can fuel inflationary pressures, complicating monetary policy and weakening currency stability. External perceptions also matter—rating agencies may view persistent deficits negatively, raising borrowing costs and affecting capital inflows.

Fourth, intergenerational equity concerns arise, as current consumption is financed by future taxpayers. In times of shocks (oil spikes, global crises), limited fiscal space reduces the government’s ability to respond counter-cyclically.

However, the impact depends on the quality of borrowing—if debt finances high-multiplier capital expenditure, it can enhance growth and improve debt sustainability over time.

Conclusion:

Reducing structural dependence on borrowing requires strengthening revenue mobilisation, improving expenditure quality, and maintaining a credible fiscal consolidation path to ensure long-term macroeconomic stability.

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