India's Debt, Fiscal Deficit And GDP Growth Rate

Let a country's GDP be G and its debt be D. Then its debt-to-GDP ratio is D/G. Let its GDP grow at a rate of g every year (0 < g < 1). Then its GDP next year will be (1 + g) × G. Let its fiscal deficit next year be F. Then its debt next year will be D + F. So its debt-to-GDP ratio next year will be (D + F)/[(1 + g) × G]. If the debt-to-GDP ratio is to remain constant, then:
D/G = (D + F)/[(1 + g) × G]
Let us express both debt and fiscal deficit as a fraction of the GDP. Let D/G be d and F/[(1 + g) × G] be f. Then the constant debt-to-GDP ratio condition becomes:
d = d /(1 + g) + f
This gives us:
1. f = d × g / (1 + g)And:
2. g = f / (d - f)
A country starts off with a certain amount of debt (D) – which is expressed as a fraction of its GDP (D/G = d). It wants to reduce its debt-to-GDP ratio (d). How to do this? There are two ways of asking and answering this question:
1. If the country's GDP grows at a certain rate g, then it must keep its fiscal deficit (as a fraction of its GDP) below some level f. Equation 1 gives us this value of f.
2. If the country maintains its fiscal deficit (as a fraction of its GDP) at a certain level f, then its GDP must grow above some rate g. Equation 2 gives us this value of g.

India's debt-to-GDP ratio is 70% – which is the highest among major industrialising countries. How to reduce this? We can use the two equations given above. Accordingly we have:

A. Maximum fiscal deficit (based on the GDP growth rate)

GDP Growth Rate	Maximum Fiscal Deficit
5%	3.3%
6%	4.0%
7%	4.6%
8%	5.2%
9%	5.8%
10%	6.4%

Our average GDP growth rate since 2000 has been 7%.

B. Minimum GDP growth rate (based on the fiscal deficit)

Fiscal Deficit	Minimum GDP Growth Rate
3%	4.5%
4%	6.1%
5%	7.7%
6%	9.4%
7%	11.1%
8%	12.9%
9%	14.8%
10%	16.7%

Our average fiscal deficit since 2000 has been 4.5%.

Note: The 2003 Fiscal Responsibility and Budget Management (FRBM) Act states that the government must reduce the fiscal deficit to 3% of GDP.