India’s debt is somewhat worrying

Due to India's increasing debt, you will pay higher taxes. Our debt:-

2014: 54 lakh crore
2023: 205 lakh crore

People are doing politics around this data.
But, here are critical facts you should know:

[1] A good debt is: when you borrow to build productive assets.
Very similar to if you borrow to buy an iPhone, not a very smart move.

But, if you are borrowing to buy a good real estate, it might be a productive use.

[2] Similarly if a country takes debt (borrowings) to build productive assets, it could be considered as a good debt.

So how do we figure out: whether the money has been borrowed for productive/unproductive use.

[3] While there is no standard way to do this: there are a few indicators that could help.

[4] First, you could check for borrowing as a % of GDP. Since, 2005, this number has been going down.

In 2005: around 63%
In 2023: around 45%

So the government seems to have done a great job!

Source: World Bank data

[5] Second, you check: whether this borrowing is (external borrowing) or (domestic borrowing).

Because if we borrow externally more, our economy gets controlled by foreign players.

For this, check external borrowing as a % of GDP

Here, nothing much has changed since 2005. It has stayed around 20%
This indirectly means that: we are borrowing more domestically.

Going forward, it is quite likely that inflation (real inflation is going to be high).

While the government data always underplays inflation, you need to be sensible here, to understand the real inflation.

[6] Third, we need to check if the money that is being borrowed, is it being spent on productive vs unproductive things.

For this we could check Gross Fixed Capital formation data.

This in simple terms mean: how much money is being spent on productive things like investments, rather than consumption.

So high GFCF is good.
Here we are not doing well.
It used to be around 36% in 2008. It is now around 28%.

This points: most of our borrowings is actually going to pointless spending.

If things do not change: expect higher taxation and higher inflation.

Understanding how to deal with higher real inflation (and future proofing your investments) is going to be critical in the future. more