India's debt ratio looks reasonable, but its interest cost doesn't, says ISB finance professor

India's public debt is manageable by the size of the economy, but the cost of servicing that debt deserves closer scrutiny, Prasanna Tantri, associate professor of finance at the Indian School of Business, said amid a debate over the country's fiscal position.

"India's public debt is about 80% of GDP and broadly stable," Tantri said in a post on X. "In 2025-26, the Centre’s debt ratio is 56.1%, down sharply from 62.8% after Covid, although state debt has recently edged up."

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Tantri said the bigger concern is the interest burden. "The concern is interest payments: 3.7% of GDP for the Centre and about 5.5% including states."

The professor said that India has a lower debt-to-GDP ratio than the US and UK, yet pays more as a share of GDP to service it. The same is true relative to many countries with higher debt ratios, although there are exceptions such as Brazil and Egypt, he added.

He said this warrants a closer examination of why India is paying so much to service what he described as a manageable debt stock. "Since the denominator is nominal GDP, neither low tax collection nor low inflation mechanically explains this ratio," Tantri said. "We need to rigorously understand, rather than merely hypothesize, why India pays so much to service a manageable debt stock."

"The debt ratio looks reasonable. Its cost does not," the professor added.

The whole debate began after author Anand Ranganathan raised concerns about India's overall debt.

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Ranganathan said the Centre alone owes about ₹201 lakh crore and that general-government debt, including the states, is above 80% of GDP. He also pointed to the Centre's interest bill, which is budgeted at more than ₹14 lakh crore for FY27.

"Interest already takes 40% of the Centre’s revenue; the FY27 bill is budgeted above ₹14 lakh crore. That is not a footnote. It is the first charge on every tax rupee," he said.

He argued that a growing share of borrowing by some states was being used for salaries, power subsidies and cash transfers rather than asset creation.

"A growing slice of state borrowing is paying for salaries, power subsidies, and unconditional cash transfers; twelve states alone set aside about ₹2 lakh crore for women-centric cash schemes in FY26, not for assets that service the debt. Several high-debt states are, in effect, borrowing to give money away," Ranganathan said.

Kanchan Gupta, senior adviser at the Ministry of Information and Broadcasting, dismissed that assessment. He said the debt stock alone does not determine sustainability and pointed to the declining Centre’s debt ratio after the pandemic.

"The claim that fiscal trajectory since Covid is therefore worsening is simply false," Gupta said.

For FY27, the government has budgeted a fiscal deficit of 4.3% of GDP and central debt at about 55.6%, Gupta said. Effective capital expenditure is projected at 4.4% of GDP.

Gupta also said the IMF projects India’s debt ratio to decline over the medium term and assesses sovereign-stress risk as moderate.

"And yes, ₹14.04 lakh crore of interest against ₹35.33 lakh crore of revenue receipts is roughly 40%. An interest/revenue ratio is a measure of fiscal space, not a standalone test of insolvency," he said, adding that in fact many of the economists have accused the Modi govt of being fiscally too conservative and prescribe borrowing more.

He also said that even if ₹2 lakh crore is being spent on women-oriented transfers, "that does not prove that ₹2 lakh crore of borrowing financed those transfers." He said the government budgets are fungible. "To establish the charge, examine each State's revenue balance, borrowing, capex and debt sustainability."