Imagine you want to get a new bicycle, but you don’t have the money to do it. So, you borrow ₹ 1,000 from your friend and say you will return ₹ 1,100 after a month. The extra ₹100 is interest for borrowing money. Borrowing money is very similar to what countries do when they borrow money for their domestic needs like roads, hospitals, or education.
Also, there can be scenarios where you have taken multiple loans and find it hard to pay them. Debt consolidation came into picture here, with its help you can combine all your debts into one single loan. This is also applicable in case of the national debt but the mechanism and context can differ a little .
What is National Debt?
National debt is the total amount of money that a country owes to others. This is similar to how an individual owes to a bank after taking a loan. Countries borrow money when they need more than they collect in taxes. Funds borrowed are then used to construct infrastructure, pay government employees, and improve health facilities.
Countries pay back this borrowed money over an extended period, along with the interest. For example, if India borrows ₹10,000, it may pay back ₹12,000 after 5 years, where ₹2,000 is the interest.
How Do Countries Borrow Money?
Countries borrow in two main ways:
- Issuing Bonds: When a country requires funds, it usually resorts to selling bonds. A bond is a sort of assurance to the public that it will receive its money, along with the interest.
- Loans from International Organizations: A country can also borrow from entities like the IMF and World Bank. These loans come with conditions to help the country manage its economy.
How Big Is the National Debt?
To understand how much money a country owes, we use the debt-to-GDP ratio. This is the relationship between the debt in a country and the total output of money that is generated (GDP). Hence, if the ratio is high, it is an indication that the country is in a worse state of having a higher debt in comparative figures to its earnings.
For Example, In 2023, the national debt of the USA was more than $33 trillion. At the same time the GDP of the country was around $26 trillion. This means, USA makes more than it spends in a year. Here’s a table to make it easier:
| Country | National Debt (in trillion) | GDP (in trillion) | Debt-to-GDP Ratio |
| USA | $33 trillion | $26 trillion | 127% |
| India | ₹157 trillion | ₹299 trillion | 52.5% |
| Japan | ¥1,100 trillion | ¥540 trillion | 204% |
Why Does National Debt Matter?
Borrowing amounts can be considered beneficial for any country’s developmental purposes, but too much debt can be risky. Let’s see why:
- Slower Economic Growth: A country with too much debt spends more on repayments than on schools, hospitals, or infrastructure.
- Risk of Default: The inability of a country to repay its debts will result in default. A country defaulting means it refuses to pay back the money it owes.
- Higher Interest Rates: Poor conditions of service in the government make the citizens pay by increasing the interest they charge when borrowing.
How Can Countries Manage Debt?
Countries should be able to evaluate how much to borrow. Here are a few things from which one can control debt:
- Economic Growth: If the economy grows fast, the country can make more money to pay off its debt.
- Interest Rates: It is easier to borrow when interest rates are lower. Rising rates can make it harder to pay back money.
- Balanced Budgets: Governments should try not to spend more money than they make in taxes, helping reduce the need to borrow.
Conclusion
The National debt is a way through which states get to grow and develop themselves by seeking borrowed funds for very important projects. Just like people, countries should also borrow judiciously. If they borrow too much, just like a person borrowing too much money finally makes him suffer in the end; it slows down the economy, leads to higher interest rates, and could even end up in default. Countries need to borrow wisely to ensure their debt doesn’t harm their long-term growth.
By keeping an eye on their debt-to-GDP ratio and making sure they manage their borrowing responsibly, countries can continue to grow and improve the lives of their citizens.