Debt Ceiling: A Brief Note

Nowadays, we often hear the term “Debt Ceiling” in many newspapers when they try to describe about the Government policy. What is debt ceiling? A "debt ceiling" is the maximum amount of debt that a government can take. In simple term, there is a limit, where government freezes their debt.

Why there should be a Debt Limit? The Main purpose of the debt ceiling is to try to limit out-of-control spending of the Government. In other words, debt ceiling is required to encourage more thrift and to have economically sound fiscal management.


Debt Ceiling and India: After almost a two decade of large fiscal deficits, India has adopted a rules-based fiscal framework in 2003 called the Fiscal Responsibility and Budget Management Act (FRBMA), with the objective to ensure intergenerational equity in fiscal management and the fiscal sustainability necessary.


According to FRBM ACT 2003 there are 4 Annual targets:


1. By 31st March 2008, the Central government shall reduce revenue deficit by an amount equivalent of 0.5 per cent or more of the GDP at the end of each financial year, beginning with 2004-05.


2. The Central Government shall reduce the fiscal deficit by an amount equivalent of 0.3 per cent or more of the GDP at the end of each financial year, beginning with 2004-05, so that, the fiscal deficit is brought down to not more than 3% of GDP at the end of March 2008.


3. The Central Government shall not give guarantees aggregating to an amount exceeding 0.5 per cent of GDP in any financial year beginning with 2004-05.


4. The Central Government shall not assume additional liabilities (including external debt at current exchange rate) in excess of 9 % of GDP for the Financial Year 2004-05 and in each subsequent financial year, the limit 9% of GDP shall be reduced by at least 1 percentage point of GDP.

(Source: FRBM ACT, Ministry of Finance)


          India’s fiscal deficit for 2009-10 had increased to 6.6 per cent of the GDP due to Stimulus Package made by Government for recovery from Global Meltdown. The Government has projected that the fiscal deficit would come down to 5.5 per cent of GDP in 2010-11.