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Definition: Debt-to-GDP is the ratio of a country's public debt to its GDP. The percentage gives an idea of a country’s ability to pay back the loan. To calculate debt-to-GDP is the Total Debt of the Country divided by the Total GDP of the Country.
Simply put, the debt-to-GDP ratio is a measure/metric to interpret how well a country is equipped to pay back the debt/loan it has acquired. Let’s see an example. Suppose you have a loan of ₹10 lakhs, and your annual income is ₹30 lakhs. Here, because you earn more, you are more capable and likely to pay back. When you borrow more than you earn, it increases your debt-to-GDP ratio and increases the risk of default.
See these numbers for a better understanding. India’s debt-to-GDP ratio was 81% in 2022, compared to 260.1% for Japan, 121.3% for the US, 111.8% for France, and 101.9% for the UK.
An indicator of the country’s economy, let us see how the debt-to-GDP ratio is interpreted. A high debt-to-GDP ratio is considered to be unfavourable and indicates an increased risk of default. The World Bank mentions that a score higher than 77% over an extended period can be adverse to the economic growth of a country’s economy.
However, also keep in mind that a score over 100% does not always indicate that a country is moving towards bankruptcy. For example, Japan’s debt-to-GDP ratio which is over 200% over the last decade shows no signs of defaulting. A high ratio is accepted if the country is paying the interest on its debt without its economy being adversely affected.
The chance of default decreases if a country has the financial capacity to manage its significant debts. For instance, in 2017, Greece had a debt-to-GDP ratio of 177% when its economy defaulted.
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