A Minsky moment can lead to a loss of confidence in the financial system.....

 India's public debt, encompassing the center and state governments, is a significant component of the overall debt landscape, and its management against private debt is a crucial aspect of economic stability. Understanding the interplay between public and private debt, especially in the context of potential "Minsky moments" (sudden asset price declines leading to financial instability), is essential for informed economic policy. India's public debt, is a major factor in the overall debt and is important for stability. Understanding the relationship between public and private debt, especially the risk of a "Minsky moment" (sudden asset price collapse), is vital for sound economic policy. India's high debt levels, especially from the central government, can lead to higher borrowing costs, potential currency instability, and increased inflation expectations, impacting government spending and overall economic growth.

Public Debt in India:

Fiscal Responsibility and Budget Management (FRBM) Act:

This act aims to ensure fiscal discipline at both the central and state levels by setting targets for fiscal deficits and debt levels, according to a report from the National Institute of Public Finance and Policy (NIPFP).

Debt-to-GDP Ratio:

The total debt of the Indian government (central and state) as a percentage of GDP is a key metric for assessing debt sustainability. The ratio was 89.45% in 2020-21 due to increased expenses during the COVID-19 pandemic, and it is expected to remain at 83.6% until 2027-28.

Central and State Debt:

The central government's debt-to-GDP ratio is generally lower than that of the states, with states relying more on market borrowings, according to a report from the Reserve Bank of India (RBI).

Impact of COVID-19:

The pandemic led to a significant increase in public debt as governments increased spending to support the economy and mitigate the crisis.

Debt Management:

The Reserve Bank of India (RBI) manages the public debt of the union government and undertakes the management of state debts by agreement.

Revenue Mobilization:

Efforts are being made to improve revenue mobilization, including the implementation of the Goods and Services Tax (GST), to sustain expenditure and avoid further increases in fiscal deficits.

Private Debt in India:

Growing Private Credit Market:

The private credit market in India has been expanding rapidly, with a significant increase in the assets under management (AUM) of private debt funds, according to Preqin.

Private Debt Deals:

Large private debt deals, such as the $3.4 billion deal by Shapoorji Pallonji, indicate the increasing appetite for private credit in India, according to Bloomberg.

Impact on Economic Growth:

The rapid growth of private credit can contribute to economic growth, but it also carries the risk of asset bubbles and potential "Minsky moments".

Potential for "Minsky Moment":

A sudden decline in asset prices could lead to a situation where private debt is unsustainable, causing financial instability and potentially requiring intervention by banks.

Balancing Public and Private Debt:

Fiscal Consolidation:

A structured approach to fiscal consolidation is needed to balance economic growth and debt management, including reducing fiscal deficits and debt-to-GDP ratios.

Debt Sustainability:

Assessing the sustainability of both public and private debt is crucial for long-term economic stability.

Risk Management:

Understanding the risks associated with both public and private debt, including the potential for "Minsky moments," is essential for effective policymaking.

Interplay between Public and Private Debt:

The government's borrowing decisions can influence the private credit market, and vice versa, highlighting the need for a coordinated approach to debt management.

Transparency and Disclosure:

Increased transparency and disclosure regarding government borrowing and off-budget liabilities are necessary to address concerns about rising hidden debt.

Public Debt as a Significant Component:

India's public debt, which includes the liabilities of both the central and state governments, is a substantial portion of the country's overall debt burden. As of early 2025, the total debt of India was estimated to be around ₹181.68 trillion, encompassing both internal and external borrowings.

Interplay with Private Debt:

The relationship between public and private debt is complex. High public debt can crowd out private borrowing, making it more expensive for businesses to invest. Conversely, a healthy private sector can contribute to economic growth, which helps the government manage its debt.

"Minsky Moment" Risk:

A "Minsky moment" occurs when asset prices unexpectedly and rapidly decline, leading to a sudden crisis of confidence in the financial system. Both public and private debt can be vulnerable to this type of shock. For example, if a large number of private debts are tied to asset prices that collapse, it can put pressure on banks and financial institutions, which could then have difficulty servicing their public debt obligations.

Economic Policy Implications:

Understanding the interplay between public and private debt is crucial for informed economic policy. For example, policymakers should consider the impact of public debt on private borrowing, the potential for "Minsky moments," and the need to manage both types of debt sustainably.

India's Specific Challenges:

India faces specific challenges related to its high public debt, including potential currency instability, increased inflation expectations, and the need to maintain a stable exchange rate. These challenges highlight the importance of managing both public and private debt responsibly.

A subprime crisis in India, similar to the US in 2008, is unlikely, but a crisis in the Indian microfinance sector is possible. The Indian banking system is generally considered sound, and direct exposure to subprime mortgages is minimal. However, the rapid expansion of subprime lending, particularly in microfinance, has led to concerns about a potential debt crisis.

Here's a more detailed breakdown:

1. Subprime Crisis vs. Microfinance Crisis:

Subprime Crisis (US 2008): This involved a collapse of the US mortgage market, driven by risky loans to borrowers with poor credit history.

Microfinance Crisis (India): This is a different type of crisis, where small, collateral-free loans are being given to low-income individuals, often those working in informal sectors.

While the US subprime crisis was due to irresponsible lending practices and a bubble in the housing market, the Indian microfinance crisis is more about the rapid growth of this lending sector and the potential for defaults due to low-income borrowers facing financial distress.

2. Signs of Distress in Microfinance:

Surveys show distress among borrowers:

Data indicates that a significant portion of subprime borrowers (68%) are showing signs of financial distress, says Business Standard.

Increase in overdue loans:

The share of loans overdue for 91-180 days has risen from 0.8% to 3.3%, indicating a growing repayment crisis, reports The420.in.

Borrowers taking new loans to repay old ones:

This is a sign that borrowers are struggling to manage their debts, according to Business Standard.

Some families resorting to extreme measures:

In some cases, families are pulling their children out of school to cope with debt burdens, says The420.in.

3. Factors contributing to the potential crisis:

Rapid growth of microfinance:

The microfinance industry has seen a massive expansion (2,100% growth), leading to a concentration of risk, according to eFiletax.

Unsecured loans to low-income borrowers:

This is a risky proposition, as borrowers may have limited ability to repay, says eFiletax.

Erosion of social collateral:

The pandemic has disrupted group lending practices, making it harder to assess creditworthiness and enforce repayment, notes Dvara Research.

4. Potential Impact and Concerns:

Higher defaults: The industry is bracing itself for a wave of defaults as borrowers struggle to repay their debts, says The420.in.

Excessive Credit and Speculation:

A Minsky moment often follows a period where investors and borrowers have become overly optimistic about the future, leading to rapid increases in borrowing and asset prices.

Asset Price Collapse:

When this unsustainable growth stops, asset prices can fall unexpectedly and rapidly, triggering a crisis.

Financial Instability:

Banks and other financial institutions may be forced to sell off assets quickly to meet their obligations, which can further depress asset prices and create a vicious cycle.

Impact on Debt:

Private debts tied to falling assets become harder to repay, and this can put pressure on banks' balance sheets and their ability to service public debt.

Loss of Confidence:

A Minsky moment can lead to a loss of confidence in the financial system, as investors and lenders become wary of future asset prices and credit expansion.

In essence, a Minsky moment in India would be a sudden and significant economic shock that highlights the inherent instability of financial markets and the potential for excessive credit expansion to lead to a crisis.