In a recent statement that has sparked widespread discussion, Viral Acharya, a prominent economist and former deputy governor of the Reserve Bank of India (RBI), has warned about the potential risks posed by increasing government borrowing.
According to Acharya, the surge in public debt could create a ripple effect, putting significant pressure on the corporate sector and hampering economic growth in the long run. His remarks come at a time when many countries, including India, are grappling with the challenge of balancing fiscal deficits with the need for sustained economic recovery following global disruptions.
Acharya highlighted that excessive government borrowing tends to “crowd out” private investment, a phenomenon where the state’s demand for funds competes with the corporate sector’s access to credit. When governments borrow heavily from financial markets, they drive up interest rates, making it more expensive for businesses to secure loans.
This, in turn, limits the ability of companies—especially small and medium enterprises—to expand operations, invest in innovation, or even meet day-to-day operational costs. The observation aligns with growing concerns among economists about the sustainability of rising public debt levels in the face of economic uncertainties.
The backdrop to Acharya’s comments is the sharp increase in government borrowing seen in recent years. With the need to fund stimulus packages, infrastructure projects, and social welfare programs, many administrations have leaned heavily on debt markets.
While these measures have been critical in supporting economies battered by the pandemic and subsequent global challenges, Acharya cautions that the long-term consequences could be detrimental if not managed carefully. He pointed out that the corporate sector, often hailed as the engine of economic growth, might find itself squeezed between rising borrowing costs and shrinking market opportunities.
One of the key issues Acharya emphasized is the strain on liquidity. As governments issue more bonds to finance their deficits, banks and financial institutions tend to park their funds in these relatively safe investments. This shift reduces the pool of available capital for private businesses, which are inherently riskier but vital for job creation and innovation.
The corporate sector, already reeling from supply chain disruptions and inflationary pressures, could face a double blow if credit becomes scarce or prohibitively expensive. Acharya’s analysis suggests that policymakers need to strike a delicate balance to avoid stifling private enterprise while addressing fiscal needs.
The former RBI official also drew attention to the broader implications for economic stability. High levels of government borrowing can lead to inflationary pressures, as increased public spending floods the economy with money.
For corporations, this translates into higher input costs, reduced profit margins, and the need to pass on price increases to consumers—further fueling inflation. Acharya warned that without prudent fiscal management, this vicious cycle could erode investor confidence, both domestic and foreign, potentially destabilizing markets.
Acharya’s remarks have reignited debates about fiscal discipline and the role of monetary policy in mitigating these risks. He argued that central banks, like the RBI, may face constraints in controlling interest rates if government borrowing continues to escalate unchecked.
This could limit their ability to support the corporate sector through lower lending rates or other monetary tools. The interplay between fiscal and monetary policy, Acharya noted, is crucial to ensuring that neither the public nor private sector is disproportionately burdened.
The corporate sector itself has begun to voice similar concerns. Industry leaders have long argued that access to affordable credit is essential for sustaining growth, particularly in a competitive global environment. With rising interest rates and a tightening financial landscape, businesses may be forced to scale back expansion plans or delay critical investments in technology and infrastructure. For a country like India, where the private sector plays a pivotal role in driving GDP growth, such a scenario could have far-reaching consequences.
As governments worldwide navigate these challenges, Acharya’s observations serve as a timely reminder of the interconnectedness of public and private finance. While borrowing may be a necessary tool for addressing immediate economic needs, its long-term impact on the corporate sector cannot be ignored.
Policymakers will need to adopt a forward-looking approach, ensuring that fiscal strategies do not inadvertently choke the very entities they aim to support. For now, Acharya’s cautionary words are likely to fuel further discussion among economists, business leaders, and government officials alike as they chart the path ahead.
