Every Country is In Debt. But Why?

Every Country Is in Debt — Here’s Why That’s Not Always Bad

The Majority of Countries Are in Debt.

Most of them (immature economies) and advanced economies—including India, Pakistan, Qatar, the USA, and Japan—all borrow as much as they spend.

Example No.1:

Japan will have a debt that is approximately 200% of Gross Domestic Product. Japan’s GDP is estimated to be $4 trillion, while Japan’s total debt is estimated to be approximately $9 trillion.

Example No.2:

India has a similar ratio of debt. India’s debt equals approximately 80% of its GDP.

The total amount of Global Debt would be roughly 2.5 times the total Gross Domestic Product (GDP) of the entire planet.

Loans to governments are now so common that the conversation has shifted. Instead of primarily discussing the total amount of national debt, attention is now on how much additional borrowing occurs each year—known as the fiscal deficit.

From a Personal Financial Perspective, a Debt is shocking and therefore a negative. However, on the Macro Level, not all National Debt is bad.

This article will help us learn:

The reason(s) for Government Loans
Sources of Government Loans
How Governments Manage Their Debts
What the future looks like for countries buried in loans

Who gives Debt to countries

How Governments Earn and Spend Money

Every government functions like an organization. It earns money and spends money.

Government Income Comes From:

Taxes
Revenue from investments
Profits from PSUs (the government-owned companies)

Government Spending Includes:

Infrastructure investments
Salaries of government employees
Subsidies and welfare schemes
Free ration and public services

Government expenditure almost always exceeds government income worldwide.

Then how do governments manage this gap?

By borrowing money.

To understand how countries bridge this gap, let’s define the concept of national debt.

The total loan taken by a country’s central government is called:

National Debt
Sovereign Debt
Public Debt

Huge amounts of loans can be issued by the various states within a country, independently, such as for financing an expensive metro system/rail system. Many of these loans will come from multilateral development banks like the World Bank and Asian Development Bank; these loans will not be included in the National Debt.

India’s Debt Situation:

Central government debt: 50–60% of GDP
Total debt: Up to 80% of GDP, including states

This ratio is called the Debt-to-GDP Ratio, and it is an important indicator of economic stability.

Key insights:

The number itself matters less than how fast it is increasing or decreasing.

Japan’s debt-to-GDP ratio exceeds 250%.
The USA’s debt is also extremely high.

So, debt alone does not decide whether a country is developed or not.

Fiscal Deficit Explained Simply

When a government has more expenditure than it has money, the amount left after subtracting expenditure from revenue is called the fiscal deficit.

The Government fills this gap by borrowing money. In India, the fiscal deficit is usually between 4% and 6% of GDP for each financial year.

The real question is:

What will the Governments do if their revenue is always less than their expenditure? How will Governments ever repay their debts with that?

Why Governments Don’t Just Cut Spending or Raise Taxes

Option 1: Cut Spending

Fewer projects
Less money in the market
Job losses
Economic slowdown
Public anger and protests

Option 2: Increase Taxes

Less money in people’s hands
Lower demand
Reduced production
Economic slowdown
Again, public protests

So governments try to balance both, and borrow the remaining amount.

Debt for Development: Why Borrowing Is Necessary

Big projects like:

Bullet trains
World-class highways
Power plants
Metro systems

require a huge amount of money upfront.

Just like individuals take home loans instead of saving for 30 years, governments take loans to build infrastructure quickly.

The important rule is simple:

If the return from the project is higher than the loan’s interest rate, the debt is good.

Bad debt is when loans are taken for:

Luxury projects
Corruption
Paying interest on old loans only

Ultimately, taking out additional debt simply to pay interest can lead to a debt trap, a country continuously taking on more debt to pay for its existing debt. An example of this is the recent economic collapse of Sri Lanka in 2022.

Emergency Borrowing

Governments are sometimes forced to borrow during:

Pandemics
Wars
Natural disasters
Famines and droughts

In such cases, borrowing is unavoidable.

Who Lends Money to Countries?

1. Citizens (Through Bonds)

Governments issue bonds, promising:

Fixed interest
Repayment in the future

These bonds are bought by:

Individuals
Banks
Mutual funds
Foreign investors

They are considered relatively safe investments.

2. Foreign Governments & Institutions

Countries borrow from:

Other nations
World Bank
Asian Development Bank

These loans are used for development projects and come with conditions.

Example:
Sri Lanka borrowed from China to build Hambantota Port. When it couldn’t repay, China took control of the port.

3. IMF (International Monetary Fund)

The International Monetary Fund provides emergency loans, not development funding.

Conditions include:

Cutting government spending
Raising taxes
Reducing subsidies
Privatizing public companies

In some countries, this helped.
In others (Greece, Argentina), it worsened the situation.

4. Central Bank (Printing Money)

Governments can borrow from their central bank (like the RBI), which prints new money.

This is called debt monetization.

But this causes:

Currency devaluation
Inflation

Zimbabwe is the classic example of why this is dangerous.

Is Debt Good or Bad?

Debt is bad if:

It is unplanned
It funds waste or corruption.
It only pays old interest.

Debt is good if:

It funds growth
It increases productivity
Economic growth exceeds interest rates.

Unlike individuals, countries are considered eternal.
They are not expected to repay the principal—only to keep paying interest and maintain credibility.

Why Countries Lend to Other Countries?

Often, loans come with conditions that benefit the lender.

Example:
If Japan lends money to India for a project, it may require India to buy Japanese components.

This helps:

Japanese companies grow
Jobs increase in Japan.
Technology eventually transfers to India.

So both countries benefit.

Conclusion

Every country tries to ensure that:

Economic growth > Interest rate on debt

When this fails, countries fall into debt traps.

When managed well, debt becomes a tool for progress, not destruction.