Facts for Prelims (FFP)
Source: IE
Context: The US government is facing a crucial issue regarding the debt ceiling.
About Debt Ceiling:
| Topic | Debt Ceiling |
| Definition | The maximum amount of money that the US government is legally allowed to borrow to fund its operations and meet its financial obligations. It sets a cap or limit on the total amount of government debt. |
| Origin | Established by the US Congress in 1917 during World War I to promote fiscal responsibility in the federal government. |
| Issue | Disagreement between President Joe Biden (executive) and the Republican-controlled US Congress (Legislature) on raising the debt ceiling. The decision to increase the borrowing cap lies with the US Congress, which needs to vote on it. |
| Impact | Possible government default if the debt ceiling is not raised, leading to economic consequences such as a weaker dollar, stock market problems, and job losses. |
| The downgrade of the US credit rating made future borrowing more expensive for the government. | |
| Hinders discussions on long-term fiscal challenges and has become a political tool instead of a responsible fiscal mechanism. | |
| Impact on India | Increased volatility in financial markets affects currency exchange rates, capital flows, and investor confidence. |
| Impact on India’s exports, foreign direct investment, and overall economic stability. | |
| Previous instance | In 2011, the US faced a near default on public debt due to a delay in raising the debt ceiling. This led to the first downgrade in the US credit rating, a sharp drop in the stock market, and higher borrowing costs. |
| Suggestions for reforms | Automatic increase of the debt limit whenever legislation is passed or abolishing the debt limit altogether |
| India’s Debt Ceiling Mechanism | India does not have a formal debt ceiling mechanism like the one in the United States.
The Indian government manages borrowing and debt obligations through fiscal discipline, budgetary controls, and oversight by the Reserve Bank of India (RBI). The Fiscal Responsibility and Budget Management (FRBM) Act governs India’s borrowing activities, setting targets for fiscal deficits and debt-to-GDP ratios. |
