Imagine a farmer, Sunny, in a small village. He needs ₹50,000 to buy seeds and fertilizer for his fields. Without this money, he has no chance of producing any crop for this season. Hence, he takes ₹50,000 as the loan amount from the local bank. Sunny earns ₹80,000 after a successful harvest. From this, he repays the loan amount of ₹55,000 (with interest) and the rest of ₹25,000 is kept as profit.
Sunny’s story shows how debt can provide opportunities to grow and earn more. Debt allows individuals, businesses, and governments to access money when they need it most.
Let’s dive deeper to understand its role, benefits, and risks.
What is Debt?
Debt means borrowing money with the promise of returning the same later, mostly with interest. It gives access to funds now, which would otherwise take years to save.
- Example: A family may take a ₹20 lakh home loan to buy a house today instead of waiting 10 years to save the full amount.
Excessive borrowing and failure to repay can lead one toward financial trouble, while debt potentially leads to growth.
How Debt Benefits the Economy
Debt acts as fuel for economic growth. It allows businesses, governments, and individuals to access resources. This enables them to invest and innovate. Acemoglu’s research highlights how debt fosters collaboration and boosts productivity, helping economies grow.
| Benefits of Debt | Example |
| Business Growth | Startups borrow to expand and contribute 25% to GDP growth. |
| Infrastructure Development | India borrowed ₹8.1 lakh crore for projects in 2023. |
| Consumer Spending | Loans helped boost India’s car sales by 18% in 2022. |
1. Business Growth
Usually, businesses take loans to be able to invest in new equipment, new people, or due to expansion. This increases profits, thus, creating jobs.
- Example: A textile company borrowed ₹10 crore to buy machines. As a result, their production capacity increased by 30%, generating ₹12 crore in additional revenue.
2. Infrastructure Development
Governments take loans to make roads and bridges to build hospitals, create jobs, improve transport, and boost the economy through the same.
- Example: The Delhi Metro project borrowed over ₹30,000 crore. Today, it serves approximately 2.8 million passengers daily, reducing traffic congestion and pollution.
3. Consumer Spending
Loans allow people to purchase homes, cars, and appliances, thus creating demand in the economy for goods and services.
- Example: In 2022, over 35 lakh people in India took home loans worth ₹8.3 lakh crore. This boosted the housing market and created construction jobs.
Risks of Debt
While debt drives progress, it can also create problems if not managed well.
1. Economic Crises
When a large number of individuals or companies do not pay back their loans, it leads to financial instability.
- Example: The 2008 global financial crisis occurred because banks lent excessive loans. Over 10 million people in the U.S. lost their homes due to unpaid mortgages.
2. Debt Burden
Repayment of huge debts severely shrinks the availability of money for other purposes. This affects individuals, businesses, and governments in one way or the other.
- Example: In 2023, the Indian government spent ₹10.8 lakh crore repaying debt, leaving less for education and healthcare.
Conclusion
Debt is like a two-edged sword. It helps people grow their businesses, like Sunny, or buy homes sooner or later. It enables the government to establish roads, hospitals, and schools. But if too much or too little borrowing occurs and the repayments of the loan are not paid promptly, it causes a financial crisis.
Repayments on time—with wise borrowing turn out to be a tool to grow. If you have multiple loans then debt consolidations will help you in easy repayments. Whether it is a farmer like Sunny who uses such financing to maximise yields or a government that borrows money to build infrastructure, responsible debt management will take them both through to long-term success and stability.
