Question
If a country's real interest rate (r) is higher than its
real GDP growth rate ($g$), and it is running a primary deficit, the Debt-to-GDP ratio will:Solution
This is a core concept in debt dynamics. If the cost of borrowing (r) is higher than the rate at which the economy is growing (g), the interest on the old debt grows faster than the ability to pay it back. When you add a "primary deficit" (spending more than you earn, even before interest), the debt spirals out of control. This is why the RBI and Finance Ministry closely monitor the r-g differential.
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