The Coronavirus pandemic is not just a health crisis but an economic crisis as well. It has brought economic activities across the world to a standstill and the countries are struggling to find a way out of this abyss. India too has not been an exception. The country was already having a slow year, and to add to its woes the COVID-19 crisis has put it between a rock and a hard place. Both the centre and the state are borrowing more to carry on their activities. Experts say that the growing government debt, both at the centre and the state level, can be the death knell to the Indian economy. So, how can India avoid falling into the debt trap in a post-COVID world?
What is government debt?
The government has to obviously fund its activities and it does so primarily from taxes — direct and indirect that it collects. But what if it falls short? What if they have to spend more and are left with no funds? They do exactly what an individual does — the government borrows. The government has broadly two types of borrowing — public debt and intra-governmental debt. The Economic Survey 2018-19 says that the Indian Government owed Rs 84.7 lakh crore at the end of March 2019 — 90 per cent of which was public debt, i.e owed to both foreign and local buyers of government bonds, notes, and other fiscal instruments.
Can we pay it back?
That depends on how much worth you have. Same goes for the government as well and its worth is determined by the debt-GDP ratio. Which gives us an idea of how the country is producing as compared to how much it has borrowed from the world. This will give a fair idea of how likely a country is to pay off its debts. India went through a phase of very high debt-GDP ratio back in the early 90s when the reforms were put into place — 77 per cent for the first part of the 90s. But then the debt came down to a much more manageable 66 per cent by 1996. In the financial year 2004, an election year that brought the Manmohan Singh government to power, the debt again rose to a whopping 83 per cent — an all-time high. But the current crisis might just break that record as well. Some domestic rating agencies have predicted that the debt-GDP ratio might shoot up to 84 per cent in the next financial year — 2021. Contrary to what the government has tried to project as advancement, the GDP growth rate has not been high in the past few years and the country entered 2020 with a growth rate of 4 per cent — lowest in the past few years. A debt of 84 per cent at this point would mean that the country with Rs 200 lakh crore GDP will have a debt of Rs 168 lakh crore.
Where do the states stand?
The government — both centre and state need to keep a check on the fiscal deficit. Even though the state governments were restricted to a deficit of Rs 2.5 crore, the centre went past its mark of Rs 3.5 crore to Rs 4.6 crore. The combined borrowing of the central and state governments to fund the deficit is set to rise from Rs 13 lakh crore to a mind-boggling Rs 22 lakh crore. The COVID crisis has forced the government to increase the states’ borrowing limit from 3 per cent to 5 per can of their produce.
What can the government do?
Well, the government has an option that we do not have — print money. This will not help pay back the loans directly but it will definitely boost the demand. The entry of the extra funds in the hands of the people will increase their propensity to spend. Even if it is on food and essential items. Indian has always been a demand-driven economy and supply bottleneck was not its major concern ever. If the economy recovers faster, the debts ratio decreases and it will also be easier to pay it off. But the government does not seem to go that way. They can also diversify its borrowing so that there is no crowding-out effect in the market. There should be an attempt to bring down the deficit to 3 per cent which will need a strict fiscal policy to be implemented right away. To reduce the reliance on banks which are already in pretty bad shape the government needs to let develop the bond market and also keep in mind that the currency does not depreciate amidst all this by reducing the current account and trade deficit.
Why are India’s ratings hard to get back up?
India has never been the rating favourite. While some say that we do not need to look at the rating agencies, the investors do look at them to get an idea of where they want to invest and that does not work in India’s favour. Even though the Indian government has been trying to get FDI dumped into the economy, we have seen investors rather set up camp in countries like Vietnam and the Philippines rather than India. Some investors, Dr Kaushik Basu, former Chief Economist of the World Bank, said, have left India to set up base in these countries in the past few years. Global agencies like Moody’s and S&P have not upgraded India’s rating in the past decade even though the country has had one of the highest GDP growth rates across the world. But why is that? Experts say that India has failed to keep its fiscal deficit in check, neither has it been able to cut down on public debt nor bring about reforms in land and labour laws in quite some time. And this might possibly be the reason behind them not getting much attention from the rating agencies.
What are we looking at?
If the debt situation worsens as predicted, the government will sweep off everything it can from the market and the private players will have trouble getting loans from the banks which are the major source of funds now. The COVID crisis has still not reached its peak in India and the situations don’t seem to improve in the next couple of years. The interest rate is still low and we do not see any sign of imminent inflation as we are well stocked up on food supplies. India should be able to surf through this wave of the crisis well enough with a proper fiscal consolidation and invest the additional borrowings wisely. Creating assets is always a good idea as t will also attract the private sector. India can power through this with domestic debt and a low-interest rate but if the interest rates increase and we inch towards inflation the country might even get back to the dark ages it has once seen.