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Millennium Post

Centre has landed in debt trap

Believe it or not, India’s next national government may face a similar situation as Mamata Banerjee’s in the state of West Bengal, forcing moratorium on debt repayment to pay salaries to some 40 lakh central government employees and almost a similar number of pensioners and aided staff on the first of every month. With the government of India’s public debt already touched the Rs 40,00,000 crore (nearly US$800 billion) mark this year, including nearly $80 billion in foreign debt, the repayment burden will more than double 2014-15 onwards when the next government at the centre is normally due.

The non-government external debt at the end of September 2011 was as large as $255 billion or 78 per cent of the country’s total external debt of $326.6 billion. The total government borrowing, which stood at Rs 29,21,360 crore at the end of March 2011, alarmingly jumped by almost 37 per cent in a single year. The corporate sector debt, mostly in short-term high interest bearing borrowings, is inching towards the Rs 10,00,000 crore mark amidst fears of possible widespread repayment default in the near terms apart from putting extra pressure on its bottom line.

The second avatar of the UPA government is borrowing like mad, mostly in long term bonds with maturity between five and 14 years. In 2010-11, the central government issued securities to the tune of Rs 4,37,000 crore. According to the official statistics, only Rs 11,000 crore or 2.52 per cent of the gross amount of securities issued during the year carried the maturity period of less than four years. The bond issues offering maturity between five and nine years covered Rs 1,52,000 crore and those between 10 and 14 years covered Rs 1,64,000 crore. Together, these two categories accounted for 72.21 per cent of the gross amount the securities issued during the year. The two other categories – 15-19 years’ maturity bonds raised Rs 54,000 crore or 12.36 per cent of the gross amount and 20-30 years’ bonds raised Rs 56,000 crore or 12.81 per cent of total issue. The government bonds are showing an uncomfortably high yield at close to eight per cent. Soon after the finance minister presented the 2012-13 budget proposals in Parliament in March, the bond yield appreciated by as much as nine basis points to reach 8.42 per cent. Globally, a yield of over six per cent indicates that financial markets have serious doubts about the issuer’s credit worthiness.

The revised 2010-11 fiscal deficit was estimated at over Rs 4,00,000 crore. The deficit moved up to over Rs 4,12,000 crore last year. The quantum of actual deficit, this year, is too early to be predicted. One will not be surprised if the government’s net borrowing well exceeds the projected level of Rs 4,79,000 crore in the current fiscal. The maturity profile of the government securities shows that the debt repayment burden during this financial year will go up to Rs 91,000 crore from the last year’s level of Rs 74,000 crore. The additional burden is predicted to marginally increase to Rs 95,000 cores next year. On the face of it, this should be manageable if the economy grows at the rate of over 7.5 per cent during these two years and both the inflation rate and the current account deficit show encouraging contraction aided by large domestic and foreign investment (FDI) in development projects. But, that is a big ‘IF’. The current economic trends do not support such optimism.

The real challenge before the financial managers of the government starts from 2014-15 when the maturity profile of the government securities jacks up at one stroke the centre’s debt repayment commitment to Rs 1,68,000 crore and, thereafter, to Rs 1,97,000 crore in 2015-16, Rs 1,93,000 crore in 2016-17 and Rs 1,94,000 crore in 2017-18. The external debt servicing will pose an equally big challenge due to adverse balance of payment (BoP) trends and inadequate foreign direct investments in large and long term projects. The foreign borrowing is shooting up since 2009. Of the government’s total foreign debt at the end of March 2011, Rs 1,88,000 crore came from multilateral sources, Rs 86,000 cr from bilateral agreements and Rs 27,000 cr from the International Monetary Fund (IMF). A large part of foreign borrowings is in the short-term nature.

The external debt repayment burden threatens to aggravate in the coming years and the Indian Rupee is likely to be under bigger pressure as large external commercial borrowings by the country’s corporate sector, a portion of which has been lately rescheduled, will be due for repayment 2013-14 on. India’s large corporate borrowers of foreign currency are not necessarily big earners of foreign exchange either from trade or from services. In fact, most of them are big net foreign currency spenders. The onus of releasing foreign exchange to local business corporations to meet their external debt servicing commitments rests on the Reserve Bank of India. The government’s external commercial borrowing policy (ECB) has been faulty and lacks vision. The government also failed to make right policy gestures to attract foreign investment, improve competitiveness of domestic industry and address current account imbalances.

To put it mildly, Asia’s third largest economy is certainly not in good shape. It badly needs a massive policy shake up which this government is incapable of undertaking. The price of its indecision and incompetence to handle the current economic situation will have to be paid by the next government, even if it becomes another avatar of the UPA. The longer this politically paralysed, morally shaky and risk aversive government lasts, the heavier will be the price. Sadly, by then, India may no longer be in the reckoning as a positive contributor to the global economy. The country may even go out of the composition of the much talked about growth-engine block, BRICS (Brazil, Russia, India, China and South Africa). It may be replaced by Indonesia, Asia’s most steadily growing economy at the moment after China. It may find itself being clubbed with PIGS, the acronym for the Europe’s latest and biggest economic headache – Portugal, Ireland, Greece and Spain.

The most unfortunate part of the development is that the next government, which too may find itself in a similar fractured political existence, may show no courage to take strong economic policy decisions to save the country from drifting towards financial bankruptcy. The present UPA’s dogged political resolve to stay in power at all cost is bound to make things worse with time. Once considered pillars of the country’s economic progress under UPA I – economists Manmohan Singh, 79, Pranab Mukherjee, 77, Montek Singh Ahluwalia, 69 and C Rangarajan 80 – may soon be branded as India’s ‘Gang of Four’ responsible for leading the country to the brink of financial collapse. Politically shrewd Sonia Gandhi, 66, UPA’s Italian born chairperson, responsible for holding the Congress party and the UPA together for several years, also may not escape the charge of inaction to change the profile of the union cabinet and its leadership following the unfolding of one after another financial scandals involving the government and awkwardly weakening its authority to govern.
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