India’s Rising Debt Mountain
Will The Indian Government Be Able To Repay Its Loans?
The government provides various services to citizens such as subsidies, welfare schemes, infrastructure, education, and above all, security. The government also needs to pay salaries to all government employees. Most of these expenses are constant irrespective of whether the country is in lockdown or not.
How does the government get money to provide these services?
- Taxes
- Interest received from giving loans to state governments
- Dividends from public sector companies
- Borrowing from the public
Out of these only 1 and 4 can be significantly controlled by the government. Taxes account for almost 68% of the government’s revenue and since there is no economic activity to tax right now, the government is forced to borrow more money to sustain its constant expenditure. Recently, the government announced that it is planning to increase borrowing in FY21 by 53.8% from ₹7.8 lakh crores to ₹12 lakh crores.
Now, there is uncertainty as to how the Indian government will manage to repay this debt given that things don’t look too rosy for our economy in the coming years. This uncertainty translates to people losing trust in their government. Nomura expects India’s GDP to shrink by 5.2% in FY21.
How can the Government repay its debt?
- Increasing taxes and duties— Long legal process and not effective given a negative outlook on the economy.
- Borrow from external sources — Unlikely that any external source will be willing to lend given India’s economic outlook. Moreover, we don’t want a Ponzi scheme.
- Selling its stake in public sector companies — The government had planned stake sales in BPCL, Air India and LIC before the pandemic hit. Things are a whole lot worse now. Selling more stake would mean lesser dividend revenues.
- Print more money — The rupee has already been under pressure relative to the dollar. Printing more will further hurt the rupee and hence, imports.
None of these seem like a viable option currently due to which many rating agencies are expected to downgrade India’s credit rating soon.
Just like bonds, countries are given ratings too, which is a measure of how much one can trust the county’s government. Fitch and S&P currently rate India as Baa3 (which is the lowest in the investment-grade category) and Moody’s is soon expected to downgrade India’s credit rating from Baa2 to Baa3. Fitch and S&P also have a negative outlook on India.
Note: USA has a Aaa rating despite a debt to GDP ratio of over 100% because of the fact that it is a mature economy and the most trusted one globally.
Unless there is a rapid economic recovery post the lockdown, which is highly unlikely, India, which is an emerging economy will be sailing in turbulent waters.
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