Indian government must not take its fiscal deficit too lightly
During the week, the GST Council has stated that the center will borrow a sum of Rs.158,000 crore to compensate the states for GST losses. This is due to the COVID 2.0 stress, but is it a good idea?
Not much of a choice
One argument is that India really does not have much of a choice. GST flows are likely to have been badly hit in last couple of months due to the resurgence of COVID and the impact will be known only in the lag data. Hence, the decision to borrow Rs.158,000 crore additional has been taken. But the only point is that the center is yet to pay the GST dues of last year and this money may be used to cover that. Effectively, center will have to borrow once again to make good the current year’s GST shortfall.
But what happens to total debt
That is the billion-dollar question. The center has already set borrowing target of Rs.12 trillion for the current fiscal. If you add up additional borrowings for the previous and this fiscal year, then the fiscal deficit as a percentage of GDP would spike from 6.8% to 8.5%. That is not something the rating agencies will be comfortable since there have already been warning about possible sovereign downgrades. If you add the likely hit on borrowings due to revenue shortfalls, then the total debt levels and the fiscal deficit could spike still further. That will put a lot of pressure on India’s macros.
Debt to GDP is up sharply
One of the parameters often used to measure the stability of economies is the debt/GDP ratio. During the COVID period, the debt / GDP ratio in India has gone up from 73% to 90%. Out of the total global debt, India accounts for just about 2.7% of total government debt. However, India is the one country with a very high debt/GDP ratio if you look at emerging economics and especially the BRICS nations. Yes, Japan has 237% as well as countries across Europe, as well as the US and Canada have debt/GDP ratios of above 100%. But they are all economies with high per capita GDP and can afford the burden of public debt.
Time to rethink debt levels
When Budget 2021 announced sharply higher levels of fiscal deficit, it was seen as fait accompli. However, what is not visible in the last few months is a clear attempt to create a timetable for debt reduction. Just to reiterate, there is no point in comparing with Japan, Canada, the US and EU and feel smug about lower levels of debt/GDP ratio in India. For the kind of vulnerabilities that exist in the Indian economy, it cannot afford to run such high levels of debt. The good news is that most of India’s debt is domestic debt, but that is not saying much. When an economy with $1900 per capita GDP runs a government debt bill of over $2 trillion, you know there are big rating agencies at the gates!