Right at the core of India's desperate bid to revive the economy lies the question whether the country can spend substantially more on infrastructure building to generate much higher demand in the economy. Something that can then create a ripple effect in the 100-plus allied and supporting industries to trigger a large scale consumption cycle across the Indian economy.
But at the heart of that question is yet another question: whether India has the financial wherewithal to borrow a lot more than it has already been borrowing to fund substantially higher infrastructure development!
By all accounts, if India needs to give a very substantial push to new infrastructure development, it needs an additional Rs 6-8-10 lakh crore, over and above what the Centre already spends annually, just to trigger a quick virtuous cycle of demand and consumption. That's 3-5 per cent of India's GDP and about 20-25 pc of its annual expenditure. Clearly, beyond our means right now!
Economic Survey 2021 recommends India must borrow more to push infrastructure development just as kings used to build palaces in times of downturn or famines. The Survey also suggests that as long as the country's rate of GDP growth is higher than the rate of interest at which funds are borrowed, the country will be in a position to pay off all debt. That, however, may be a limited way of looking at the nation's fiscal predicament.
Here are the ground realities:
As of FY21, of all the money that Government of India was collecting/earning in the financial year, debt was projected to be 20 per cent. At the same time, annual interest payout was projected to be 18 per cent of all its expenditure planned for the year.
In the credit card industry, this is better known as the dreaded debt rollover where the borrower keeps adding more debt just to pay off interest while repayment of principal remains beyond his earning capacity.
And this equation will surely skew further when FY21 numbers are announced in Budget 21. In May, 2020, right in the midst of the lockdown and drastic fall in tax collections, the government, in fact, announced it will borrow an additional Rs 4.2 lakh crore. This is an unplanned emergency debt due to Covid crisis-54 per cent more than the Rs 7.8 lakh crore of additional debt originally planned for the financial-taking the total new debt taken during FY21 to Rs 12 lakh crore.
According to the Economic Survey, government debt is already 68.1 per cent of GDP, private corporate debt is another 54.8 per cent taking the total debt as percentage of GDP to 122.9 per cent. With the economy itself projected to shrink by 7-9 pc during the year, the ratio is likely to be worse when the final numbers are disclosed.
Look at it another way, at $558 billion, just India's external debt in FY20 was already 20 pc of GDP. The external debt alone caused forex outgo of $18.63 billion (Rs 1.4 lakh crore) during the financial year. That's more than twice the amount of allocation to the ministry of health in FY20.
Can India afford to take any more external debt under the circumstances? More external debt will also be bad optics at a time when there is widespread crackdown on imports and the Centre is recommending forex conservation and 'Make in India' under the Atma Nirbhar Bharat programme.
If it decides to borrow at home, large additional borrowing has implications and triggers a vicious cycle, as follows: It can crowd out corporate borrowings, leaving them gasping for more. Yields on government securities shoot up when there is large supply of securities in the market. There is also limited money chasing government securities.
Even state governments borrow funds. But investors remain the same - insurance firms, banks and pension funds who invest in SDLs (State Development Loans) and G-Secs of the Centre. The yield for state government are also likely to spike. While the RBI has opened the overdraft window for states via increased limit under ways and means advances, the second half of the year would see bunching of all the securities.
Finally, there could be ratings action (downgrade) by sovereign rating agencies which has a direct impact on corporate borrowings, raising their interest rates and cost of operations thereby.
So can't the government print money? Of course, it can. But ideally not at this scale. With India's CPI already in the 7 per cent range, way higher than the RBI comfort level of 4-6 per cent, printing money has a direct bearing on inflation. Spiralling inflation will force RBI to tighten monetary policy by raising repo rate which will be counter-productive in a recessionary year.
Clearly, borrowing or printing money at the scale that is the need of the hour to push infrastructure development is out of bounds of the Government of India right now. Particularly, because unlike the West whose economies were on the upswing when Coronavirus crisis hit, India's was the weakest and lowest point in recent economic history due to 16 quarters of deceleration. New GoI data suggests India grew even slower in FY20 at just 4 per cent against 4.2 per cent projected earlier.
So, what are the options?
Centre and states must take cues from corporate India and households. Budget-busting loans and expenditure suits everyone as it concerns no-one right now. The consequences though will have to be borne by future generations.
Neither corporate India nor households overspent during the crisis. Instead both tightened their belts. Household savings have gone up substantially and Corporate India has, in fact, reported some of the best profits despite shrinking topline.
GoI and states must learn from them. Governments are some of the most inefficient machineries and can easily shaving off 10-15 pc of costs (without removing employees).
At just the Centre, a 10-15 per cent saving in government expenditure can provide an incredible Rs 3-4.5 lakh crore of leeway to spend on new infrastructure. States can plan a similar act. With that, Centre will only need to borrow another 3-4 lakh crore to push infrastructure like never before with a free hand to spend Rs 6-8 lakh crore. This could then be a mix of some external borrowings, some domestic borrowings and some printing of money, stretching neither beyond the limit.
That would truly make this the 2021 Budget like 'never before'.
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