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High Debt is a Constraint to Growth
Jan 28, 2017

It's the weekend before the budget. Speculation is on in full swing. What will Jaitley do? Will taxes by cut for the common man? What about corporate India? Will the rich get taxed more? What new subsidy scheme will be launched?

In this din of analysis, it's easy to forget that what should not be done is as important as what should be. Yesterday Tanushree wrote to you about what we believe, the FM should not do in this Budget.

Here's Tanushree,

    Subsidies are not the only populist policies in the Budget that worry us. Schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) could be equally damaging. The outlay under this scheme could touch a record of Rs 580 billion this fiscal. Even after accounting for spillovers, this is the highest spend under the program since its inception.

    To keep schemes like MGNREGS going, the government will have to wade into the credit market. It will have to binge-borrow and suck up liquidity. It could force the heavyweight public sector banks to subscribe to its bonds. And it could crowd out the private sector by making the cost of credit too high.

    Private sector investments are already at decade lows. Further resistance to borrow could choke the flow of credit in the banking system.

    Housing credit and retail borrowing by people like you and me can only add a speck of optimism. In the absence of demand for credit from corporates, the earnings revival is not turning.

    So the Budget could either offer the private sector better reasons to set up new businesses and grow existing ones. This could include making it easier to do business, providing a more conducive tax structure.

    Or it could continue to find ways to spend taxpayer money on schemes that have minimal impact on real GDP.

You see, India's problem is debt. The government's borrowings over the years have grown by leaps and bounds. The borrowing has increased the amount of interest the government has to pay on the outstanding debt every year. Today's chart tells us why Jaitley may not have much room spend extravagantly.

India's Debt to GDP ratio has been at elevated levels for the last decade or so.The final number for FY16 is expected to be around 66%. The Indian government spends about 30% of its revenue on interest payments. This doesn't leave any room for the government to spend on productive purposes.

Unless this structural issue is addressed, the debt will be a big overhang on growth and India's credit rating won't improve.

Data Source:, Finance Ministry

This Chart Of The Day was published in The 5 Minute WrapUp - Here's Why We Are Bullish on the Nifty

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