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India's biggest risk gets bigger - Views on News from Equitymaster
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  • Jun 23, 2009

    India's biggest risk gets bigger

    When compared to the developed nations namely the US, UK and Japan, India has the edge given that its GDP has been growing and is expected to grow at a much faster pace going ahead. What is more, India seems to be in a better position than its peers even when it comes to the total debt that has been amassed. In a bid to bolster their economies, the US, UK and Japan have accumulated debts that are set to exceed or equal the size of their economies.

    India in that sense is slightly better off as the government's total debt would still remain well below the country's GDP size. The total debt of the US, UK and Japan has already reached a size of about US$ 17 trillion, nearly 25 times of that in India's. Therefore, while there is a valid rationale as far as these three countries are concerned for resorting to such gargantuan borrowings in the near term given the scale of the crisis, in the longer term repaying this debt will emerge as a pressing concern.

    To add fuel to the fire, if you juxtapose this rising debt issue with their rapidly shrinking economies, you get a debt to GDP figure that will only chart the upward path.

    In India's case too, while in comparison the country may seem to be in a better position, by itself, India's mounting debt is definitely a matter of concern. India has also been borrowing heavily to support the growth of its economy which has slowed down due to the global financial crisis. Once again, the large scale borrowings may provide the much needed boost, but India has a bigger problem to deal with, namely its burgeoning fiscal deficit.

    Wasteful expenditure, huge interest payments and salaries of government employees are already taking a toll on the government's finances. Add to that the farm loan waivers and various subsidies especially in the fertiliser and the energy sector and you have a very challenging task indeed of bringing this deficit down.

    Leading global rating agency S&P for instance has pegged India's fiscal deficit to set to increase 6.5% of GDP, which will be the highest in almost two decades. And this is excluding the off-budget liabilities such as fertiliser subsidies and compensation to state-run oil companies. Together these liabilities are estimated to be another 4% of GDP, thus taking the total deficit into double digits.

    The deficit situation can be considered even worse but for the higher revenues that are expected to come from selling 3G spectrum to telecom companies and stake sale in public sector units. While these additional revenues will help the government narrow the deficit, but it will still remain very high this year. "Fiscal risk in India is among the highest globally. It'll be difficult for the government to address this issue at least for another year," remarks a senior official from S&P.

    Certainly, the Finance Minister will be kept on his toes in his present term and it will be interesting to watch how he manages to tackle this problem.



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    2 Responses to "India's biggest risk gets bigger"

    Nabeel Kattakath

    Jun 24, 2009

    India'a burgeoning fiscal deficit is treat to the sustainable growth of our country.Islamic financial products can play a critical role to solve this issue.It can be achieved by replacing debt based investments for infrastructure developments with the funds mobilised through equity based Govt securities for infrastructure development.(Ex-Issuing sukuks by Govt for infrstucture and other developments in India)


    Dr P Mulay

    Jun 23, 2009

    In my opinion, no matter how much India borrows in the short term, the long term this borrowing will pay off.

    That will never be the case with UK, USA or Japan. In short the later countries are in so serious problem, that I am nervy about the possible implosion of the pound sterling. I dont think USA will implode as China needs USA. China does not need UK.

    Equitymaster requests your view! Post a comment on "India's biggest risk gets bigger". Click here!

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