Oct 22, 2009|
The dangerous side of stimulus...
Stimulus packages have been the magic wand that almost every government and central bank has waved since the beginning of the financial crisis last year. Most are still wary of withdrawing the same lest their GDP growth trajectory gets derailed and investors get a glimpse of real ailments hurting their economies. But what they do not seem to be realizing is that the debt that they have accumulated under the guise of offering stimuli is leading to insurmountable risks. Risks that hint at the possibility of an eventual sovereign debt crisis.
The Obama-led US government insists that it understands the risks posed by deficits and ever-increasing debt. However, as the US runs up a trillion-dollar deficit this year, with trillions in debt for years to come, it needs to look no further than Japan to see how overspending can ravage an economy. Tokyo's new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive by way of taxes for the first time since the years after World War II.
Years of stimulus spending on expensive dams and roads have inflated Japan's gross public debt to twice the size of its US$ 5 trillion economy (189% of GDP to be precise) making it the highest debt to GDP ratio in recent history. The US, UK and India have each accumulated debt that is nearly 60% of their respective GDPs. Just paying the interest on its debt consumed a fifth of Japan's budget for 2008, compared with debt payments that compose about a tenth of the US' budget. In comparison, China's government debt is less than 20% of its GDP, despite giving out one of the most generous doses of stimuli.
One important difference that needs to be noted is that Japan like India is rich in personal savings and assets and owes less than 10% of its debt to foreigners. By comparison, about 46% of the US' debt is held overseas by countries such as China and Japan. However, that does not diminish the risk of currency devaluation for Japan.
As per Economist, the average debt of every Indian has been estimated to soar to about Rs 30,000 by the end of this fiscal with the central government stepping up its borrowing programme to fund public expenditures and offer subsidies. The average debt of an Indian citizen would then be nearly equal to his 10-month income, which on an annual basis has recently been estimated at Rs 38,000 by the Central Statistical Organisation (CSO). Also, with the Indian government adding about Rs 3 trillion to the public debt annually in the last few years (largely to fund subsidies), the total public debt is estimated to zoom to a whooping Rs 34 trillion by March 2010, nearly double the amount recorded seven years ago.
While corporate India has been championing the cause of continuing the stimulus packages so as to rein in inflation and pump prime their businesses, the larger economic issue cannot be sidelined. Else we in India may also be allowing this risk to our economy and currency, assume gargantuan proportions. It is time the government and the central bank do some independent thinking.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Aug 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407