Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Is our public debt a Ponzi? - Outside View by S.S. TARAPORE
Is our public debt a Ponzi?

The Fourteenth Finance Commission, Chaired by Y. V. Reddy, has a galaxy of stalwarts as members - Sushma Nath, M. Govinda Rao, Abhijit Sen and Sudipto Mundle. Given the unquestioned quality of the team, there is great anticipation regarding the guidance the Commission would provide for India's fiscal system for 2015-2020.

The main task of the Commission is to recommend how the Union Government should share taxes levied by it with the States and furthermore, the allocation among the States. One of the most salutary traditions is that the recommendations of the Finance Commission on the sharing of taxes is never challenged by either the Centre or the States.

Earlier Finance Commissions (Eighth, Ninth and Tenth) and Comptroller and Auditor General Reports had laid emphasis on evolving a viable scheme for securing the repayment of the public debt.

While work in the Reserve Bank of India (RBI), in the latter part of the 1980s, by A. Seshan, C. Rangarajan and N. D. Jadhav highlighted the possibility of explosion of internal public debt, no specific scheme on debt repayment was worked out.

Gross and Net Borrowing

The RBI attempted some tentative work in the late 1980s to evolve a scheme for debt repayment, but it could not find a satisfactory resolution. Work in the RBI continued in the first half of the 1990s and in 1996 the RBI came up with a comprehensive scheme of a Consolidated Sinking Fund (CSF) which would, over time, become self-sustaining.

The Ministry of Finance shot down the scheme as it was felt that a CSF would be meaningless while there was a fiscal deficit. Furthermore, the then prevailing view in Government was that so long as the primary deficit was reduced there would be no problem of financing debt repayment. Over the years, a practice has evolved wherein the Government focuses its attention on its net borrowing. Once this is secured, it is for the debt manager to raise gross borrowing to meet the repayment. The system of repayment of public debt smacks of a Ponzi. Some years ago, the Government and the RBI used to highlight the Central Government's gross borrowing, net borrowing, interest payments and the annual debt repayment profile.

Now, this information is lost in the mountain of statistical information. The RBI would do well to highlight, in its Annual Report for the year ending June 30, 2013, an annual data series from 1990-91 onwards, the Central government's gross borrowing, net borrowing, interest payments and the profile of annual debt repayments. This information would bring out that the Central government's public debt operations has elements of a Ponzi.

Had the RBI's 1996 CSF scheme been implemented, by now the CSF would have been self-sustaining and there would not be recourse to borrowing to meet repayments. One hopes that the 14 {+t} {+h} Finance Commission would incorporate, in its Report, an explicit examination of the debt repayment problem and suggest appropriate remedial measures.

At present, the government is seriously considering fundamental changes in the financial sector legislation. If public debt management is separated from the apron strings of monetary management and the government no longer has the crutch of the statutory liquidity ratio for banks and separate prescriptions for insurance, provident funds and pension funds, would the government be able to raise its market borrowing at low rates of interest?

In recent years there has been an elongation of the average maturity of government borrowing. At some future point of time, the average maturity could shorten. The present time is apposite for setting up a CSF.

Resources for CSF

A CSF cannot take up debt repayment immediately. It would need to develop a sufficient corpus which would then become self sustaining. The corpus of the CSF could be developed as follows:

(i) From each year's gross borrowing, a small proportion, say 3 per cent could be earmarked for the CSF (precise figures will have to be actuarially worked out).

(ii) All proceeds from sales of public sector assets should be credited to the CSF. The sale of the family silver should be used only to reduce the government debt.

(iii) A part of the RBI profit transfer to the government should be earmarked for the CSF.

The snag is that with the creation of the CSF, the fiscal deficit would appear larger but fiscal transparency requires such hard decisions.

Finance Commission's Role

It is sometimes argued by fiscal pundits that public debt does not create an inter-generational burden but it certainly does create an intra-generational burden. One fervently hopes that the 14th Finance Commission would undertake a study of the public debt repayment problem and come up with an enduring solution. Internal debt, unlike external debt, is a silent, sudden killer. The public debt Ponzi must be stopped before it disrupts government finances.

This is a matter for the 14th Finance Commission to look into. Internal debt is a silent and sudden killer.

Please Note: This article was first published in The Hindu Business Line on May 31, 2013.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


Equitymaster requests your view! Post a comment on "Is our public debt a Ponzi?". Click here!


More Views on News

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

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.

Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

Aug 21, 2017

Most Indians who cannot find jobs, look at becoming self-employed.

The Key Factor Pushing Gold Up These Days (Outside View)

Aug 21, 2017

PersonalFN explains the chief factor pushing gold prices up of late.

How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

Aug 21, 2017

One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

Aug 19, 2017

Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

More Views on News

Most Popular

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

Aug 8, 2017

'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

Bitcoin Continues Stellar Rise(Chart Of The Day)

Aug 10, 2017

Bitcoin hits an all-time high, is there more upside left?


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Aug 21, 2017 (Close)