For the best part of two decades, the driving motor of the global economy has been debt, issued on a whim and traded for speculative purposes rather than backing productive and long-term investments and such continued dependence of economic growth on debt proves to be a constant source of instability in an economy.
High and persistent fiscal deficit is one of the major macroeconomic problems in India since the mid -1980s. Fiscal consolidation is at the forefront of policy discussion in India not only at present but since the early 1990s. Post Financial Crisis 2008-09, there has been sluggish economic growth in India, therefore in order to stimulate the process of economic growth, there has been substantial growth in government borrowings.
Although the country’s foreign exchange reserves are as high as $ 430 billion, The sharp rise in Indian external debt over the last couple of years from $485 billion in 2017 to $ 557 in June 2019 has opened a big gap over forex cover – potentially rendering the economy open to any external shocks. As liquidity in domestic financial markets tightened over the last couple of years and companies found it tough to raise funds from banks and non-banking financial companies(NBFCs), Indian Inc. incrementally turned towards financial markets to raise funds. The growth in external debt over the last year is the highest seen in last five years since the 11.8% growth recorded in June 2014. Sates finished the fiscal year to March 2019 with a combined fiscal deficit of 2.9%. The Outstanding debt of states has risen over the last five years to 25 percent of GDP, posing medium-term challenges to its sustainability. “The increase in external debt was also contributed by valuation losses resulting from the depreciation of the US dollar against Indian rupee and other major currencies”, the RBI in a statement. The external debt to GDP ratio remained at 19.8 percent at end-June 2019, the same as its level at end-March 2019.
Accumulation of public debt might result in higher policy uncertainties and affect economic growth through its impacts on various macro variables like interest rate, inflation, investment, etc. in an economy and in order to avoid such uncertainties, the public debt especially domestic debt should be controlled and used in a more productive manner to have a favorable impact.
Given that the twin balance sheet today appears worse than during the last two episodes of global turbulence- 2008 and 2013- the ability of the private investment to respond to the stimulus might be corresponding weaker and the ongoing slowdown in consumption demand only complicates the matter.
Recently India has implemented two major policy reforms to enhance its revenue base, i.e., implementation of Goods and Services Tax (GST) and demonetization of high denominated currency in 2016. These policies, especially GST, have stimulated tax compliance, increased the number of taxpayers under tax brackets and also tax receipts. But, simultaneously the Government of India is also facing the burden of additional public spending due to the recommendations of the 7th pay commission. Therefore, efforts should be made to improve the revenue base of the economy as an alternative policy strategy to settle the outstanding public debt.
- By Samarth Khurana