Impact of loan economy on India and the world

Siddharth Roy

(siddharth01.roy@gmail.com)

Most of the countries around the world are going through unprecedented economic crises. Everyone has their own set of problems and issues. Where on one side the dark clouds of recession are looming over USA, UK and the Eurozone, on the other side the currencies of all these countries are going in a downward spiral. And without any doubt one can say that the major economic crises going on are related to the twin problems of insolvency and bankruptcy. We have seen the condition of Sri Lanka recently. It reached the brink of a civil war due to adverse balance of payments and unsustainable debt. It was such a horrendous situation that violent protests turned into riots and even the President had to flee. The situation became such that the country didn't even have petrol to get their automobiles moving and thus Sri Lanka had to lease out its Humbantota port for 99 years to China for being unable to service the debt. Similar situation was also observed in our neighbouring country of Pakistan. Due to the unsustainable debt and balance-of-payment crisis, the exchange rate to inflation rate was all out of control. The economic situation has worsened so much that to avoid the threat of dengue to its population, Pakistan also had to buy mosquito nets from India on loan. This is the same Pakistan which ended all trade relations with India after being shocked by India's might in Balakot. In both these countries there is one thing in common which led to such miserable economic conditions, and that is unsustainable debt levels. According to a latest report, Sri Lanka's debt was more than its GDP in 2022. Also, Pakistan's liabilities had reached 107% of its GDP. Looking at the present circumstances, it now seems that India is also walking on the path of Sri Lanka and Pakistan.

To run a government, funds are of utmost importance. There are two ways in which these funds can be acquired, i.e., either through equity or debt. Equity means to receive funds in exchange for participation in ownership, share in profit, and sometimes decision making and debt means to receive funds against the regular principal and interest repayment. There are some features of debt that makes it more preferable like the ownership remains with the original shareholders when the loan is taken. The component of interest payment remains involved, and the shareholders do not have to share any fixed portion of the profit with the lenders. Moreover, in case of debt, owners take decision independently without concerning any externalities making it favourable for lenders. Except PSUs, Government is not required to do equity investment. For the government, debt is the only option but at the same time debt has a lot of downsides to it. In loss making scenarios, unsustainable debt levels can jeopardize future investments for nations as well as companies and all the revenue will be used up in debt repayments. With regard to Central government debt, the debt to GDP ratio has improved over the years from 65% in 2004-05 to 49.62% in 2018-19. But due to the Covid pandemic the GDP declined and to support its economy and social sector, India had to resort to high amounts of borrowings leading to increase in debt to GDP ratio which is now around 62.6%. Now looking at the debt to GDP ratio of the state governments, it has always been in an increasing trend. Covid-related economic slowdown and enhanced borrowing requirements have pushed the debt to its highest ever level, i.e., 31.2 %. If we add up the liabilities of the Central and the state governments, the total public debt is around 89.26%. Despite increasing trend of debt to GDP ratio, the external borrowing of the government has been decreasing and currently it is only 2.95% of the GDP. Even private debt is on the rise and currently it is around 51.37% of the GDP. According to the IMF, the debt of India's private sector is much less as compared to the developed and even emerging countries. The total debt of the government plus the private debt adds to around 140% of the GDP, which is alarming, but IMF has declared India as an economically stable country.

Now the question arises as to how much debt is good. It is difficult to set benchmarks by looking at the debt figures of just one country and to determine which level can be called a sustainable level of debt. Venezuela, Italy and Greece are economically troubled nations with debt to GDP ratios of 350%, 200% and 156% respectively. But there are developed economies as well which are running smoothly with high debts such as USA which has a debt of about 128% of the GDP and Japan which has a debt of around 266% of the GDP. These countries have remained stable and developed economies even with such high debt levels. Only underdeveloped economies have low debt levels like Brunei which has a debt to GDP ratio of only 3%. So from this data, we can conclude that in order to have high economic growth and to become a developed economy, it is necessary to take debt. It is not possible to spend on special sector and infrastructure without borrowing, and hence debt levels of most developed economies remain high. Even exchange rate affects debt. Suppose India's debt is $20, which makes about Rs 1,600 at an exchange rate of 80. If the rupee depreciates 20% and reaches 96, then India's debt will suddenly increase to Rs 1,920. High debt level can be justified if the debt money has been used to create capital assets such as infrastructure projects, etc. Although it seems that India is moving along the path of Pakistan and Sri Lanka in terms of debt to GDP ratio, but only on this basis one cannot judge the economic stability of India because there are developed countries like Japan which have high debt. What matters is the quality of expenditure and macroeconomic fundamentals. The key for a growing economy is to maintain a sustainable level of debt as low debt can hinder the growth process of any nation. As a voter one needs to keep in mind that we should not make freebies a part of the political culture in our country. Loans if taken for productive quality expenditure, subsidies if used for bare minimum necessities like education, health and food for the poorest section, then these are justified. As educated and responsible citizens of India, we should let our votes be only based on long-term economic benefits and not short-terms freebies as freebies also put an unnecessary burden on the government exchequer. Loan is a necessity for quality development of a nation, but if the government can spend it well then only India can one day become a 5-trillion-dollar economy.