1273565 Karan Gaba F1 Q no 40:- Is debt a ticking time bomb for India too?

Is debt a ticking time bomb for India too?

Introduction

A company with high amount of debt can be like a ticking bomb. When things are going well, it would be benefit from many aspects: Low interest rates, high margins which allow it to service its debt with ease, easy funding options, amongst others. However, when the tide turns, things become difficult. Forget repayment! But even servicing the debt can become a challenge. And then to save itself from bankruptcy, drastic measures are required to be taken. Some of which include asset sales, employee layoffs, reduction in investments; actions which are not warranted, but are unavoidable during such times. 

Now let us take this to a broader scale; on a country level for instance. A way to gauge the debt levels of countries is the debt to GDP ratio - how much debt has a country taken in relation to what it produces. This indicates its ability to pay back and service its debt. 

Now, when someone says that this ratio is the worst it has been in over 200 years, it would make anyone get up, take notice, and worry! As per Moneynews, a research paper by Harvard economists suggests that the western world or the developed part of the world is broke. So broke that harsh measures would be required to get its economy back on track! These might include defaults and savings tax on private wealth. What makes the situation seem worse is that such measures have not been used since times of the Great Depression and the post World War-II era. 

In 2014, the governments' gross debt to GDP ratio is estimated to be at about 110% levels for all advanced economies. Quite a contrast to the 33.6% level of the emerging economies. The latter have seemingly managed to lower their debt levels in the past five years. And this is what the solution is as per the authors of the research paper. Explicit restructuring would be the only resolution. 

When one views the scenario back in India, things do not really seem all hunky dory. Especially when compared to the debt statistic of its peers. India's debt to GDP stood at about 66% in FY13, which is nearly double that of the emerging nations. Plus, with the twin deficits, there does not seem an easy way out anytime soon. While one positive, as highlighted by Dr. Rajan recently, is that India's external debt is not something to worry about. However, to meet its expenditures plans, the government will have to continue borrowing from within the country. Unless drastic measures are taken, this would only lead the debt ballooning to unsustainable levels. Moreover this could also crowd out private borrowers, thereby increasing the borrowing costs for corporates. And as you would very well know, that is not good situation for any economy. 

What kind of problems will the next government face once it takes over in May 2014?

There is, of course, the aftermath of the growth slowdown, high inflation, rising subsidies, and unpaid bills from UPA-2 (fuel and fertiliser subsidies, and new ones under the Food Security Bill) to deal with.

But UPA will also be leaving a ticking time-bomb in terms of a rising burden on debt repayments from 2014-15. This is partly the result of the shift in the maturity profile of government papers issued in 2008-10, when fewer investors wanted longer-dated paper, but it is also the result of the UPA’s calculated decision to ensure that it has very low debt repayments scheduled for 2013-14 – the current year, and the UPA’s last before the next general election. One look at the accompanying chart will tell you the whole story. While debt redemptions in 2013-14 are very low (below Rs 500 billion, or Rs 50,000 crore), from 2014-15 onwards the redemption rates shoot up Rs 1,50,000-Rs 2,50,000 crore annually over the coming five years. A high redemption rate means large loans will have to be raised just to repay old, maturing loans. The Financial Stability Report of the Reserve Bank of India, released on 30 December, has this to say. “The average life to maturity of the outstanding GoI’s dated securities, at 9.67 years, is quite elongated and thus, does not pose any significant rollover risk. Nonetheless, redemption pressure would increase significantly starting from 2014-15 to 2019-20.” But UPA will also be leaving a ticking time-bomb in terms of a rising burden on debt repayments from 2014-15. How did this happen? “The demand for long-dated government securities dwindled in the aftermath of the global financial crisis. Thus, a large portion of the government market borrowing programme during 2008-09 and 2009-10 was completed by issuing relatively short and medium-term securities which are maturing between 2014-15 and 2018-19.” P Chidambaram was Finance Minister in 2008-09, and Pranab Mukherjee from the year after that - the two years in which this problem was created. How convenient for the outgoing government that it not only gets to pay the easy bills now falling due, while leaving its successor with a huge outgo.

Conclusion

According to my point of view Continuous increase in debt will lead to downfall in growth, even it is an individual or an organization or a country, so timely repayment is necessary in any kind of loan or debt.Talking about the country, like in tha past few years due to slow growth rate and high inflation, the government of India failed to repay the amount of debt. While the governor of RBI, Mr Raghuram Rajan said that increasing foreign debt is not dangerous for the economy but continuous increase will become a mojor problem for the next government because of repaying the huge amount and that will directly affect the Balance of Payment and Forex Reserve.