The Debt Story of India
I am not an economist to have expert views on the Indian economy, but i do enough reading to have build a view that its not in the greatest shape.
So i decided to read a little more to try and understand the core terms defining the economics of a given country and where does India stand. Penning down my views...
PS : Anyone who is an expert in economics, please feel free to correct me on anything written here.Am pretty sure a lot many would jump in :)
My Stand:
The UPA-2 has left the indian economy in shambles and it will take some tireless work from the current NDA goverment for a change to actually be visible at the ground level.
Lets Jump in.
Disclaimer:(All the data presented here are based on numbers i got from the finance ministry website and not from any article published by a news post. So its 100% credible. however the calculations are mine and might have mistakes.)
What is External Debt.?
When the BJP goverment led by Mr. Vajpayee came into power in 1998, the total External Debt on India was close to ~97 Billion dollars. The goverment successfully keep it under control with an average Y/Y increase of ~3% with a sustained increase in GDP (GDP at constant prices) going at the rate of ~6% Y/Y. India was indeed Shining.!
With the UPA goverment taking over in 2004 and passing over the baton to the BJP goverment in 2014, the external debt had increased at a alarming rate of ~13% Y/Y, with the GDP rising at a modest rate of ~6% Y/Y., amassing a total external debt of ~475Billion dollars for the Narendra Modi led goverment to handle
A steep increase in the external debt post 2004 can be clearly seen in the graph below.
The Story does not end here. Lets dive into few more concepts called "Short Term Debt" and "Forex to Total Debt"
Short term Debt are debt's which are due within an year mostly taken at a high rate of interest. The maturity of the debt is generally measured as "short term debt to total debt" ratio. Smaller the better.!
here is an interesting article on "crisis increased due to short term debt".
http://www.nber.org/digest/mar00/w7364.html . An excerpt from the article
Then started the saga of relentless external debt's by the UPA goverment to fund all the different socialist schemes for which the goverment didn't have money. With the increasing short term loans, more loans were taken to do the payouts for the existing short loans, primarily the interest.
In the next 10 years of the UPA rule, the short term debt increased to a whopping 20% of the total debt from 3.9% going as high as 23% in the year before the general elections to woo the voters into another term. The trend can be seen in the graph below as a sharp increase in the short term debt almost linearly through the last 10 years.
At the same time, state of forex reserves in india went quite dismal.In 1998 when the UPA goverment took over.. we had the forex reserves to cover the entire debt that india had.. In the initial regime of the UPA-1, the ratio of the forex reserves to the total debt increased but by the end of 2014 it was in shambles. it had come down to just 68%.
Here in an article in imf website : https://www.imf.org/external/np/pdr/debtres/
Lets Jump in.
Disclaimer:(All the data presented here are based on numbers i got from the finance ministry website and not from any article published by a news post. So its 100% credible. however the calculations are mine and might have mistakes.)
What is External Debt.?
The portion of a country's debt that was borrowed from foreign lenders including commercial banks, governments or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made.
When the BJP goverment led by Mr. Vajpayee came into power in 1998, the total External Debt on India was close to ~97 Billion dollars. The goverment successfully keep it under control with an average Y/Y increase of ~3% with a sustained increase in GDP (GDP at constant prices) going at the rate of ~6% Y/Y. India was indeed Shining.!
With the UPA goverment taking over in 2004 and passing over the baton to the BJP goverment in 2014, the external debt had increased at a alarming rate of ~13% Y/Y, with the GDP rising at a modest rate of ~6% Y/Y., amassing a total external debt of ~475Billion dollars for the Narendra Modi led goverment to handle
A steep increase in the external debt post 2004 can be clearly seen in the graph below.
The Story does not end here. Lets dive into few more concepts called "Short Term Debt" and "Forex to Total Debt"
Short term Debt are debt's which are due within an year mostly taken at a high rate of interest. The maturity of the debt is generally measured as "short term debt to total debt" ratio. Smaller the better.!
here is an interesting article on "crisis increased due to short term debt".
http://www.nber.org/digest/mar00/w7364.html . An excerpt from the article
For example, in late 1997, as the financial crisis in Thailand began to spread across the region, investors looked at Korea and what they saw was a country holding short-term debt equal to 300 percent of its reserves and around 15 percent of GDP. Foreign creditors began demanding payment and almost overnight a nation that was often cited as a sterling example of the new Asian economic powerhouses was flirting with default.The Vajpayee led NDA government had managed to bring down the short term debt ratio from ~5.4% to 3.9% in 2004.
Then started the saga of relentless external debt's by the UPA goverment to fund all the different socialist schemes for which the goverment didn't have money. With the increasing short term loans, more loans were taken to do the payouts for the existing short loans, primarily the interest.
In the next 10 years of the UPA rule, the short term debt increased to a whopping 20% of the total debt from 3.9% going as high as 23% in the year before the general elections to woo the voters into another term. The trend can be seen in the graph below as a sharp increase in the short term debt almost linearly through the last 10 years.
At the same time, state of forex reserves in india went quite dismal.In 1998 when the UPA goverment took over.. we had the forex reserves to cover the entire debt that india had.. In the initial regime of the UPA-1, the ratio of the forex reserves to the total debt increased but by the end of 2014 it was in shambles. it had come down to just 68%.
Here in an article in imf website : https://www.imf.org/external/np/pdr/debtres/
on relation of forex reserves to debt and why is that inreasingly becoming an important indicator of an country's ability to shield itself to global meltdown post the recession in 2003.
Quoting from the article.
In recent years there has been increasing interest in comparing the level of reserves to a measure of external debt, in particular to short-term external debt by remaining maturity. A measure comparing reserves and short-term external debt is useful to gauge risks associated with adverse developments in international capital markets. Short-term debt by remaining maturity provides a measure of all debt repayments to nonresidents over the coming year and, as such, constitutes a useful measure of how quickly a country would be forced to adjust if it were cut off from external borrowing.
Concessional Debt
Another important aspect of the external debt is a part of the long term debt called the concessional debt.
Concessional debt is defined as loans with an original grant element of 25 percent or more.
Source: World Bank, International Debt Statistics.
To put in simpler words, concessional debts are highly long terms debt's which have been given out at a very low rate of interest with eased out return policies.
There are many large public sector projects, particularly infrastructure project, which require long-term financing, which is often not available, or affordable, through the market.A key benefit of concessional loans is the ability to mobilise large levels of upfront financial resources, with affordable terms and conditions, for these projects.They can help recipient countries improve their debt management capabilities; they can strengthen partnership and cooperation; they offer flexibility to meet specific project needs; and they can provide a way of offering a larger volume of funding and over longer term periods
The ratio of concessional debt to the total debt has seen a downtrend since the early 90's but the NDA goverment under Vajpayee was able to keep the rate of decline at a very low rate with the ratio of concessional debt to the total debt going down from 38% to just ~35%.with the UPA goverment taking over in 2004 and handling over the baton in 2014 the ratio saw a sharp downward curve coming to ~8% of the total debt from 35% in 10 years.
The Narendra Modi after having come to power has been travelling accross the world for improved foreign relations with countries like US,Japan and other developed countries to get financing for infrastructure projects which have been long pending.
A classic example of the same is the soft loan given by Japan for the bullet train project in India.
http://www.thehindubusinessline.com/economy/logistics/japan-hands-out-sweet-deal-for-bullet-trainbeats-expectations-on-soft-loan-terms/article7980794.ece
Another great example is the soft loan given by germany to india for solar power.
http://india.smartcitiescouncil.com/article/germany-offers-euro-1-bn-concessional-loan-indias-solar-sector
Why did the debt kept on rising.?
here is an excellent article which explain the "Debt Trap" for india.
http://www.sunday-guardian.com/analysis/in-the-end-india-will-still-be-trapped-in-debt
Quoting from the article
This can clearly be seen based on the next term which is known as "Fiscal Deficit".
Fiscal Deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.
During the UPA-1 regime the Fiscal deficit shot up to a whopping 8.9% in 2008 and stayed at an average of ~5% over the UPA-2 regime.
The 2008–2009 budget quite clearly made inadequate allowances for rural schemes like the farm loan waiver and the expansion of social security schemes under the National Rural Employment Guarantee Act (NREGA), the Sixth Pay Commission award and subsidies for food, fertilizer, and petroleum.” “These together pushed up the fiscal deficit sharply to higher levels.
There were also off-budget items like the issue of oil and fertilizer bonds, which should be added to give a true picture of fiscal deficit in 2008–2009. The fiscal deficit shot up to 8.9% of GDP (10.7% including off-budget bonds) against 5.0% in 2007–2008 and the primary surplus turned into a deficit of 3.5% of GDP. “
The huge increase in public expenditure in 2008–2009 of 31.2% that followed a 27.4% increase in 2007–2008 was driven by the electoral cycle with parliamentary elections scheduled within a year of the announcement of the budget.
Also the other factor that is important is the quality of fiscal deficit. The UPA goverment was able to contain the fiscal deficit post the 2008-2010 fiasco linked to general election (still high at 4.5-5%), however this was primarily achieved by lesser spending in all sectors leading to overall stalling of thousands of infrastructure projects in the country,!
Tough path ahead for Narendra Modi goverment.
The Narendra Modi goverment has started taking some correct steps to fix this overall scenario but it is a very tough road ahead. One of the important things that the goverment is looking into is bringing down the % of short term debt to improve the quality of debt service (higher prinipal payouts).
The short term debt to overall debt has seen a decrease of ~2.5% in 2014-15 and another 1% in the first half of 2015-16 while strengthening the forex reserves ratio at the same time bringing the overall short term debt to forex ratio down from 30% to 23%.
The overall fiscal deficit was <4% (3.9%) for 2015-16 and is targeted at 3.5% for 2016-17 and the goverment looks well on its way to achieve this all this with a healthy investment in every infrastructural sectors (roads,railways,..) to boost the overall GDP targeted to grow at ~10% for 2016-17.
Many economists argue that the BJP goverment has got the benifits of lower oil prices to have achieved this feat, but then what can i say "Luck favours the brave" :).
Hope that in the next 3 years we will see a downward trend in the overall external debt and come out of this trap largely by 2025 with the Narendra Modi Goverment seeing another term at the centre.
A classic example of the same is the soft loan given by Japan for the bullet train project in India.
http://www.thehindubusinessline.com/economy/logistics/japan-hands-out-sweet-deal-for-bullet-trainbeats-expectations-on-soft-loan-terms/article7980794.ece
Another great example is the soft loan given by germany to india for solar power.
http://india.smartcitiescouncil.com/article/germany-offers-euro-1-bn-concessional-loan-indias-solar-sector
Why did the debt kept on rising.?
here is an excellent article which explain the "Debt Trap" for india.
http://www.sunday-guardian.com/analysis/in-the-end-india-will-still-be-trapped-in-debt
Quoting from the article
India is neck-deep in debt simply because successive governments have got the nation hooked onto populist schemes replete with corruption. Food, fuel and fertilizer subsidies, wonky welfare programmes and spiralling defence spending swallow 30% of India's budget. With interest eating up 25%, only about 40% of India's budget is available for everything else, including health and education. Even in this there is widespread waste and corruption.
This can clearly be seen based on the next term which is known as "Fiscal Deficit".
Fiscal Deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.
During the UPA-1 regime the Fiscal deficit shot up to a whopping 8.9% in 2008 and stayed at an average of ~5% over the UPA-2 regime.
The 2008–2009 budget quite clearly made inadequate allowances for rural schemes like the farm loan waiver and the expansion of social security schemes under the National Rural Employment Guarantee Act (NREGA), the Sixth Pay Commission award and subsidies for food, fertilizer, and petroleum.” “These together pushed up the fiscal deficit sharply to higher levels.
There were also off-budget items like the issue of oil and fertilizer bonds, which should be added to give a true picture of fiscal deficit in 2008–2009. The fiscal deficit shot up to 8.9% of GDP (10.7% including off-budget bonds) against 5.0% in 2007–2008 and the primary surplus turned into a deficit of 3.5% of GDP. “
The huge increase in public expenditure in 2008–2009 of 31.2% that followed a 27.4% increase in 2007–2008 was driven by the electoral cycle with parliamentary elections scheduled within a year of the announcement of the budget.
Also the other factor that is important is the quality of fiscal deficit. The UPA goverment was able to contain the fiscal deficit post the 2008-2010 fiasco linked to general election (still high at 4.5-5%), however this was primarily achieved by lesser spending in all sectors leading to overall stalling of thousands of infrastructure projects in the country,!
Tough path ahead for Narendra Modi goverment.
The Narendra Modi goverment has started taking some correct steps to fix this overall scenario but it is a very tough road ahead. One of the important things that the goverment is looking into is bringing down the % of short term debt to improve the quality of debt service (higher prinipal payouts).
The short term debt to overall debt has seen a decrease of ~2.5% in 2014-15 and another 1% in the first half of 2015-16 while strengthening the forex reserves ratio at the same time bringing the overall short term debt to forex ratio down from 30% to 23%.
The overall fiscal deficit was <4% (3.9%) for 2015-16 and is targeted at 3.5% for 2016-17 and the goverment looks well on its way to achieve this all this with a healthy investment in every infrastructural sectors (roads,railways,..) to boost the overall GDP targeted to grow at ~10% for 2016-17.
Many economists argue that the BJP goverment has got the benifits of lower oil prices to have achieved this feat, but then what can i say "Luck favours the brave" :).
Hope that in the next 3 years we will see a downward trend in the overall external debt and come out of this trap largely by 2025 with the Narendra Modi Goverment seeing another term at the centre.
