Have we just entered a debt trap?

Feb 24 2014, 15:28 IST
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SummaryBusiness schools must train students to analytically understand the Budget and also read between the lines so that they are able to take intelligent business decisions in the future.

to more borrowings and hence a rising interest burden, which further raises the revenue deficit, getting out of the situation being extremely difficult. India has been on the verge of a debt trap many times in the past. In the accompanying table, we can see that the interest payment was less than the revenue deficit in 2012-13 and 2013-14 Budget estimates, but more than revenue deficit in revised estimates of 2013-14 and projected Budget estimates for 2014-15. If debt trap is a situation when the government borrows even to pay the interest, then that would happen when the interest payment is greater than the revenue deficit? Thus, the table shows that the entire revenue account borrowing is going towards meeting the interest payment obligations, and is yet not adequate. Does it mean that India has already entered the scary ‘debt trap’ situation? Best luck to the next finance minister.

Primary deficit, which is the fiscal deficit minus interest payments, indicates government’s fresh borrowing requirement. Over the same years, it has fallen from 1.8%, 1.5%, 1.3%, 0.8% of the GDP. This means that interest payment, thus obviously the debt burden, has gone up over the years and without it we would be close to achieving a balanced budget! What’s even more worrisome is the government’s denial that there ever was any policy paralysis, their complacency with the GDP growth numbers hovering around 5% and little attention to inflation. Also cause of concern is India’s rising proportion of external debt. Foreign borrowing makes financial sense from the angle of lower interest rates abroad where funds are typically cheaper. But on the flip side, the country owes as much to foreigners rather than to India’s future generations.

There were no expectations from the present interim Budget, since it could neither harm nor help the Indian economy for two reasons. One, its provisions will be effective only for a few months and second and more important, Indian economy is driven to the current status as a cumulative effect of the past few years of political arrogance and economic mismanagement. Given the situation of inflationary recession, twin deficits, corruption and paralysis, even a full-fledged Budget could have hardly done much, leave alone an interim one seeking Vote-on-Account. So, what next?

If RBI refuses to fall in sync with the finance ministry, government can buy back bonds, thereby reducing their own debt and interest obligation and also pushing the

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