In fact, for two years, more than half of the revenue receipts of the Centre went to merely pay interest on debt. Matters improved a bit in 2002-03, primarily because interest rates went down and there was good economic growth. But the basic situation remains challenging.
According to rating agency Standard & Poors, countries are broadly classified into two groups investment grade and speculative grade. The latter is considered fairly risky investment, and is often prohibited from the investment portfolios of pension funds and so on.
Countries with the lowest credit rating that manage to make it into investment grade tend to have interest payments that are only 9 per cent of revenue receipts. With a number of 42 per cent, India is in a bad situation that is why it has been classified into the speculative grade, also called Junk.
The Kelkar taskforce projections show that if present trends continue, this number is likely to remain at around 42 per cent for the next five years. In other words, after going through the herculean task of collecting tax and non-tax revenues, 42 per cent of that inflow would exhaust in merely paying interest.
If Kelkars proposed reforms are implemented, this ratio is projected to come down sharply to 32 per cent by 2008-09. This would give breathing space to a government coping with the huge stock of debt, and may suffice to push India into investment grade.
How will they do it The proposals work at two levels. The first channel is by increasing tax revenues. A simpler, more rational tax system with fewer exemptions and lower rates is projected to increase tax revenues. In addition, the burgeoning services sector is being brought into the tax net.
The second channel lies through accelerating GDP growth. Taking our home loan analogy, this is akin to higher income reducing your EMI. This is, of course, the nicest way in which indebtedness can be addressed.
The taskforce proposals accelerate GDP growth by moving towards a Single National Market, by setting the stage for massive export-oriented manufacturing, by removing the distorted behaviour of households and firms that come about in trying to dodge taxes using exemptions, and by modernising the tax system using IT.