EDITORIALS & ARTICLES
Addressing public debt sustainability
As per a recent research report India will be included in global bond indices in early 2022. This will result in investment inflow of $170-250 billion into the Indian sovereign bond market during the next decade. The Indian bond market has been in the news for various reasons. sustainability of public debt is one of the critical issues from the point of view of policymakers.
Public Debt
- Public debt is the total amount, including total liabilities, borrowed by the government to meet its development budget. It must be paid from the Consolidated Fund of India.
- It can be divided into internal and external debt
Sources of public debt
- Dated government securities (G-Secs,
- Treasury bills
- External assistance
- Short-term borrowings.
India’s Public Debt Then and Now:
Before Independence
- The borrowing needs of Indian princely states were largely met by indigenous bankers and financiers.
- The concept of borrowing from the public was pioneered by the East India Company to finance the Anglo-French wars during the 18th century.
- The First World War saw a rise in India’s public debt due to the country’s contribution to the British public supply of money.
- The provinces of British India were allowed to float loans for the first time in 1920 when the local government borrowing rules were issued under the Government of India Act, 1919.
Current Inflation of Public Debt
- India’s public debt to gross domestic product (GDP), at constant prices, increased to a record high of 100.86% in 2020 as against 76.86% in 2014.
- India has become the most indebted nation after Brazil and Argentina among the emerging market economies.
- India is the most indebted country in South Asia after Bhutan and Sri Lanka.
- While Brunei, United Arab Emirates, and Russia have low debt-to-GDP ratios with 2.46%, 19.35% and 19.48% respectively.
Effects of Excessive public debt
- In the short-run, an increase in public debt might stimulate aggregate demand and output.
- However, excessive public debt leads to higher risk premium in interest rates, which results in reduction of private investment as well as contraction of GDP in the long run.
- Also, the economic growth will turn negative in the long run if the debt to GDP ratio exceeds 90%.
Measures to make Public dept Sustainable:
1. Privatisation of loss-making PSUs
- The government may think of privatizing loss-making public sector undertakings (PSUs) such as Air India.
- The government may run any business if it is Socially relevant, technologically feasible, environment friendly, economically viable, legally unassailable, and ethically right.
- ‘Minimum government and maximum governance’ principle should be adopted in privatising any PSU.
2. Prudential Stance
- As per the Fiscal Responsibility Budget Management (FRBM) Act 2003, it is the duty of the government to control fiscal profligacy and to achieve long term macro-economic sustainability
- Through effective conduct of monetary policy and prudential debt management in a transparent manner.
- The RBI has been sensitising States like Chhattisgarh, Goa, Manipur, etc., about prudential measures of cash and debt management.
3. Leveraging of PFMS
- For better fiscal deficit management and accountability, the Public Financial Management System (PFMS) should be leveraged through real-time data on advances, transfer of funds and utilisation.
4. PPP model in Social Schemes
- The government should implement public private partnership (PPP) model in social schemes such as Deen Dayal Upadhyay Grameen Kaushalya Yojna (DDU-GKY).
5. Investment in Infrastructure
- According to RBI data, gross fixed capital formation to total combined liabilities of Centre and States ratio was 37.47% as of March 31, 2019, when compared to 45.77% in 2014.
- The government should focus on investment in infrastructure and human capital for realizing the multiplier effect.
6. Harmonisation of Tax Regime
- GST needs to be harmonised and expanded to other areas to reach national consensus with a view to improving the tax-GDP ratio.
- The government should create an investor-friendly environment for additional source of financing to replace the high public debt.
7. Thrust on Renewable Energy
- India imports nearly 80% of its domestic requirement of crude oil.
- India can become a $5 trillion economy by 2025, if it gives more thrust on renewable energy by reducing its reliance on fossil fuels, thereby saving on foreign exchange.
Road ahead
- Prudential Measures of cash management should be extended to all States with a view to adhering to fiscal deficit targets and debt-GDP ratios.
- Under co-operative federalism, the Central and State governments should undertake robust expenditure planning to address the socio-economic challenges.
- There is a need to implement more social welfare schemes like PFMS for better deficit management.
- There is a need for contribution in cash or kind from the project implementing agencies in private sector
- When captive employers are sourcing the skilled trainees for their operations in order to reduce the fiscal burden of the government.
- Though Goods and Services Tax (GST) includes almost all the indirect taxes, but it should be implemented in areas like alcohol, petroleum products, electricity, etc.
- The government should enhance efficiency of public debt management by adhering to low cost, risk mitigation and market development.
Through low costs and risk mitigation the government can maintain prudent risk profile with low roll-over risk, relatively long maturity of outstanding debt predominantly fixed rate coupon securities insulating it from interest rate volatility, calibrated opening of G-Sec market to foreign investors, and huge diversified investor base.
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