A large part of global economic and financial research these
days is focused on the burgeoning debt at all levels - government, business and
household. The global government debt is now estimated to be 105% of global GDP
and is still rising briskly. In the year 2020 itself the global government and
private debt burden may increase by US$200trn, approximately 35% of global GDP.
According to Bank of International Settlements, the percentage of companies
with less than one interest coverage ratio has exploded since the global
financial crisis (GFC). This number is witnessing sharp rise in the wake of
COVID-19 led economic crisis.
In Indian context also, we have seen sharp rise in fiscal
deficit (rise in government debt); corporate debt and household debt. Also, the
quality of debt has deteriorated materially at all levels. The ratio of India’s
public debt to GDP is expected to scale a new high at the end of FY21 due to
record borrowing by the central and state governments and an expected
contraction in the country’s gross domestic product (GDP) during the fiscal
year.
According to RBI, the combined liabilities of the Centre and the
state governments were around Rs 147 trillion or 72.1% of GDP at the end of
March 2020. The revenue (and hence the debt servicing capability) of the
government has deteriorated as the economic slowdown has led to material fall
in tax revenue as well non tax revenue. The lower interest rate for fresh
borrowing is helpful, but higher social sector spending is more than
neutralizing that benefit.
Indian households had debts worth nearly Rs 43.5 trillion at the
end of March this year, up from Rs 6.6 trillion at the end of March 2008 and Rs
19.3 trillion five years ago at the end of FY15. Outstanding retail loans are
now equivalent to 21.3 per cent of India’s GDP in FY20, up from 13.2 per cent
at the end of March 2008 and 15.5 per cent at the end of March 2015.
Wide spread job losses, wage reduction and poor employment
outlook in organized sector has led to higher household debt, at a time when
debt servicing capabilities are worsening fast. The fact that personal loans
have not seen much reduction in interest rates, makes the situation even worse.
In unorganized sector the conditions are much worse. The informal debt is much
more expensive and difficult to service. The chain effect of the informal debt
is much deeper and wider as compared to the formal debt. (see
here)
The credit quality of Indian companies has materially
deteriorated in FY20. As per the rating agency ICRA, The value of debt
downgraded has more than doubled, according to ICRA Ratings Ltd. The disruption
from the Covid-19 pandemic is likely to make the things worse. (see
here)
In the study of indebtedness, the Japanese model is considered
prominently. Japan government is the biggest debtor in the world. It owes more
than 230% of GDP of debt. To save the economy from sinking Japan started to
balloon its public debt many decades ago, at the expense of economic growth.
For past many decades, Japanese economy has failed to register any meaningful
growth or inflation. European Union, BoE and USA have also taken the same path
in past one decade.
The question that are begging answers are therefore: (a) How
this debt will ever be repaid? (b) If the global growth continues to remain
low, how the poor and developing economies will bridge the development gap with
developed countries and come out of poverty? (c) How the perpetually slow
growth will impact the demography, i.e., whether the world will follow the
demographic trends of Japan and grow old? (d) What will happen to the
commodities based economies and populations in case the global demand for
commodities continue to shrink for longer than expected? and (e) Will the
digital highways make the geographical boundaries and hence the present concept
of "Nationalism" redundant?
I am not an expert on any of these matters and mostly
incompetent to satisfy these inquisitions. Nonetheless, since the questions
have come to my mind, I will certainly try to seek some answers. I will be
happy to share my thoughts with the readers in later posts.
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