Amidst the continuing liquidity crisis, NBFCs mismanagement and banks\u2019 NPA woes, there is one trend that gives some reason to cheer. Total liabilities of the central government have come down to just about 50% of GDP at the end of FY18 as per RBI data. This is a substantial improvement from a high of 67% recorded in FY03. Total national debt (Central + State government debt) has also declined from 83% to 69% now although the decline here is lesser. Here is a look at the dynamics of government\u2019s borrowings and drivers.Government debt has always been a point of heated discussion among the economists, policy makers etc as the government can borrow\/print any amount of money and spend. However, such profligacy has huge impact on the economy in the form of \u201ccrowding out\u201d of private investments and in the extreme case, hyperinflation as seen across quite a few countries in the world. The problem becomes even more acute when the debt is external.<\/p>\n
It would be pertinent to first understand why government needs to borrow despite earning so much as taxes, royalties etc. Simple reason is, overspending! However, that is too simplistic. Governments do have to undertake lot of expenditure towards capacity building which adds to the current liability but pays in the future. Besides, it also has to undertake expenditure to serve its obligation as a \u2018welfare state\u2019.<\/p>\n
Government\u2019s expenditure can be classified under two heads \u2013 revenue and capital. Revenue expenditure refers to the expenditure made for running the administration, bureaucracy, police, military etc, besides the interest payment on past debt. The excess of revenue expenditure over revenue receipt is what is called revenue expenditure and if government is having a high revenue deficit, it is a recipe for disaster.<\/p>\n
Other than the revenue expenditure, it makes lot of investment in building assets such as railways, roads, bridges as well as in developing social infrastructure such as educational, health, skills development institutions etc. Benefits from expenditure on social infrastructure are intangible and difficult to quantify, yet, is the responsibility of the government.<\/p>\n
If government borrowing is going towards these capital expenditures it is not only acceptable but desirable. (Whether it is actually being utilized effectively is another critical issue. Yet, absence of an effective delivery mechanism is not sufficient reason to curtail the scope of these schemes).<\/p>\n
An analysis of government\u2019s debt movement over last about 40 years shows two distinct phase \u2013 a period of profligacy leading to continuous and sharp increase in debt till about 2000 followed by a period of consolidation. The collective wisdom was displayed by the government and RBI during 90s, probably fallout of 1991 foreign exchange crisis, resulted in implementation of several tough yet far reaching measures. Two of these are discontinuation of printing of money to finance government\u2019s deficit also called monetization of deficit and FRBM Act (Fiscal Responsibility and Budget Management). While implementation of FRBM Act still faces challenges, governments are waking up to the reality of having to operating within the boundary set by it.<\/p>\n
This brings us to the actual movement of government debt. As per RBI data, central government\u2019s liabilities are estimated at Rs 84 lakh crore at the end of FY18. This is nearly the same as loans extended by banking sector to the rest of the economy at Rs 78 lakh crore. This should save the government from the accusation of \u2018crowding out\u2019 investments. Total liabilities have risen at the rate of 9.4% during FY14-18 against over 12% during FY09-14. The liabilities had risen at as high as 20% during 1980s – probably the worst period in terms of fiscal profligacy and government\u2019s mismanagement – and moderated to about 15% by the end of 1990s.<\/p>\n
Other than restricting the aggregate debt, government\u2019s performance in managing external borrowings has been more impressive. External borrowings, which were rising at 18-20% rate till mid 90s, fell sharply to single digit subsequently and is less than 5% now. As a share of total debt, it now stands at less than 5%, sharp reduction from a high of 26% in 1992.<\/p>\n
More on this, in some other article\u2026<\/p>\n","protected":false},"excerpt":{"rendered":"
Amidst the continuing liquidity crisis, NBFCs mismanagement and banks\u2019 NPA woes, there is one trend that gives some reason to cheer. Total liabilities of the central government have come down to just about 50% of GDP at the end of FY18 as per RBI data. This is a substantial improvement from a high of 67% […]<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[857],"tags":[],"class_list":["post-8727","post","type-post","status-publish","format-standard","hentry","category-economy","membership-content","access-restricted"],"yoast_head":"\n