“The debt is not, that is to say, to be regarded as a residual among quantities of economic policy…. Thus debt management can be regarded neither as something to be, as it were, left to the last and adjusted to all other policy decisions, nor on the other hand, as a consideration which should override all other policy decisions; it has to be integrated with a variety of measures in the pursuit of the broad aims of economic policy.”
Report of Radcliffe Committee on the Working of the (British) Monetary System (1959)
The challenges facing the government on domestic debt management will be tremendous in the coming years. The total amount of debt due for redemption in the 12th Plan period (2012-17) is Rs 7.81 lakh crore or Rs 1.56 lakh crore per year. The peak will be reached in 2016-17 when it will be Rs 2.31 lakh crore.
To achieve a growth rate of nine per cent the approach paper to the 12th Plan envisages a massive investment of 38.7 per cent of gross domestic product (GDP) against 36.4 per cent in the previous Plan. The infrastructure sector alone will account for $1 trillion. Since government borrowings are in the nature of Ponzi schemes – in that the government borrows afresh to repay a maturing loan – the annual market loans will have to cover both redemptions and fresh borrowings besides interest on outstanding debt.
According to the approach paper, the average fiscal deficit will be Rs 4.46 lakh crore per year during 2012-13 to 2016-17. In the absence of information on sources of finance for the Plan, the fiscal deficit may be taken as a proxy for borrowing. Going by experience, the bulk of the borrowing can be expected through market loans. In fact, the proportion of market loans to total debt receipts has gone up from 80 per cent (revised estimate) in 2011-12 to 93 per cent (Budget estimate) in 2012-13.
What are the implications for monetary policy, especially since infrastructure projects take many years to bear fruit in terms of an increase in GDP while, in the meantime, money would have been pumped into the economy? Would government borrowings crowd out private investment?
There are two aspects to the debt problem — flows and stocks. The main objective of the Reserve Bank of India (RBI), till such time a separate agency is set up for the purpose, would be to help the government raise resources at the lowest cost, as it has been doing all along. In recent times, it handled the problem of tight money conditions and rising yields through buybacks of government securities. But, it means that the deficit already incurred is monetised — call it retroactive or retrospective monetisation. Except for the time element, monetisation of deficit and its impact on the economy are the same, whether it takes place in the primary market, where RBI is legally prohibited from entry, or in the secondary market, where it can engage in buybacks.
During 2011-12, the buybacks amounted to around Rs 1 lakh crore. Can RBI continue to inject such massive amounts into the system year after year in addition to what it does at the repo window without damaging the fabric of the economy? The government is planning to set up a Public Debt Management Agency on the ground that the existing arrangement results in a conflict of interest for RBI. Then, can RBI continue to engage in buybacks with a view to providing liquidity to the market to subscribe to fresh issues of securities? Would it not be defeating the purpose inherent in stripping RBI of public debt management?
On the stock side, outstanding internal liabilities, including market borrowings, went up from Rs 24.36 lakh crore at the end of 2006-07 to Rs 41.81 lakh crore at the end of 2011-12, recording an annual growth rate of 11.4 per cent. The data on debt do not tell the whole story. They do not include unpaid bills, pending refunds of income tax and so on, in the absence of accrual-based accounting. Besides, contingent liabilities are a potential charge on the resources of government.
The Debt Service (DS) ratio, measured as a proportion of DS to revenue receipts, rose from 48.2 per cent (actual) in 2010-11 to 52.1 per cent (revised estimate) in 2011-12. It is estimated to be 47.5 per cent in 2012-13. As much as 44.9 per cent of the market loans are expected to pay for interest on their outstanding stock in 2012-13 against 40.6 per cent last year. The country is caught in an internal debt trap, being forced to borrow more and more even for paying interest. (See “The Burden of Domestic Public Debt in India” in Reserve Bank of India Occasional Papers, June 1987.)
Economic Survey (2011-12) has disposed of “government debt” in less than 170 words in one para (3.32). It illustrates the warning of the Radcliffe Committee cited at the beginning in treating debt management as a residual in policy making. The paragraph concludes with the following complacent, comforting and congratulatory note: “As against the targets set by the Thirteenth Finance Commission and the Government Debt Report 2010, there has been overperformance in terms of reduction in government debt, driven by the favourable dynamics of the positive and sizeable differential between GDP growth rates and interest rates.” We have to wait for the next Annual Report of RBI for a deeper analysis of the debt problem — not only for the year ahead but the entire Plan period.
The author is an economic consultant and a former officer-in-charge in the department of economic analysis and policy at the Reserve Bank of India