The debt pile: IMF sounds a warning about growing levels of debt

The International Monetary Fund (IMF) has released a set of indicators for worldwide debt that has raised many valid concerns. It estimated that global debt was now $164 trillion, 225 per cent of global gross domestic product (GDP). This is, says the IMF, a "historic high"; the world economy is 12 per cent deeper in debt than in 2009, "with China as a driving force". In advanced economies, the driver of increased debt since the financial crisis is government, with states running deficits in order to counteract the effects of the crisis in their economies. In developing economies, meanwhile, the private sector has seen debt increase; the IMF says that the average level of debt for emerging economies, at 50 per cent of GDP, has not been seen since the 1980s debt crisis. Yet, even for developing economies, the IMF argues, it is governments that are at fault: "Underpinning debt dynamics are large primary deficits, which are at their highest in decades in the case of emerging markets and developing economies."

India's general government debt, at 69 per cent of GDP, according to the IMF, is significantly high for a country at its level of development. While fast growth has led to management of the problem over the past two decades, it is clear that the government's chronic overspending has built up a debt burden that is reaching dangerous proportions. The governor of the Reserve Bank of India, Urjit Patel, warned as much in a speech last year: "Our general government deficit (that is borrowing by the Centre and states combined) is, according to IMF data, amongst the highest in G-20 countries. In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade… Borrowing even more and pre-empting resources from future generations by governments cannot be a short cut to long-lasting higher growth." The government should take Mr Patel's words to heart. In response to more demands for spending, the last Union Budget saw the Centre relaxing the fiscal consolidation path that had been set years previously. Such demands will be even more acute in an election year. Yet the room for expansion of the primary deficit is minimal. Already, tied spending — entitlements, wages and pensions, interest payments and the like — takes up a large proportion of the government's budget. It should be wary of expanding spending unless it knows that its revenue intake is permanently higher following the introduction of the goods and services tax.

India's level of debt may not be large enough to distort the world economy, as is the case in the United States, Japan or China - the three countries the IMF blames for the debt pile-up. But it does have severe implications for savings and investment within the Indian economy. The expansion of state and central deficits, alongside easy recourse to the debt market for quasi-sovereign borrowing to finance various infrastructure projects, is one of the causes of a shortage of capital. India is living through a classic case of "crowding out", where government borrowing is high enough to depress investment and thus growth. To revive growth, the government must first address its overspending.