Per capita debt of a country and why it should concern you
In a reply to the question asked in the Lok Sabha on 10 March, Arjun Ram Meghwal, minister of state in the ministry of finance said that, there has been a rise of 9.2% in per capita total debt (internal and external) as on 31 March 2016 as compared to 31 March 2015. He further added that the per capita internal debt increased by 9.3%, while the per capita external debt increased by 5.1% during the given period.
In absolute terms, the per capita total debt increased by an amount of Rs4,525, and reached Rs53,796 on 31 March 2016. Let’s read more about the per capita debt and why we should be concerned about it.
Per capita debt
According to the IMF, external debt is defined as “the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to non-residents by residents of an economy.”
Similarly, internal debt is owed by residents of an economy to residents who lend funds to the government.
According to India’s Constitution, the central government can borrow from external sources but state governments can borrow only from internal sources.
Based on the borrowings of both central and state government, total debt is calculated and accordingly per capita debt is determined. It is calculated by dividing the amount of total outstanding debt of the government by the number of residents in the country.
The total government debt consists of funds borrowed from external sources (foreign entities) as well as funds borrowed from internal sources (domestic entities).
The external sources of debt include agencies like the International Monetary Fund (IMF), export credit, commercial borrowings, and non-resident Indian deposits.
On the other hand, internal borrowings can be from—among other sources—individuals, firms, companies and even other government agencies. Small savings schemes such as Public Provident Funds, National Savings Certificate, and Kisan Vikas Patra, along with government bonds and the liabilities towards provident fund of government employees are also considered debt for the government.
Even currency is considered a form of debt.
Why governments borrow
“The primary reason for the increase in debt has been increase in government borrowings, majority of which has been due to increase in internal debt, which contributes to 97% of total debt,” said minister Meghwal in his reply to the Lok Sabha.
And when its expenditure exceeds the income, we have a situation of fiscal deficit. Not all expenditures of a government can be deferred or avoided. To ensure that the government’s work can carry on smoothly, borrowings can become necessary.
And that is the reason governments need to take on debt. The major portion of a government’s earnings come from taxes. When money from this source is not enough to meet the expenses, the central and state governments are allowed to borrow and bridge the fiscal deficit. However, borrowings are allowed to proceed unchecked, it can lead to financial difficulties.
Already, the debt to GDP ratio in the country is very high. This is evident from the fact that general government debt (GGD) to gross domestic product (GDP) ratio stood at 68.6% at end-March 2016. This means that the amount of debt was 68.6% of the GDP at that point in time.
The GGD represents the indebtedness of the government sector (including both central and state governments). Read more about the perils that can arise from this situation at: bit.ly/2mvHBeC.