PIIGS is a demeaning acronym for the fiscally profligate European countries of Portugal, Ireland, Italy, Greece and Spain. This group has an average fiscal deficit of about 10% and government debt of about 85% of the gross domestic product (GDP). Compare that with India’s 12% consolidated fiscal deficit and government liabilities of around 90% of GDP. Perhaps PIIGS would be better renamed PIIIGS—you can take your pick which of the I’s should be India.
What’s worse is that several of these European nations have seen a sharp deterioration in their government finances as a result of the recession, whereas India’s fiscal woes go back as far as memory can stretch. If the numbers can be trusted, even Greece ran up a primary deficit only in 2003.
On the other hand, for the better part of the last two decades, India hasn’t seen a consolidated fiscal deficit lower than 7-8%. Bureaucrats and politicians prefer referring only to the narrow Union government deficit while talking about government finances. Only rogue nations such as Argentina, which is known for having defaulted three times in the recent past on its sovereign debt, resort to such definitions on fiscal issues. Why is it then that India isn’t mentioned in the same breath as the other European countries? The primary reason is that these nations finance their fiscal deficit quite heavily externally, whereas India has a domestic, captive market for its debt. This doesn’t mean that India is in the clear; in fact, history and lessons learnt from Japan would suggest that such a model can cause the problem to inflate to gigantic proportions, and if continued along this path, the blow-up can be spectacular.
Most of the government debt crises that hit the global media tend to have external debt involved—the Asian, Latin American, Russian crises of the 1990s and India’s own crisis of 1991 all involved copious amounts of external debt. However, there’s nothing stopping domestic debt crises either—few people know that France in the 1950s and Italy in the 1970s had huge blow ups related to internal debt; one of Argentina’s defaults was on its internal debt too. By cultivating a domestic, captive market for the debt and a willing central bank supporting the exercise, all we are doing is inflating the problem to unsustainable levels and encouraging the same irresponsible spending, corruption and the bloated public sector.
Over the years, Japan has always had eager customers for its debt—its own domestic financial institutions. The pension funds, insurance firms and banks own about three-fourth of the government debt, the central bank owns another 10%. As a result, government liabilities have ballooned from around 60% of GDP 20 years ago to 180% of GDP today. The break-up of the holders of Indian government debt is uncomfortably similar to Japan’s, so is the trajectory the debt growth is on. In Japan’s defence, the meat of their debt increase was during their lost decade of economic malaise, something that doesn’t hold in India’s case. Now Japan finds itself with an ageing and retiring population increasingly living off its savings. The savings rate is declining dramatically and elderly Japanese are putting away less towards their nest egg and hence have that much less to fund the government’s spending.
In India’s case, the private and household sector savings will continue growing for the foreseeable future, thus there’s ample scope to further inflate the government debt bubble. However, even at its immense debt load, Japan’s interest expense is only about 18% of its tax revenue, in India this is already about 40%. The higher interest rates in India mean that a much lower debt load than Japan can be supported. At the same time, nothing much has been done to broaden tax enforcement.
What is also reprehensible is the central bank monetizing the fiscal deficit—it happens in Japan and it happens in India. Quantitative easing—buying government debt to lower overall interest rates—as part of monetary policy is one thing, but the incestuous intersection of fiscal policy and monetary policy in which the central bank funds the government is a long-term detriment to India’s acceptability on the global platform. If not anything else, the central bank printing money to fund the government is inflationary. The central bank can’t but be aware of these issues, but prefers to pull the wool over its own eyes.
No discussion on government debt would be complete without the US—the largest issuer of debt by a large margin. However, a large part of US’ sustained deficit has to do with its entitlement programmes—social security, Medicare (health insurance for the elderly) and Medicaid (health insurance for the poor). India has managed to run a consistent fiscal deficit without establishing any of these safety nets for its people. Where does the money go then?
Infrastructure spend is far below what it should be and a large part of it is in the private domain. Asinine vote bank policies such as forgiving farmer loans do nothing for the long-term efficiency of the farm sector or for the wellbeing of the farmer. If it isn’t politicians at the Centre wrecking the government’s finances, the states are always ready to pitch in.
Japan has been advertising on taxi cabs and using media personalities to market its debt to retail investors. Before India, too, comes to the point where it needs to hunt for the marginal buyer for its debt, it will be well advised to get its fiscal house in order.
Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They write every other Thursday. Send your comments to firstname.lastname@example.org