High private sector debt contributed to last boom in India

High private sector debt contributed to last boom in India

The boom in the economy from 2003 to 2008 can be attributed to several reasons. Both savings and investment rates went up. Gross domestic capital formation as a percentage of gross domestic product (GDP) increased from 24.1% in 2000-01 to 39% in 2007-08. The boom in the global economy also helped—the world economy expanded by 5.3% and 5.4% in 2006 and 2007, respectively. Investors discovered the Brics (Brazil, Russia, India and China) and a flood of money, spurred on by low interest rates in the developed world, found its way into the emerging markets. That helped Indian firms raise money and invest. Both consumption and investment did well.

However, private debt (household + corporate) has increased. Note that the rise in private debt during the last decade has been steep: from 32.5% of GDP in FY 2000 to 63%. Of this, Citi says, domestic debt is 50% of GDP, while foreign debt is 13%. The growth in private debt was, of course, from a very low base. Contrast the increase in private debt in Italy, from 126% of GDP in 2000 to 181% in 2010. Or the rise in Spain’s private debt from a high 187% to a stupendous 283% over the period.

But while private debt in India is still very low, its increase undoubtedly contributed to the high growth of the economy during the last boom.

Also See | Steep trajectory (PDF)

PDF by Yogesh Kumar/Mint