Monday, December 11

The Debt Trap

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Greece and certain other countries of Europe recently faced a public debt crisis. The government’s debt had increased to such an extent that it was unable to repay. Other countries of the European Union have been able to stave off the crisis for the time being. But the problem of sovereign debt persists in several countries, including Greece.
In 1950-51, India’s public debt was only Rs. 2054 crore. It is expected to reach Rs. 2,898,799 crore by 2010-11. If we add post office savings and Provident Fund,  the total liability of the Centre will reach Rs 3,944,598 crore. The most worrying aspect is that it is increasing by Rs. 3 to 4 lakh crore per annum.
In terms of the 2010-11 budget, the government will borrow approximately Rs 2.5 lakh crore just to pay interest on the loans previously taken. This pressure of debt compels the government to enhance taxation and thereby increase intervention in the economy. As per the economic principles, the governmental intervention should be minimal in order to avoid distortions.
The government resorts to additional taxation to overcome additional borrowing. It borrows from the Reserve Bank, which in turn prints more currency notes to meet the government’s demand. In the recent past, this action of the government, has triggered inflation almost to uncontrollable rates. And it is the common man who has to bear the brunt.
The rise in government debt has brought the world to the brink. The intensity of the problem can be gauged by its ratio to GDP or by the rate of growth of public debt. In its examination of the crisis, The Economist features a ‘clock’  on its website.  It shows that public debt is rising every second.
By 2011, the world’s total government debt  is expected to reach $ 42.5 trillion. The world’s total GDP is $ 58 trillion. Government debt is much higher in rich countries. Despite much higher GDP, the ratio of public debt to GDP is 63 per cent in the USA, 80 per cent in the UK, 82 per cent in France, 77 per cent in Germany and 82 per cent in Canada. To meet the growing public expectation over populist measures, public spending is multiplying even in developing countries. And due to their inability to raise sufficient revenues, public debt is also on the rise. In countries where it was 53 per cent of the GDP, it has now increased to 56 per cent. The major issue of concern is that public debt is growing at the rate of 15 per cent per annum; ten years ago,  it was increasing by only 6 per cent.
In India, the increasing government debt can have several repercussions on the economy. One major impact is that due to repayment obligations, the government is constrained to spend less on important social sectors such as health, child and women’s welfare. The Union Budget allocates Rs 2.5 lakh crore for interest repayment. Obviously with a budget size of nearly Rs 11 lakh crore, the options for government expenditure are very limited, more so when the fiscal deficit is at about Rs 4 lakh crore. For the past several years spending on social sectors has been limited to only 8 to 9 per cent of the budget. Health and education are the worst victims. Due to inadequate expenditure on education, the government sector institutions could not expand in keeping with the needs of  the population. This has facilitated the expansion of private educational institutions. Private schools, private medical and engineering collegesand private educational institutions, and the increasing number of managementinstitutes charge exorbitant fees. The poor are the worst sufferers. They are deprived of education, and the development of human resources suffers a setback.
Public health is another victim of insufficient public expenditure. Once again it is the poor who are the worst sufferers. The facilities in government hospitals are decrepit. Hence the boom in private hospitals and nursing homes. The poor are selling off their assets to afford the cost of treatment in private hospitals.  The Prime Minister has said that farmers in Vidarbha often commit suicide when they run into debt to get their family members treated.
Apart from the social sector, the expenditure on roads, power, ports, and drinking water is also affected by the increase in government debt.
As a result of the wasteful expenditure by the past and present regimes, the future generations will be compelled to face the exploitation of private corporations in the infrastructural sector. To keep in check the growing public debt, it is imperative to keep wasteful government expenditure and populist spending under control. Some years ago, the government enacted the FRBM Act and placed a limit on the fiscal deficit under 2.5 per cent of the GDP. But the government has itself reneged on its own commitment and has reconciled itself to a fiscal deficit of 5.5 per cent of the GDP in the  2010-11 budget. In 2009-10, it was even higher ~ at 6.7 per cent of the GDP.
The FRBM Act should seriously be enforced. The fiscal deficit should not be allowed to exceed 2.5 per cent of the GDP. In  case it is marginally higher, it should help facilitate higher expenditure on education, health and other social sectors, and on  infrastructure or agricultural development.


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