The Growth of Indian Public Debt- Raja. J. Chelliah IMF Report

8/10/2019 The Growth of Indian Public Debt- Raja. J. Chelliah IMF Report

1/51

I M F W O R K I N G P P E R

c

1991 International M one tary Fu nd

T h i s isawo r k in g paper and the au thor wo u ld w e l co me an y

co mmen t s o n

the

present text. C i t a t ions s hou ld refer

to an

unpub l i she d man u s c r i p t men t i o n i n g the au thor and the

dateofi s suanceby theIn ternat ionalMone ta ry F u n d .The

v ie w s

expressedarethoseof the author anddo notneces -

sar i ly

represent those

of

th e

Fu n d .

WP/91/72

INTERNATIONAL

MONETARY FUND

F i s c a l A f f a i r s Department

The GrowthofIndian P u b l i c Debt--

Dimensionsof the ProblemandC orrecti v e Measures

PreparedbyRajaJ.

C h e l l i a h

1/

Authorized f orDistr i b u t ionbyV i t o Tanzi

J u l y

1991

Abstract

This

paper tracesthec ausesof therapid growthofIndia's p u b l i c

debt,with special referencetoi n t e r n a l debt. Itthen demonstrates

thatthe growthofdebt woul dbecomeunsustainabl eby the end of the

1990si fthe

present trend s

c ontinue. It

develops

a

methodology

to

i t e r a t e

thepathofgrowthofdebttod is co verthesustainabl e l e v e lof

the

primary

d e f i c i t . F i n a l l y ,

i t suggests concretemeasures

tobring

down theprimary d e f i c i t .

J EL C l a s s i f i c a t i o nNumber

H63

1/ The main partof t h i s paperwaswritten while Professor RajaJ.

C h e l l i a hof the

National

I n s t i t u t eof

P u b l i c Finance

andP o l i c y

(NIPFPO),NewDelhi, India,was a V i s i t i n g Scholarat the F i s c a l A f f a i r s

Departmentof the

International Monetary Fund.

The

basic data

were

co l le cte d

at the

I n s t i t u t e

at New

Del hi ,

where

revisions

were

a l so

carried

out. Helpingatheringandc o d i f y i n g data fromR.D.Guptaand

computational

assistance

fromK.K. A t r i (bothofNI PF P),andfurther

computational

assistanceinmaking

projections

from J . Brondoloof FAD,

aswe l lasfromK.K. A t r iare

g r a t e f u l l y

acknowledged. Thanks f oruse-

f u l

commentsare due to

V i t o

Tanzi, Jo ce l y n Horne,Anupam Basu, Shankar

Acharya,andSusan Sc hadl er. Theauthoris

responsib le

f oranyerrors

that remain.


2/51

- i i -

Contents Page

I .

I n t r o d u c t i o n 1

1 . O b j e c t i v e s 1

2 . D e f i n i t i o n o f p u b l i c

debt

a n d

d e f i c i t

2

3 .

Coverage

a n d

assumptions

3

4. T he p u b l i c

debt

p o s i t i o n i n t h e

base

year (1989/90) 5

5 .

Growth

o f p u b l i c

debt--1990/91 through2000/01:

Assumption I 7

6.

Debtdy namics

a n d r e l a t e d

conceptual

i s s u e s 18

7.

Growth

o f

debt--scenario

under

A ssumption

I I 24

8 . M a i n t a i n i n g a constant p r o p o r t i o n o f primary

d e f i c i t

t o G DP 2 6

9.

Measures

t o reduce t h e

primary d e f i c i t r a t i o

3 0

1 0 . A suggested

accounting

framework f o r a p p r a i s a l

o f

long-term

f i s c a l

stance

3 9

Text

Tables

1 . I n d i a : T he L e v e l o f

Debt

a n d i t s Composition 6

2 . I n d i a : P r o j e c t i o n o f t h e Growth o f

Debt

t o G DP

Under

Assumptions I a nd I I 8

3 . I n d i a : Growth o f I n t e r e s t o n P u b l i c

Debt

UnderAssumptions I a nd I I 9

4. I n d i a : Gross I n t e r e s t

Payments

o n T o t a l

Debt

a s

Percent

o f

Gross

C e n t r a l

Government Revenue

11

5. I n d i a : R a t i o o f Borrowing (Domestic a n d T o t a l )

t o G D P

UnderAssu mptions

I a nd I I 12

6. I n d i a : N et I n t e r e s t

Payments

o n T o t a l

Debt

a s

Percent

o f Ne t C e n t r a l Government Revenue 13

7. I n d i a : Average I n t e r e s t

Rate

o n T o t a l

Debt

14

8. I n d i a : N et Domestic Borrowing a s a

Percent

o f

Gross DomesticSavings 16

9. I n d i a :

Primary D e f i c i t

a s a

Percent

o f G DP 2 5

1 0 . I n d i a :

SimulatedDebt:GDP

R a t i o 28

1 1 . I n d i a :

Simulated

Debt:GDP R a t i o 29

1 2. I n d i a : SimulatedDebt:GDP R a t i o 3 1

1 3. I n d i a : Growth i n Revenue

Expenditure

o f t h e

C e n t r a l

Government

33

1 4. I n d i a : U t i l i z a t i o n o f C a p i t a l Receipts 37

AppendixTabl e

1 5. I n d i a : Decomposition o f

Growth

i n t he

Debt

o f C e n t r a l

Government 4 3

Appendix Decomposition o f Growth i n th e

Debt

o f C e n t r a l

Government 4 2

Chart I . Debt:GDP R a t i o 44

References 4 5


3/51

- ii i -

Summary

Th is

paper

examines p u b l i c debt i n

I n d i a

and conclu des that i f present

trends of b orrowing by the

Government

of

I n d i a

c ontinue, the cou ntry

w i l l

plunge i n t o

f i n a n c i a l

c r i s i s by the end of the 1990s. I t analys es the

cau ses of the growth of debt by tra c i ng trends i n the t o t a l

f i s c a l d e f i c i t

and i n the primary

d e f i c i t .

I n the base year 1989/90, the primary d e f i c i t

was nea rl y 4 percent of GDP, whi l e the t o t a l d e f i c i t was take n to be 7.6

perc ent. On the b as i s of anumberof conserv ativ e (fav orab l e) assumptions

and u si ng a simple proje ct ion methodology, th e a n al y s i s demonstrates th at

maintaining

the primary

d e f i c i t

even at a

l e v e l

of 3.5 percent i s u nsu stai n-

a b l e because t h i s would

raise

the debt-to-GDP r a t i o to 77.4 perc ent i n

2000/01from 60.2 p erc ent i n1989/90, and the d efi c i t-to- GDP r a t i o to nearl y

10 percent. Interestpaymentswoul d then ab sorb 6.4 perc ent of GDP, ca st in g

an unbearable burden on thebu dget.

The

paper

showsthat the f i r s t stage of f i s c a l adjustment should

con s ist of

measures

to enable the

Government

to reduce the primary

d e f i c i t

t o 2.5 per c ent of GDP by the y ear 2000/01. I f t h i s i sdone, the

growth

of

p u b l i c debt w i l l slow and the t o t a l d e f i c i t w i l l be c ontai ned around 8 per-

c ent of GDP i n

2000/01.

I n ord er to reduc e the primary d e f i c i t to 2.5 perc ent of GDP, ste ps

mustbe taken to reduc e the d e f i c i t on the

b u dget's

revenue acc ount to

takemuchof the f inan c in g of the p u b l i c

enterprises

out of the b udget,

t o s t a b i l i z e the

rate

of c a p i t a l formati on on government acc ount, to

raise

the return on government len d i ng and inv estment, and to i nc reas e the income

e l a s t i c i t y

of taxes through tax reform. Giv en the waste and s l a c k i n

Government,

and i n vi ew of

c erta i n u n j u s t i f i a b l e

s u b s i d i e s ,

expenditure

red u c tion sho u l d be emphasizedmorethan tax i nc reases . Three steps are

needed: narrowing the

scope

of

gov ernment a c t i v i t i e s ,

freezing

government

employment,and

c u t t i n g s u b s i d i e s .

To reduc e c a p i t a l expenditure, the

Government shou l d p r i v a t i z e pu b l i c enterprises and c l o s edownor s e l l

i n e s s e n t i a l loss-making ventu res, whi l e compensating or r e h a b i l i t a t i n g the

workers who

w i l l

be d i s p l a c e d .

F i n a l l y ,

the P l anning Commission's approach

o f approvi ng the

growth

of expenditure w i t h i n a f i ve - y ear horiz on without

regard to how the hi gher expend itu re w i l l be su stained i n the f ut ure ,must

be

abandoned.

Oncethe f i r s t stage of adjustment i s completed, l oan fi nanc e shou l d be

l a r g e l y

l i m i t e d to c a p i t a l expenditures,whose

benef it s

c ou l d be spread over

anumberof y ears . The

paper

ends by sug gesting an acc ounting framework

thatwoul d help regu l ate and eval u ate the r o l e of debt i ngov ernment

finance.


4/51


5/51

I .

I n t r o d u c t i o n

1. Q b j e c t i v e s

The

u n i nterr u pte d

and

r a p i d

growth of

p u b l i c

debt i n

I n d i a

d u r i n g

t h e 1980s

i s on l y a

man i festat i on

of the deepening

f i s c a l c r i s i s t h a t

has ov ertake n the c ou ntry .

E a r l i e r

on,

most In d ian

economists had

h e l d

t h a t

the growth of p u b l i c debt i n pl anned magnitud e was normal and

d e s i r a b l e

i n a d e v e l o p i n g c o u n t ry

s i n c e government

b orrowing represented

t h e a bs orpt ion by the

Government

of a

part

of domestic sav i ngs and of

t h e

i n f l o w of c a p i t a l from ab road, to

f i nan c e

and promote c a p i t a l forma-

t i o n i n the p u b l i c

s e c t o r

and p r i o r i t y areas i n the p r i v a t e

s e c t o r .

The

r a t h e r complacent

a t t i t u d e

togov ernment budget d e f i c i t ( i n the broad

sens e) and the r e s u l t a n t growth i n p u b l i c debt was based on the assump-

t i o n s

t h a t

b orrowed fu nds would be used only f o r c a p i t a l purposes and

t h a t the r e s u l t a n t inv estments would yet y i e l d adequate d i r e c t or

i n d i r e c t r e t u r n s . The assu mptions

were o f t e n

not

f u l f i l l e d

i n p r a c t i c e .

The

manner

i n w hi c h

c a p i t a l

fu nds from the dom esti c

p r i v a t e s e c t o r

were

r a i s e d

and i t s impact on the a l l o c a t i o n of reso ur c es a l s o have not been

a d e q u a te l y

s t u d i e d

and tak en note of . The

f i s c a l c r i s i s

and the a t t e n -

dant exponential growth of p u b l i c debt has a r i s e n , not merely because of

revenue ex pend it u res ru nning ahead of

c u rrent

rev enues, but a l s o because

c a p i t a l e x p e n d i t u r e s

f i nan c e d

by b orrowing have no t been p r o d u c t i v e of

adequate

r e t u r n s .

P u b l i c debt has

grown

ver y f a s t d u r i n g the 1980s--both a b s o l u t e l y

and i n r e l a t i o n to GDP. The t o t a l debt of the

C e n t r a l

and s t a t e govern-

ments

1/,

a c c o r d i n g

to b u dgetary f i g u r e s ,

grew

from Rs

215.77 b i l l i o n

at

t h e

end of

1970/71

to Rs 663.51

b i l l i o n

at the end of 1980/8 1. From

t h i s l e v e l ,

i t

grew r a p i d l y

to Rs 2,637.58

b i l l i o n

at the end of

1988/89.

As a

proport i on

of GDP,

t h i s

meant

a

f a l l

from 50 perc entat

t h e

end of Marc h, 1971, to 48.9 per c ent at the end of 198 0/81, and then

a

r i s e

to 67.4 perc ent at the end of

1988/89.

Of the t o t a l p u b l i c debt

( c enter

and

s t a t e s ) , e x t e r n a l

debt acc ounted f or Rs

252.30 b i l l i o n

or

9.57 per c ent of the t o t a l at the end of 1988/89.

The debt of the

Government

of I n d i a (GOI)

grew

from Rs 191.93

b i l -

l i o n

at th e end of

1970/71

to Rs 594.49

b i l l i o n

at the end of 1980/8 1,

and to Rs

2,282.41 b i l l i o n

at the end of

1988/89;

of

t h i s ,

i n t e r n a l debt

ac c o unted

f or Rs 2,027.02

b i l l i o n .

That i s ,

i n t e r n a l

debt at the end of

1988-89 formed 51.8 perc ent of GDP i n t h a t y e a r .

I t

i s

c l e a r

t h a t d u r i n g rec ent y ears the p u b l i c debt in I n d i a has

been

growing at a

r a t h e r

a l a r m i n g

r a t e , with

the bu dget

d e f i c i t s

i n c r e a s i n g

as a

proportion

of revenues as w e l l as of GDP. 2/

A l o n g s i d e ,

t h e proportion

of the

c e n t r a l

government

d e f i c i t f i nan c e d

by net Reserve

1/

E l i m i n a t i n g do u b le c o u nting and i g n o r i n g the

smal l

p o r t i o n of

c e n t r a l

government

s e c u r i t i e s

h e l d

by the s t a t e governments.

2/ The r a t i o

d e f i c i t

to GDP was arou nd 8 per c ent i n1989/90 for th e

GOI.


6/51

2

Bankof

I n d i a

(RBI )

c r e d i t

has

i n c r e a s e d

from

l e s s

than16percentin

t h e e a r l y

1970s

ton e a r l y one

t h i r d

d u r i n g the l a t t e r h a l f of the 1980s.

T h i s

b u rgeoning

of

p u b l i c debt

and the

d i s p r o p o r t i o n a t e

and r i s i n g

share

o f RBI c r e d i tin the

t o t a l

f i n a n c i n g of c e n t r a l

government

b udget

d e f i -

c i t has n a t u r a l l y g i v e n

r i s e

to s e r i o u s c oncernamong f i n a n c i a l e x p e r t s

as w e l l

as the

general p u b l i c . Q u e s t i on s

have been

r a i s e d about

the

medium-or l ong-term

l

s u s t a i n a b i l i t y of thedebtandi t s b u r d en ,and

f e a r s

have been

expressed about the

Government

and thec o u n t r y )

f a l l i n g

i n t o debt t r a p s , e x t e r n a l

and

i n t e r n a l .

In c o n s i d e r i n g thegrowthof p u b l i c

debt/GDP

r a t i oandi t scon-

seq uences,not

j u s t i n t e r n a l

d e b t ,butb oth

i n t e r n a l

and

e x t e r n a l

debt

s h o u l d

be

i n c l u d e d .

However,thegrowthof

e x t e r n a l

d e btat a

f a s t

pace

and beyond a

l i m i t

c r e a t e s i t sown s p e c i a l problems, whichare a d d i -

t i o n a l

to theproblems cau sedby ther i s i n g debt/GDP

r a t i o

ass u c h ,and

a

d i s c u s s i o n

of theproblems cau sedby

e x t e r n a l

debt must take noteof

t h e

t o t a l ,

e x t e r n a l

debt

of the

economy

as a

whole

and not j u s t t h a t of

t h e p u b l i c

orgovernment

s e c t o r .

In t h i s paper,

a t t e n t i o n

i sf o c u s e don

t h e i n t e r n a l p u b l i c

debtof the GOI,a l t h o u g hthe

GOI's

e x t e r n a l

d e btis

a l s o taken i n t o a c c o untat thea p p r o p r i a t e stageforp r o j e c t i n g thepath

o f

growthof t o t a l

p u b l i c

debt/GDP

r a t i o

and thegrowthof

i n t e r e s t

b u rden.

Threeof themost r e c e nt

s t u d i e s

of theprobl emof the

r a p i d

growth

o f I n d i a n p u b l i c deb t, namely , Rangarajanet al( 1 9 9 0 ) , B u i t e r and P a t e l

( 1 9 9 0 ) ,andGenberg (1989b ) have

c a r r i e d

outmathematic al

e x e r c i s e s ,

on

t h e b a s i s

of an i m p l i c i t or e x p l i c i t model, to

p r e d i c t

thegrowthand

n o n s u s t a i n a b i l i t y of the I n d i a n p u b l i c d e b t . The purposeof t h i spre-

sent paper is not to

e x p l o r e

thec onsequences of thegrowthof

p u b l i c

debt

on theb a s i s of an

e x p l i c i t

model, which takes

i n t o

a c c o u n t

the

i n t e r a c t i o n s

between

thegrowthof

debt/GDP r a t i o ,

r e a l i n t e r e s t r a t e ,

growthof theeconomy ,and i n f l a t i o n . Thepurposeof

t h i s

paperi s

r a t h e r

todemonstrate to thep o l i c y m a k er s

t h a t

the

r a t e

ofgrowthof net

p u b l i c b orrowing witnessed i nrecent y earsis not s u s t a i n a b l e onreason-

a b l e

ass umptions

r e g a r d i n g i n t e r e s t

andgrowth

r a t e s

even i ftheseand

t h e

i n f l a t i o n

r a t e

are

h e l d i n v a r i a n t

to the

r a t e s

ofgrowthof

d e f i c i t / G D P and

deb t/GDP

r a t i o s . A f t e r s u c h d e mon strat i on , a t t e n t i o nis

c on c entrate donworkingout thedegreeofadj u stment needed to r e s t r i c t

t h e

growthof

i n t e r n a l

debtto a

s u s t a i n a b l e

l e v e l ,and on the

p o l i c y

measures

r e q u i r e d to move toward t h a t o b j e c t i v e . D uringthec o u r s eof

t h e d i s c u s s i o n ,

anattempt is

a l s o

made to c l a r i f y somec o n c e pt u a l

i s s u e s.

2.

D e f i n i t i o n

of

p u b l i c

debtand d e f i c i t

In t h i s paper,by

p u b l i c

debt of

I n d i a ,

we mean the

i n t e r n a l

and

e x t e r n a l debtof the GOI. The

most

comprehensive d e f i n i t i o n of I n d i a n

p u b l i c debt would

i n c l u d e

thei nde b tednessofa l lthet h ree

l e v e l s

of

Government

anda l l

p u b l i c e n t e r p r i s e s ,

to thedomestic

p r i v a t e s e c t o r

and to thee x t e r n a l s e c t o r . S i n c ewe aremainl y concerned w i t h i d e n -

t i t y i n g theb u d getary

p o l i c y

changes to be

e f f e c t e d

by theGOI- -the main


7/51

- 3 -

a c t o r i n t h e f i e l d - - w e a r e c o n f i n i n g o u r s e l v e s t o t h e d e b t o f t h e G O I .

I t s o h a p p e n s t h a t , a s o f t o d a y , t h e m a j o r p a r t o f t h e d e b t o f c e n t r a l

p u b l i c e n t e r p r i s e s a n d o f t h e s t a t e g o v e r n m e n t s c o n s i s t s o f t h e i r i n d e b -

t e d n e s s

t o t h e G O I .

H e n c e ,

t h e

d e b t

o f G O I i s a

g o o d

i n d e x

o f t h e

I n d i a n

p u b l i c d e b t .

T h e R B I i s w h o l l y o w n e d b y t h e G O I . W e

t r e a t

R B I a s a p u b l i c

f i n a n c i a l e n t e r p r i s e a n d e x c l u d e i t f r o m t h e d e f i n i t i o n o f t h e G O I .

S i n c e t h e l i a b i l i t i e s o f G O T t o R B I a r e t r e a t e d a s p a r t o f i t s d e b t , w e

a r e a b l e t o c o n s i d e r s e p a r a t e l y R B I c r e d i t t o G o v e r n m e n t , a n d d i s c u s s

i t s c o n s e q u e n c e s .

( H o w e v e r ,

w h i l e d i s c u s s i n g t h e i n t e r e s t b u r d e n o n t h e

c o m m u n i t y a r i s i n g f r o m p u b l i c d e b t , i t m a y b e p r o p e r t o e x c l u d e t h e

i n t e r e s t p a i d t o R B I s i n c e a l m o s t a l l o f i t c a n , i n t h e o r y , b e r e r o u t e d

t o G O I a s d i v i d e n d s . ) B o r r o w i n g f r o m R B I i s e q u i v a l e n t t o p r i n t i n g

b a s e ) m o n e y , w h i c h i s t a k e n a s s e i g n o r a g e . S e i g n o r a g e e n a b l e s t h e

G o v e r n m e n t

t o o b t a i n r e s o u r c e s w i t h o u t

i n c u r r i n g

l i a b i l i t y t o r e p a y o r

p a y

i n t e r e s t .

B o r r o w i n g f r o m

t h e R B I

d o e s

n o t i n

e f f e c t

e n t a i l

a n y

l i a b i l i t y t o r e p a y , b u t i n t e r e s t i s p a i d o n t h e

g o v e r n m e n t

d e b t h e l d b y

t M o s t o f

t h i s

i n t e r e s t i s n o t r e r o u t e d t o G O I b u t i s s p e n t i n

v a r i o u s w a y s b y R B I a s a l l o c a t i o n o f i t s p r o f i t s . W e a r e t h e r e f o r e

r e c k o n i n g t h e l i a b i l i t i e s o f t h e G O I t o R B I a s p a r t o f p u b l i c d e b t , a n d

i n c l u d i n g

t h e i n t e r e s t t h e r e o n i n t h e i n t e r e s t o n p u b l i c d e b t .

T h e b u d g e t d e f i c i t h a s

b e e n

d e f i n e d i n m a n y w a y s . S i n c e w e a r e

d e a l i n g

w i t h p u b l i c d e b t a n d i t s g r o w t h , w e d e f i n e

g o v e r n m e n t d e f i c i t

a s

t h e r e q u i r e d n e t b o r r o w i n g 1 / b y t h e

G o v e r n m e n t

t o c o v e r t h e g a p

b e t w e e n

e x p e n d i t u r e s a n d r e v e n u e s . S i n c e p a r t o f n e t b o r r o w i n g i s u s e d f o r

l e n d i n g ,

e x p e n d i t u r e s a r e t a k e n t o i n c l u d e t h o s e o n ( a ) g o o d s a n d

s e r v i c e s ;

( b ) s u b s i d i e s a n d t r a n s f e r s o t h e r t h a n i n t e r e s t ; ( c ) i n t e r e s t ;

a n d

( d ) n e t

l e n d i n g , i n c l u d i n g i n v e s

t m e n t

i n

e q u i t y . T h i s

g a p i s

g e n e -

r a l l y r e f e r r e d t o a s

f i s c a l

d e f i c i t . F i s c a l

d e f i c i t

m i n u s i n t e r e s t

p a y m e n t

h a s

b e e n

d e f i n e d a s p r i m a r y

d e f i c i t

i n d i c a t i n g t h e g a p i n

r e s o u r c e s o c c a s i o n e d b y t h e c u r r e n t p o l i c i e s o f t h e G o v e r n m e n t .

T h u s ,

p r i m a r y

d e f i c i t

= e x p e n d i t u r e o n g o o d s a n d s e r v i c e s + s u b s i d i e s a n d

t r a n s f e r p a y m e n t s

o t h e r t h a n i n t e r e s t + n e t l e n d i n g - c u r r e n t r e v e n u e s

i n c l u s i v e o f i n t e r e s t a n d d i v i d e n d r e c e i p t s . I f p r i m a r y d e f i c i t i s

z e r o ,

i t w o u l d m e a n t h a t

g o v e r n m e n t

e x p e n d i t u r e o n t h e t h r e e i t e m s

m e n t i o n e d i n t h e

a b o v e

e q u a t i o n i s c o n f i n e d w i t h i n t h e

l i m i t

o f t o t a l

r e v e n u e s r a i s e d . 2 /

3 . C o v e r a g e a n d a s s u m p t i o n s

T h e s t u d y c o v e r s

t h e

i n t e r e s t - b e a r i n g o b l i g a t i o n s

o f G O I

e x c l u d i n g

a )

s e c u r i t i e s

i s s u e d t o t h e i n t e r n a t i o n a l f i n a n c i a l i n s t i t u t i o n s ;

b ) c o m p e n s a t i o n a n d s p e c i a l b e a r e r

b o n d s ;

a n d ( c ) r e s e r v e f u n d s a n d

1 / G r o s s b o r r o w i n g m i n u s r e p a y m e n t ,

i t a n y , o f

p a r t

o f e x i s t i n g

d e b t .

2 / T h e p r i m a r y

d e f i c i t

c a n a l s o b e c a l c u l a t e d a f t e r e x c l u d i n g n e t

e n d i n g f r o m t h e e x p e n d i t u r e s i d e .


8/51

d e p o s i t s . The

d e b t

f i g u r e s

u s e d h e r e

t h e r e f o r e d i f f e r

f r o m

t h e

b u d g e t

f i g u r e s . T h e

d e b t

at th e end of

1 9 8 9-9 0

i s

t a k e n

a s t h e

b a s e

f o r

p r o j e c t i o n s

w h i c h

a r e

e x t e n d e d

g e n e r a l l y up to th e

y e a r

2 0 0 0 / 0 1 .

T o

i n d i c a t e t h e n o n s u s t a i n a b i l i t y of th e f i s c a l

p o l i c y

s t a n c e

o f

r e c e n t

y e a r s ,

we f i r s t

p r o j e c t

t h e

g r o w t h

o f i n t e r n a l

d e b t

o n t h e

a s s u m p t i o n t h a t n e t b o r r o w i n g f r o m d o m e s t i c s o u r c e s , e x c e p t R B I , w o u l d

grow a t th e same r a t e a s i n t h e

l a s t f i v e y e a r s ( A s s u m p t i o n

I ) .

B o r r o w i n g f r o m

R BI i s

t a k e n

t o

r e m a i n c o n s t a n t

as p r o p o r t i o n o f GDP.

D u r i n g t h e p r o j e c t i o n

p e r i o d ,

n o m i n a l

G DP i s assumed t o

grow

a t t h e r a t e

o f

12 p e r c e n t pe r annum; c o m p r i s i n g a r e a l g r o w t h

r a t e

o f 5.5 p e r c e n t

( a s a c h i e v e d d u r i n g

t h e

S e v e n t h P l a n p e r i o d

( 1 9 8 5 - 9 0 ) and as s t i p u l a t e d

i n t h e

E i g h t h P l a n

f o r t h e

p e r i o d 1 9 9 0 - 9 5 ) ,

an d a 6.5

p e r c e n t r i s e

i n

t h e p r i c e l e v e l ( c l o s e t o t h e r a t e o f

i n c r e a s e

i n th e GDP

d e f l a t o r

i n

t h e

1 9 8 0 s ) .

I n

o r d e r

t o

keep

c l o s e

t o

b u d g e t a r y

p r a c t i c e

and to

f a c i l i t a t e

t h e

u s e

of

b u d g e t a r y d a t a , b o r r o w i n g f r o m

RBI or

m o n e t a r y

d e f i c i t , h a s been

t a k e n to be

e q u i v a l e n t

t o ( a ) i s s u e o f

91- da y T r e a s u r y b i l l s , p l u s

( b ) r u n n i n g

down of Government's

c a s h b a l a n c e s . S i n c e

( b ) i s u s u a l l y

n e g l i g i b l e ,

we

t a k e

i n

e f f e c t

what

r o u g h l y

amounts t o

s h o r t - t e r m

b o r r o w i n g

f r o m

R B I . 1 / T h e

r e a s o n

f o r

h o l d i n g c o n s t a n t

t h e r a t i o o f

b o r r o w i n g

f r o m

RB I i s to make

r e a l i s t i c

t h e

a s s u m p t i o n

t h a t t h e r a t e o f

i n f l a t i o n w i l l

n o t a c c e l e r a t e and

w o u l d

b e 6.5

p e r c e n t

pe r annum

i . e . ,

o n l y s l i g h t l y

h i g h e r t h a n

i n t h e

p a s t

i n

t e r m s

o f GDP d e f l a t o r ) .

O n c e t h e

r a t e

o f

i n c r e a s e

i n t h e p r i c e l e v e l i s

t a k e n

t o

r e m a i n

t h e

same as i n th e

p a s t ,

t h e

n o m i n a l

r a t e s o f i n t e r e s t on th e

i n s t r u m e n t s

o f

government

b o r r o w i n g

a r e a l s o assumed t o

r e m a i n

th e same as i n1 9 8 9 / 9 0 .

T h i s

w o u l d i m p l y

t h a t

no

i n c r e a s e

i n t h e

r e a l

r a t e s

o f

i n t e r e s t

w o u l d

b e

needed t o

o b t a i n f u n d s

on an i n c r e a s i n g s c a l e - - a t th e same r a p i d

p a c e

a s

i n t h e

p a s t

f i v e

y e a r s . T h i s

i s a n u n r e a l i s t i c

a s s u m p t i o n .

B u t what

c o u l d b e shown i s t h a t e v e n on s u c h an u n r e a l i s t i c a s s u m p t i o n , a p r o g r a m

o f

b o r r o w i n g

b y GOI l e a d i n g t o t h e

p a s t

r a t e o f

g r o w t h

o f i n t e r n a l

p u b l i c

d e b t w o u l d

not be s u s t a i n a b l e .

T h e n o m i n a l

r a t e s

of

i n t e r e s t

on

d i f f e r e n t

i n s t r u m e n t s

were

a s

f o l l o w s i n1 9 8 9 / 9 0 :

1 /

The

m o n e t a r y

d e f i c i t as

d e f i n e d

b y t h e

R e p o r t

o f t h eC omm ittee t o

R e v i e w

t h e

W o r k i n g

o f t h e

M o n e t a r y S y s t e m ( R B I ,

1 9 8 5 ) i s

b r o a d e r

and

more a p p r o p r i a t e , b u t e v e n t h a t does not i n d i c a t e t h e f u l l m o n e t a r y

i m p a c t

of

b u d g e t a r y o p e r a t i o n s

s i n c e , f o r

e x a m p l e ,

i t

e x c l u d e s

f o r e i g n

g r a n t s

s p e n t

d o m e s t i c a l l y and th e r e c e i p t of p r o f i t s

f r o m

R B I . I n

r e c e n t y e a r s , t h e m o n e t i s e d d e f i c i t , as t a k e n h e r e , and as t r a d i t i o n a l l y

measured i n I n d i a , and th e

m o n e t a r y

d e f i c i t as

d e f i n e d

b y t h e

a b o v e -

m e n t i o n e d

C ommi ttee have been f a i r l y

c l o s e

a s

p e r c e n t a g e

of GDP.

4


9/51

D e s c r i p t i o n K a t e o f

I n t e r e s t

M a r k e t l o a n s 1 1 . 5

S m a l l s a v i n g s

( a ) P o s t

o f f i c e

s a v i n g s a c c o u n t . 5 . 5

( b ) O t h e r s 1 2 . 0

P r o v i d e n t

f u n d s , e t c . 1 2 . 0

T r e a s u r y b i l l s 4 . 6

T h e a s s u m p t i o n t h a t t h e n o m i n a l r a t e s o f

i n t e r e s t o n f u t u r e borrow

i n g

w o u l d r e m a i n t h e

same

a s i n t h e

base

y e a r

does

n o t

mean t h a t t h e

a v e r a g e r a t e o f

i n t e r e s t

o n

i n t e r n a l

d e b t w o u l d n o t i n c r e a s e .

I n f a c t

t h a t

w o u l d i n c r e a s e f o r t w o r e a s o n s : ( a ) t h e

r e l a t i v e s h a r e o f T r e a s u r y

b i l l s

w i t h t h e l o w e s t

r a t e

o f

i n t e r e s t

w o u l d f a l l a s b o r r o w i n g

f rom

o t h e r

s o u r c e s w o u l d b e

r i s i n g f a s t e r

t h a n G DP

whereas

borrowing from R B I

w o u l d b e g r o w i n g o n l y a s

f a s t

a s G D P ; ( b ) t h e

r a t e

o f

i n t e r e s t

o n

market

l o a n s

c o n t r a c t e d

e a r l i e r

a t l o w e r r a t e s o f

i n t e r e s t

a n d

f o r m i n g p a r t

o f

t h e b a s e - y e a r

i n t e r n a l

d e b t , w o u l d g o u p a s t h e y

mat ure

a n d

a r e

c o n -

v e r t e d i n t o

n e w

s e c u r i t i e s .

I n d e e d , a n i m p o r t a n t f e a t u r e o f

t h i s

s t u d y i s t h a t

t h e m a t u r i t y

p a t t e r n a n d t h e

d i f f e r e n t i n t e r e s t

r a t e s o n t h e components o f

t h e

e x i s t i n g i n t e r n a l

d e b t

h a ve

been t a k e n

i n t o

a c c o u n t , a n d

a d d i t i o n a l

i n t e r e s t

l i a b i l i t y

h a s been i n c l u d e d f r o m t h e

r e s p e c t i v e

d a t e s o f c o n -

v e r s i o n .

T h u s ,

w e g e t a

p r o f i l e

o f

i n t e r e s t

b u r d e n i n r e s p e c t o f

t h e

d e b t

e x i s t i n g

i n t h e base y e a r d u r i n g t h e

p r o j e c t i o n

p e r i o d . T o

t h i s

i s

added

t h e

i n t e r e s t

o n

a d d i t i o n a l

d e b t

a r i s i n g

f r o m

f u t u r e b u d g e t d e f i -

c i t s

.

T h i s p r o c e d u r e e n a b l e s u s t o g e t a

more

r e a l i s t i c

p i c t u r e o f

t h e

f u t u r e i n t e r e s t

b u r d e n t h a n i f w e h a d

assumed

t h e

same a v e r a g e r a t e

o f

i n t e r e s t

a s i n t h e

base

y e a r , o r h a d

a p p l i e d

t h e m a r g i n a l

r a t e s t o

t h e

d i f f e r e n t

components o f

t o t a l

d e b t .

H a v i n g t r a c e d t h e major

i m p l i c a t i o n s

o f t h e g r o w t h o f n e t domes-

t i c

b o r r o w i n g a t a

pace r e g i s t e r e d

d u r i n g t h e p a s t

f i v e y e a r s

( A s s u m p t i o n I ) , w e t h e n

p r o j e c t

t h e g r o w t h o f

i n t e r n a l

d e b t o n t h e

a s s u m p t i o n t h a t t h e

r a t i o

o f n e t d o m e s t i c b o r r o w i n g t o G D P r e m a i n s

c o n s t a n t

a t t h e

l e v e l

r e a c h e d i n

1 9 8 9 / 9 0

( A s s u m p t i o n I I ) .

I n both

c a s e s ,

i n o r d e r t o g i v e a n i d e a o f t h e

t o t a l

d e b t b u r d e n , w e a d d o n t h e

g r o w t h o f e x t e r n a l d e b t o f G O I o n t h e a s s u m p t i o n t h a t e x t e r n a l b o r r o w i n g

w o u l d f o r m t h e

same

p r o p o r t i o n o f G D P a s i n t h e

base

y e a r .

4 . T h e

p u b l i c

d e b t

p o s i t i o n

i n t h e

base

y e a r

( 1 9 8 9 / 9 0 )

A t t h e e n d o f 1 9 8 9 / 9 0 ,

t o t a l i n t e r n a l

d e b t amounted t o R s

2,098.7

b i l l i o n ,

w h i c h

c o n s t i t u t e d

4 7 . 9 p e r c e n t o f G D P . T h e major components o f

t h e

i n t e r n a l

d e b t a n d

t h e i r r e l a t i v e

i m p o r t a n c e a r e

shown

i n T a b l e 1 .

T r e a s u r y

b i l l s

r e p r e s e n t i n g b o r r o w i n g f r o m R B I a n d

market

l o a n s

were

o f

e q u a l i m p o r t a n c e , e a c h c a t e g o r y a c c o u n t i n g t o r a b o u t 3 0 p e r c e n t o f t h e

t o t a l .

W h i l e t h e T r e a s u r y

b i l l s

m e n t i o n e d h e r e a r e h e l d b y R B I

, m u c h

o f

5


10/51

-

6 -

t h e g r e a t e r p a r t o f m a r k e t l o a n s a r e h e l d

by

t h e

b a n k s

a n d o t h e r f i n a n -

c i a l

i n s t i t u t i o n s .

On

t h e o t h e r h a n d , p r o v i d e n t f u n d s a n d s m a l l s a v i n g s

r e p r e s e n t d i r e c t

l i a b i l i t i e s

t o h o u s e h o l d s , a n d t h e s e t o g e t h e r a c c o u n t e d

f o r

a b o u t

40

p e r c e n t o f

GOI's

i n t e r n a l d e b t .

T a b l e 1 . I n d i a : T h e L e v e l o f D e b t a nd i t s C o m p o s i t i o n

I n

B i l l i o n s

o f

R u p e e s

P e r c e n t

o f T o t a l

M a r k e t l o a n s

S m a l l s a v i n g s

P r o v i d e n t f u n d s , e t c .

T r e a s u r y b i l l s

T o t a l d o m e s t i c d e b t

E x t e r n a l d e b t

6 2 4 . 4 2

4 0 9 . 8 3

4 3 6 . 4 3

6 3 2 . 0 2

2 , 0 9 8 . 7 0

2 8 5 . 1 7

2 9 8

1 9 3

2 0 8

3 0 1

1 0 0 0

Total domestic

de t

/ G D P

External debt GDP

Total debt GDP

4 7 . 9 0

0 . 6 5

4 8 . 5 5

E x t e r n a l

d e b t a t t h e e n d o f

1 9 8 9 / 9 0

a m o u n t e d t o R s

2 8 5 . 2 b i l l i o n ,

w h i c h w a s o n l y 1 2 . 3 p e r c e n t o f G D P . T h u s , t h e t o t a l p u b l i c d e b t f o r m e d

6 0 . 2 p e r c e n t o f G D P .

1

I n t h e

s a m e

y e a r , o f t h e t o t a l d o m e s t i c b o r r o w i n g , T r e a s u r y b i l l s

c o n s t i t u t e d 3 3 p e r c e n t , p r o v i d e n t f u n d s 2 5 . 9 p e r c e n t , a n d s m a l l s a v i n g s

1 9 . 6 p e r c e n t

We

n o t e

t h a t

t h e m a r g i n a l s h a r e o f T r e a s u r y b i l l s i s

h i g h e r t h a n t h e i r a v e r a g e s h a r e , w h i l e i t i s l o w e r t h a n t h e a v e r a g e

s h a r e

i n r e s p e c t o f m a r k e t l o a n s . T h e c o m b i n e d m a r g i n a l s h a r e o f p r o v i -

d e n t f u n d s a n d s m a l l s a v i n g s w a s h i g h e r t h a n t h e a v e r a g e . T h u s , w h i l e

t h e G o v e r n m e n t w a s a b l e t o b o r r o w

r e l a t i v e l y m o r e

d i r e c t l y f r o m t h e

h o u s e h o l d s l a r g e l y t h r o u g h h i g h e r p r o v i d e n t f u n d p a y m e n t s , i t w a s f o r c e d

t o d e p e n d m u c h

m o r e

o n R B I

c r e d i t

t h a n i n t h e p a s t .

1 / T h i s

f i g u r e

d i f f e r s f r o m i h e d e b t G D P r a t i o d e r i v e d f r o m

u n a d j u s t e d

b u d g e t a r y d a t a , w h i c h w a s g i v e n

e a r l i e r

w h i l e d i s c u s s i n g t h e

p a s t

g r o w t h o f d e b t . S e e A p p e n d i x 1t o r a n a l y s i s o f g r o w t h i n p u b l i c

d e b t b e t w e e n 1 9 8 4 / 8 5 a n d 1 9 8 9 / 9 0 .


11/51

7

I n

t h e b u d get

proposa l s

f o r 1989/90,

i t

ha d been

d e c i d e d

t o l i m i t

borrowing from

RBI

through Treas u ry

b i l l s t o

around

Rs 72.0

b i l l i o n ,

which would

have

formed

1.64

percent

of GDP f o r

that y ear.

The

r e v i s e d

e s t i m a t e s ,

however,

showed th at b orrowi ng from

RB I

woul d reach

Rs

113.76

b i l l i o n . R e a l i z i n g th at b orrowi ng from

R BI i n

s u c h r e l a t i v e magnitu de

was h i g h l y i n f l a t i o n a r y ,

th e

Finance M i n i s t e r

has

proposed tha t

i n

1990/91,

Treas u r y

b i l l s

i s s u e would

be l i m i t e d to Rs 74.07

b i l l i o n .

Given

t h e

past performanc e

and the

trends

i n

e xpen d i t u re, i t appears

t h a t

t h i s l i m i t might

be

exceeded. However, s i n c e

we

w i s h

t o

preserve

the assu mption tha t

th e

i n f l a t i o n

r a t e

would

not a c c e l e r a t e , we

wou l d

l i k e

t o

proceed

on the

b a s i s that

th e

Government would

b e

ab l e from

now

on

t o

h o l d

RBI c r e d i t t o

i t s e l f

a t 1.7

percent

o f GDP. We a r e

t h e r e f o r e

assuming that

net RBI

c r e d i t

t o

Government

was

o n l y

Rs

74.07 b i l l i o n

i n

1989/90, a n dhave

d e r i v e d

on

that b as i s

th e f i g u r e s f o r t h e

s u c c e ed i n g

years. C orrespon d i ng l y ,

th e

t o t a l

net

b orrowi ng d u r i ng

1989/90,

wh i c h

forms

t h e

b a s i s

o f

p r o j e c t i o n s ,

i s

taken

t o be Rs

304.98

b i l l i o n ,

i n s t e a d of the r e v i s e d b u d get

est i mate

of Rs

344.67 b i l l i o n .

As taken here, th e

t o t a l

b u d get

d e f i c i t

i n

1989/90

c o n s t i t u t e d 7.65

percent

o f GDP

( i n t e r n a l borrowing

7.0

per c ent,

and

e x t e r n a l borrowing

0.65 perc ent ). Primary d e f i c i t formed

3.7

percent

of GDP, and

gross

i n t e r e s t payments 3.9

per c ent.

5.

Growth of p u b l i c d e bt--1 9 9 0 / 9 1

through

2000/01:

Assumption

I

Ta b l e

2

shows

th e

e v o l u t i o n

of the i n t e r n a l

debt/GDP r a t i o

on th e

ass u mpti on that a l l

major components of

domestic b orrowing oth er than

RBI c r e d i t i . e . , market l oans , post o f f i c e sa v i ng s , other sma l l

s a v i n g s , and

provi dent funds ) wou l d grow

at t he same

r e s p e c t i v e r a t e s

as

d u r i n g th e l a s t f i v e

y ears. T h i s

i s

taken

t o

represent

t h e

c o n t i n u a t i o n

o f

th e

present stance

o f f i s c a l

p o l i c y .

On th ea bo ve

assumption,

t h e

i n t e r n a l

debt/GDP

r a t i o grows at an i n c r e a s i n g

r a t e , from

47.9

percent

a t the end of

1989/90

t o 102

percent

by t he end of 2000/01. The

i n t e r e s t on i n t e r n a l

d e b t c orrespon d i ng l y r i s e s from

3.6

percent

o f GDP

i n 1989/90

t o 8.7

percent

i n

2000/01 ( T a b l e

3 ) .

To

th e above

must

be

added

th e

burden

of e x t e r n a l

d e b t.

We make

the si mpl e assu mption that

e x t e r n a l net

b orrowing

b y t h e Government

would remain c onstant

as

p r o p o r t i o n

of GDP at th e

l e v e l

i n 1989/90, and

t h a t

th e

average

i n t e r e s t r a t e on Gov ernment's e x t e r n a l

debt

w i l l not

change.

In

p r a c t i c e ,

t h i s

assu mption might

not

h o l d

good; most

l i k e l y ,

the

l i a b i l i t i e s and the

bu rden

of i n t e r e s t i n

terms

o f

rupees woul d

be

h i g h e r .

1/

Thi s wou l d onl y

mean

that i f an y th i ng,

we a re

u n d e r e s t i -

mating

th e e x t e r n a l

part

o f

t o t a l l i a b i l i t i e s .

When e x t e r n a l l i a b i l i -

t i e s a r e

added,

th e

t o t a l debt/GDP

r a t i o i s

seen

t o r i s e

from

60.2

percent

of GDP at th e end of

1989/90

to 109.9

percent

i n

2000/01

( T a b l e

2 ) .

The

t o t a l

i n t e r e s t payments r i s e

from

3.9

percent

of GDP i n

1/

The

rupee might d epr ec i ate

f a s t e r

than

th e r a t e of

domestic

i n f l a -

t i o n ,

th e

i n t e r e s t

i n d o l l a r

terms might harden,

and the

r a t i o

o f

f o r e i g n

borrowing

t o GDP

might r i s e .


12/51

T

a

b

l

e

2

I

n

d

i

a

:

P

r

e

t

e

c

t

i

o

n

o

f

t

h

e

r

o

w

t

h

o

f

e

b

t

t

o

U

n

d

e

r

A

s

s

u

m

p

t

i

o

n

s

I

I

Y

e

a

r

1

9

8

9

/

9

0

1

1 1 1

1

1

1

1

9

9

7

/

9

8

1 1

9

9

9

/

0

0

2

D

o

m

e

s

t

i

c

4

7

.

9

5

0

.

2

5

2

.

7

5

5

.

6

5

8

.

9

6

2

.

7

6

7

.

0

7

2

.

1

7

8

.

1

8

4

.

7

9

2

.

7

1

0

2

.

1

A

s

s

u

m

p

t

i

o

n

I

E

x

t

e

r

n

a

l

D

e

b

t

1

1

1

1

1

9

.

6

9

.

2

8

.

9

8

.

6

8

.

3

8

.

1

7

.

9

T

o

t

a

l

D

e

b

t

6

0

.

2

6

1

.

8

6

3

.

8

6

6

.

1

6

8

.

9

7

2

.

3

7

8

1

.

0

8

9

3

.

1

1

1

0

9

.

9

D

o

m

e

s

t

i

c

D

4

7

.

9

4

9

.

7

5

1

.

4

5

2

.

8

5

4

.

1

5

5

.

3

5

6

.

3

5

7

.

2

5

8

.

2

5

8

.

8

5

9

.

5

6

0

.

1

A

s

s

u

m

p

t

i

o

n

I

I

E

x

t

e

r

n

a

l

D

1 1

1

1

1

9

.

6

9

.

2

8

.

9

8

.

6

8

.

3

8

.

1

7

.

9

T

o

t

a

l

D

6

0

.

2

6

1

.

4

6

2

.

4

6

3

.

3

6

4

.

1

6

4

.

9

6

5

.

5

6

6

.

1

6

6

.

8

6

7

.

1

6

7

.

5

6

7

.

9


13/51

1

9

3

9

/

9

0

1

9

9

0

/

9

1

1

9

9

1

/

9

2

1

9

9

2

/

9

3

1

9

9

3

/

9

4

1

9

9

4

/

9

5

1

9

9

5

/

9

6

1

9

9

6

/

9

7

1

9

9

7

/

9

8

1

9

9

8

/

9

9

1

9

9

9

/

0

0

2

0

0

0

/

0

1

T

a

b

l

e

I

n

t

e

r

e

s

t

o

I

n

t

e

r

n

a

l

D

t

o

G

3

.

5

8

3

.

8

4

4

.

0

9

4

.

3

9

4

.

7

1

5

.

0

8

5

.

5

0

5

.

9

7

6

.

5

1

7

.

1

4

7

.

8

7

8

.

7

3

I

n

d

i

a

:

G

A

s

s

u

m

p

t

i

o

n

I

n

t

e

r

e

s

t

o

E

x

t

e

r

n

a

l

D

t

o

G

0

.

3

3

9

0

.

3

4

8

0

.

3

2

9

0

.

3

1

2

0

.

2

9

7

0

.

2

8

4

0

.

2

7

2

0

.

2

6

1

0

.

2

5

1

0

.

2

4

3

0

.

2

3

5

0

.

2

2

8

I

n

t

e

r

e

s

t

o

I

n

t

e

r

e

s

t

o

T

o

t

a

l

D

t

o

G

3

.

9

2

4

.

1

9

4

.

4

2

4

.

7

0

5

.

0

1

5

.

3

7

5

.

7

7

6

.

2

3

6

.

7

6

7

.

3

8

8

.

1

1

8

P

u

b

l

i

c

D

U

I

n

t

e

r

e

s

t

o

I

n

t

e

r

n

a

l

D

t

o

G

3

.

5

8

3

.

8

8

4

.

0

9

4

.

2

8

4

.

4

5

4

.

6

0

4

.

7

3

4

.

8

4

4

.

9

5

5

.

0

4

5

.

1

2

5

.

2

0

A

s

s

u

m

p

t

i

o

n

s

A

s

s

u

m

p

t

i

o

n

I

I

n

t

e

r

e

s

t

o

E

x

t

e

r

n

a

l

D

t

o

G

0

.

3

3

9

0

.

3

4

8

0

.

3

2

9

0

.

3

1

2

0

.

2

9

7

0

.

2

8

4

0

.

2

7

2

0

.

2

6

1

0

.

2

5

1

0

.

2

4

3

0

.

2

3

5

0

.

2

2

8

a

n

d

I

I

n

t

e

r

e

s

t

o

T

o

t

a

l

D

t

o

G

3

.

9

2

4

.

2

3

4

.

4

2

4

.

5

9

4

.

7

5

4

.

8

8

5

.

0

0

5

.

1

0

5

.

2

0

5

.

2

8

5

.

3

6

5

.

4

3


14/51

- 10 -

1 9 8 9 / 9 0

t o 9.1

p e r c e n t

i n2 0 0 0 / 0 1

( T a b l e

3 ) . Even i f one a s s ume s

t h a t

t h e b u o y a n c y o f r e v e n u e s o f GOI w o u l d be 1 . 2 - - h i g h e r t h a n i n the p a s t - -

g r o s s

i n t e r e s t

payments w o u l d a b s o r b

as much as 60.6

p e r c e n t

o f

r e v e n u e s

i n

2 0 0 0 / 0 1

.

A nd i f

r e v e n u e s i n c r e a s e d o n l y

as

f a s t

as GDP,

i n t e r e s t

payments w o u l d a b s o r b 76.5 p e r c e n t o f r e v e n u e s i n t h a t y e a r ( T a b l e 4 ) .

B y t h a t y e a r

t h e t o t a l

f i s c a l d e f i c i t w o u l d have r e a c h e d

2 0 . 0

p e r c e n t

of

GDP and

d o m e s t i c b o r r o w i n g w o u l d

be 19.3

p e r c e n t

o f GDP,

w i t h

t h e

p r i m a r y d e l i c i t r e a c h i n g n e a r l y 11 p e r c e n t o f GDP ( T a b l e s 5

a n d

9 ) .

We

have

s o f a r

c o n s i d e r e d

t o t a l

b o r r o w i n g

and

g r o s s

i n t e r e s t p ay -

ments

o u t o f t h e b u d g e t . P a r t of th eGovernment's b o r r o w i n g h a s b e e n ,

a n d i n t h e f u t u r e w o u l d b e , u s e d f o r n et f i n a n c i a l i n v e s t m e n t s . H e n c e ,

t h e

n e t i n t e r e s t

b u r d e n

on th e b u d g e t

w o u l d depend

on th e

r e t u r n

on

s u c h

i n v e s t m e n t s . To th e e x t e n t t h a t t h e r e t u r n s on f i n a n c i a l i n v e s t m e n t s

c o v e r t h e

i n t e r e s t

on th e p a r t of b o r r o w i n g u s e d f o r s u c h i n v e s t m e n t s ,

t h e

n e t

b u r d e n

on th e

b u d g e t

w o u l d

b e

r e d u c e d

( o r

w o u l d

n o t

i n c r e a s e ) .

O v e r t h e y e a r s , t h e r a t i o of r e t u r n on i n v e s t m e n t s i n t h e f o r m o f

r e c e i p t s

o f i n t e r e s t and

d i v i d e n d

t o i n t e r e s t pa yments, h as

beenf a l -

l i n g .

S u c h r e c e i p t s

f o r m e d

83

p e r c e n t

o f

g r o s s

i n t e r e s t paymentsi n

1 9 8 2 / 8 3 ; b y 1 9 8 9 / 9 0 , t h e y had come down to 4 8. 4 p e r c e n t . C o r r e s p o n d -

i n g l y ,

net i n t e r e s t

payments

b y t h e Government

ha ve

r i s e n

f r o m

1 7 p e r -

c e n t

o f

g r o s s

payments i n1 9 8 2 / 8 3 to 51.6

p e r c e n t

i n1 9 8 9 / 9 0 . T h e r e

seem t o be t h r e e main r e a s o n s f o r t h e f a l l i n t h e r a t i o o f r e t u r n s t o

payments

o f i n t e r e s t on

d e b t . F i r s t ,

an i n c r e a s i n g

p a r t

o f n e t

b o r r o w -

i n g b y t h e Gov ernment h as been

a b s o r b e d

b y

e x p e n d i t u r e s o t h e r t h a n

n e t

l e n d i n g . S e c o n d , t h e r a t e s of i n t e r e s t c h a r g e d , an d r e c o v e r i e s o f

i n t e r e s t d u e ,

have been l a g g i n g b e h i n d

i n t e r e s t pa yments.

T h i r d ,

th e

a v e r a g e r a t e

o f

d i v i d e n d

on

e q u i t y

i n

p u b l i c

e n t e r p r i s e s

has

been

q u i t e

l o w . I t i s n o t p o s s i b l et o p r e d i c t t h e

movements

i n t h e a b o v e t h r e e

r e l a t i o n s i n t h e

f u t u r e .

We,

t h e r e f o r e , c o n s i d e r

two a l t e r n a t i v e

p o s s i -

b i l i t i e s . We work o u t net i n t e r e s t payments on two a l t e r n a t i v e

ass ump-

t i o n s ,

n a me l y ,

t h a t t h e y w o u l d r e m a i n 50 p e r c e n t o f g r o s s , and t h a t t h e y

w o u l d f a l l

a s

p e r c e n t a g e

of

g r o s s g r a d u a l l y

t o 25

p e r c e n t

b y 2 0 1 0 / 1 1 1/

t h e l a t t e r

w o u l d

mean a r a d i c a l r e v e r s a l of

p a s t t r e n d s ) .

T a b l e 6 shows what t h e p r o p o r t i o n s of net

i n t e r e s t

payments to net

r e v e n u e s

ot th eGovernment

w o u l d

b e u n d e r d i f f e r e n t

s e t s

o f

a s s u m p t i o n s

c o n c e r n i n g t h e r a t e of g r o w t h o f r e v e n u e s an d th e p r o p o r t i o n s of net t o

g r o s s payments of i n t e r e s t . I t n e t

i n t e r e s t

payments a r e 5 0 p e r c e n t of

g r o s s

payments u n d e r t h e

a s s u m p t i o n

o f

Government's r e v e n u e s g r o w i n g

a s

f a s t

as GDP, net

i n t e r e s t

payment

as

p e r c e n t

of net

r e v e n u e s w o u l d

r i s e

f r o m 2 0 . 7 p e r c e n t i n1 9 8 9 / 9 0 to 61.9 p e r c e n t i n

2 0 0 0 / 0 1 ; e v e n

w i t h a

b u o y a n c y of 1.2, net i n t e r e s t payments

w o u l d h a ve

r i s e n t o 43. 4

p e r c e n t

o f n e t r e v e n u e s b y

2 0 0 0 / 0 1 .

If onea s s ume s t h a t n e t i n t e r e s t w o u l d t a l l

t o 25 p e r c e n t of g r o s s i n t e r e s t , and government r e v e n u e s

w i l l

h a ve a

b u o y a n c y of 1.2

p e r c e n t - - b o t h f a v o r a b l e a s s u m p t i o n s - - n e t

i n t e r e s t

payments w o u l d

r i s e

to 29.4 p e r c e n t of net r e v e n u e s b y

2 0 0 0 / 0 1 .

But

1 / T h i r t y - n i n e p e r c e n t

b y 2 0 0 0 / 0 1 .


15/51

- 11 -

Table

4. I n d i a : Gross I n t e r e s t Payments on T o t a l Debt

as

P ercent

of Gross C e n t r a l Government Revenue

Year

1989/90

1990/91

1991/92

1992/93

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

E l a s t i c i t y

=1.0

3 3 . 6

3 5 . 7

3 7 . 9

4 0 . 2

4 2 . 8

4 5 . 8

4 9 . 2

5 3 . 2

5 7 . 7

6 3 . 0

6 9 . 2

7 6 . 5

Assumption

I

E l a s t i c i t y

=1.1

3 3 . 6

3 5 . 4

3 7 . 1

3 8 . 9

4 1 . 0

4 3 . 4

4 6 . 2

4 9 . 3

5 3 . 0

5 7 . 3

6 2 . 2

68.0

E l a s t i c i t y

=1.2

3 3 . 6

3 5 . 0

3 6 . 3

3 7 . 7

3 9 . 3

4 1 . 2

4 3 . 4

4 5 . 8

4 8 . 7

5 2 . 1

5 6 . 0

6 0 . 6

Y e a r

1989/90

1990/91

1991/92

1992/93

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

E l a s t i c i t y

=1.0

3 3 . 6

3 6 . 0

3 7 . 7

3 9 . 2

4 0 . 5

4 1 . 6

4 2 . 7

4 3 . 6

4 4 . 4

4 5 . 1

4 5 . 7

46.3

Assumption

I I

E l a s t i c i t y

=1.1

3 3 . 6

3 5 . 7

3 6 . 9

3 8 . 0

3 8 . 8

3 9 . 5

4 0 . 0

4 0 . 4

4 0 . 7

4 1 . 0

4 1 . 1

4 1 . 2

Elasticity

=

1.2

3 3 . 6

3 5 . 3

3 6 . 2

3 6 . 8

3 7 . 2

3 7 . 4

3 7 . 6

3 7 . 6

3 7 . 4

3 7 . 3

3 7 . 0

3 6 . 7


16/51

Y

e

a

r

1

9

8

9

/

9

0

1

1

1

9

9

2

/

9

3

1 1

9

9

4

/

9

5

1

1

1

1

9

9

8

/

9

9

1

2

0

0

0

/

0

1

T

a

b

l

e

5

I

n

d

i

a

:

D

o

m

e

s

t

i

c

B

A

s

s

u

m

p

t

i

o

n

I

7

.

0

7

.

4

7

.

9

8

.

5

9

.

3

1

1

1

2

.

2

1

1

5

.

2

1

1

R

a

t

i

o

o

f

B

o

r

r

o

w

i

n

g

U

n

d

e

r

A

s

s

u

m

p

t

i

o

n

s

T

o

t

a

l

B

o

r

r

o

w

i

n

g

A

s

s

u

m

p

t

i

o

n

I

7

8

.

1

8

9

9

1

1 1 1 1

1

2

D

o

m

e

s

t

i

c

a

T

o

t

a

l

)

I

a

I

D

o

m

e

s

t

i

c

B

o

r

r

o

w

i

n

g

A

s

s

u

m

p

t

i

o

n

I

I

7 7

7

.

0

7 7

7

7

7

7 7 7

7

t

o

G

T

o

t

a

l

B

o

r

r

o

w

i

n

g

A

s

s

u

m

p

t

i

o

n

I

I

7

7

7

7

7

7

7

7 7 7

7

7


17/51

- 13 -

T a b l e

6.

I n d i a :

Net

I n t e r e s t

Payments on

T o t a l

Debt

a s P e r c e n t

of Net

C e n t r a l

Government Revenue

P a r a m e t e r s

T a b l e

Growth In GDP

Growth in r e v e n u e s of

C e n t r a l Government

f o r e l a s t i c i t y = 1. 0

1.2

0 . 1 2 0

0 . 1 2 0

0 . 1 4 4

1989/90

1990/91

1991/92

1992/93

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

N e t

Revenues of C e n t r a l Govt.

A s s u m p t i o n I

5 0 % wt

20.7

2 1 . 8

2 3 . 3

2 5 . 1

2 7 . 2

2 9 . 7

3 2 . 7

3 6 . 2

4 0 . 6

4 6 . 0

5 2 . 9

6 1 . 9

7 3 . 9

9 0 . 5

1 1 4 . 5

1 5 2 . 0

2 1 7 . 4

3 5 7 . 8

8 5 9 . 7

- 3 , 3 4 0 . 4

- 6 2 4 . 1

- 3 6 3 . 0

5 0 - 2 5 % wt

2 0 . 7

2 1 . 8

2 2 . 6

2 3 . 6

2 4 . 7

2 6 . 0

2 7 . 5

2 9 . 2

3 1 . 3

3 3 . 7

3 6 . 7

4 0 . 2

4 4 . 5

4 9 . 8

5 6 . 3

6 4 . 5

7 4 . 9

8 8 . 3

1 0 6 . 2

1 3 0 . 9

1 6 6 . 8

2 2 2 . 7

e = 1.0)

A s s u m p t i o n

I I

5 0 %

wt

2 0 . 7

2 2 . 0

2 3 . 2

2 4 . 4

2 5 . 4

2 6 . 3

2 7 . 1

2 7 . 9

2 8 . 5

2 9 . 1

2 9 . 6

3 0 . 1

3 0 . 5

3 0 . 9

3 1 . 3

3 1 . 6

3 1 . 9

3 2 . 1

3 2 . 3

3 2 . 5

3 2 . 7

3 2 . 9

5 0 - 2 5 % wt

2 0 . 7

2 2 . 0

2 2 . 5

2 2 . 9

2 3 . 0

2 3 . 1

2 3 . 0

2 2 . 7

2 2 . 4

2 2 . 0

2 1 . 5

2 1 . 0

2 0 . 4

1 9 . 8

1 9 . 2

1 8 . 5

1 7 . 8

1 7 . 1

1 6 . 3

1 5 . 6

1 4 . 9

14.1

N e t

R e v e n u e s

of

A s s u m p t i o n

I

5 0 %

wt

2 0 . 7

2 1 . 2

2 2 . 2

2 3 . 2

2 4 . 5

2 5 . 9

2 7 . 7

2 9 . 7

3 2 . 2

3 5 . 2

3 8 . 9

4 3 . 4

4 9 . 1

5 6 . 4

6 5 . 8

7 8 . 2

9 5 . 3

1 1 9 . 8

1 5 7 . 5

2 2 1 . 6

3 5 3 . 0

7 6 1 . 9

5 0 - 2 5 %

2 0 . 7

2 1 . 2

2 1 . 5

2 1 . 8

2 2 . 2

2 2 . 8

2 3 . 4

2 4 . 2

2 5 . 2

2 6 . 3

2 7 . 7

2 9 . 4

3 1 . 4

3 3 . 8

3 6 . 6

3 9 . 9

4 3 . 9

4 8 . 6

5 4 . 2

6 1 . 0

6 9 . 2

7 9 . 1

C e n t r a l

G o v t = 1.2

A s s u m p t i o n

I I

w t 50% wt

2 0 . 7

2 1 . 4

2 2 . 1

2 2 . 5

2 2 . 8

2 3 . 0

2 3 . 1

2 3 . 1

2 3 . 0

2 2 . 9

2 2 . 7

2 2 . 4

2 2 . 2

2 1 . 9

2 1 . 5

2 1 . 2

2 0 . 8

2 0 . 4

2 0 . 0

1 9 . 6

1 9 . 2

5 0 - 2 5 % wt

2 0 . 7

2 1 . 4

2 1 . 4

2 1 . 2

2 0 . 8

2 0 . 3

1 9 . 7

1 9 . 0

1 8 . 3

1 7 . 5

1 6 . 7

1 5 . 9

1 5 . 1

1 4 . 4

1 3 . 6

1 2 . 8

1 2 . 1

1 1 . 3

1 0 . 6

9.9

9.2

8.6

N o t e :

Net c e n t r a l

g o v e r n m e n t

r e v e n u e s

=

G r o s s r e v e n u e s

- Net i n t e r e s t

p a y m e n t s


18/51

- 1 4 -

e v e n t h a t w o u l d c o n s t i t u t e a n u n s u s t a i n a b l e s i t u a t i o n , w h e r e i n o n l y

7 0 . 6 p e r c e n t o f n e t r e v e n u e s w o u l d b e

a v a i l a b l e

f o r

n o n i n t e r e s t

e x p e n d i t u r e ;

b y 2 0 1 0 / 1 1 , n e t

i n t e r e s t

p a y m e n t s w o u l d a b s o r b

n e a r l y

8 0 p e r c e n t o f n e t r e v e n u e s .

T h e n u m b e r s r e g a r d i n g t h e d e b t b u r d e n w e h a v e g i v e n i n t h e p r e -

c e d i n g p a r a g r a p h s

c l e a r l y

i n d i c a t e t h a t t h e b u d g e t of G O I w o u l d h a v e

e n t e r e d a

d i s a s t r o u s s i t u a t i o n

b y t h e t u r n o f t h e c e n t u r y , i f n e t b o r -

r o w i n g

w e r e i n c r e a s e d d u r i n g t h e n e x t t e n y e a r s a s f a s t a s d u r i n g t h e

l a s t f i v e y e a r s . T h e d e b t / G D P

r a t i o

w o u l d r i s e t o 1 1 0 p e r c e n t a n d t h e

g r o s s i n t e r e s t b u r d e n w o u l d r i s e t o

m o r e

t h a n 9 . 0 p e r c e n t

o f

G D P ,

a b s o r b i n g 6 1 - 7 7 p e r c e n t o f g o v e r n m e n t r e v e n u e s d e p e n d i n g o n w h e t h e r

r e v e n u e s e x h i b i t e d a b u o y a n c y of 1 o r 1 . 2 . E v e n t h o u g h t h e a v e r a g e

e f f e c t i v e r a t e o f i n t e r e s t

p a i d

o n d e b t ( T a b l e 7 ) w o u l d , o n o u r

a s s u m p t i o n s , b e l o w e r t h a n t h e r a t e o f g r o w t h - - a r e a l r a t e o f i n t e r e s t

o f 1 . 5 p e r c e n t a s a g a i n s t t h e

r e a l

r a t e o f g r o w t h o f 5 . 5 p e r c e n t - - t h e

d e b t

r a t i o

w o u l d c o n t i n u e t o

g r o w

b e c a u s e o f t h e

r i s i n g r a t i o

o f p r i m a r y

d e f i c i t t o G D P a n d t h e h i g h e r m a r g i n a l r a t e o f i n t e r e s t . T h e t a s k o f

r e v e r s i n g t h e t r e n d s w o u l d b e f a r m o r e d i f f i c u l t i n 2 0 0 0 / 0 1 t h a n n o w .

T a b l e 7 . I n d i a : A v e r a g e I n t e r e s t K a t e o n T o t a l D e b t

Y e a r

1 9 9 0 / 9 1

1 9 9 1 / 9 2

1 9 9 2 / 9 3

1 9 9 3 / 9 4

1 9 9 4 / 9 5

1 9 9 6 / 9 7

1 9 9 7 / 9 8

1 9 9 8 / 9 9

1 9 9 9 / 0 0

2 0 0 0 / 0 1

A s s u m p t i o n I

A s s u m p t i o n I I

6 . 5

6 . 8

6 . 9

7 . 1

7 . 3

7 . 4

7 . 6

7 . 7

7 . 8

7 . 9

6 . 5

6 . 9

7 . 1

7 . 3

7 . 4

7 . 5

7 . 6

7 . 7

7 . 8

7 . 9

8 . 0 7 . 9

N o t e :

b y

t o t a l

A v e r a g e

i n t e r e s t .

d e b t .

r a t e c a l c u l a t e d

a s

t o t a l

i n t e r e s t

d i v i d e d

I n t h e s c e n a r i o s k e t c h e d a b o v e , o n l y t h e

f i r s t r o u n d - e f f e c t o f

t h e

g r o w t h of b o r r o w i n g o r

d e f i c i t

a s

p r o p o r t i o n

o f G D P h a s b e e n c o n s i d e r e d ,

T h e i m p a c t o f t h e

f a s t r a t e

o f g r o w t h o f

d e f i c i t

a n d o f t h e d e b t / G D P

r a t i o

o n t h e r a t

e

o f

i n t e r e s t ,

t h e

r a t e

o f g r o w t h o f

G D P

, a n d t h e

r a t e


19/51

- 1 5 -

o f

i n f l a t i o n

h a s n o t

been

t a k e n i n t o

a c c o u n t .

B ut s u r e l y , w i t h

b o r r o w -

i n g

f r o m

t h e RB I f r o z e n a s p e r c e n t o f G DP , t h e Government w o u l d

f i n d

i t

i n c r e a s i n g l y d i f f i c u l t t o

s q u e e z e

more

f u n d s

o u t o f t h e

m a r k e t . Even

i f

o n e

assumes

t h a t t h e r a t e o f

d o m e s t i c

s a v i n g s

w o u l d

r i s e ,

s a y ,

f r o m

2 1 p e r c e n t o f G DP i n 1989/90 t o 2 3 p e r c e n t i n 2000/01, t h e

Government's

d o m e s t i c b o r r o w i n g on t h e s c a l e p o s t u l a t e d w o u l d

a b s o r b

a n i n c r e a s i n g

p r o p o r t i o n o f

d o m e s t i c

s a v i n g s , g o i n g u p t o 7 4. 2 p e r c e n t b y 2000/01

( T a b l e 8 ) . T he a b s o r p t i o n o f s u c h a h i g h p r o p o r t i o n o f p r i v a t e s a v i n g s

--government s e c t o r s a v i n g s a r e l i k e l y t o b e n e g l i g i b l e - - w o u l d n o t b e

p o s s i b l e

w i t h o u t a s t e e p i n c r e a s e i n t h e i n t e r e s t r a t e a nd s e v e r e

c r o w d i n g

o u t o f p r i v a t e i n v e s t m e n t r e s u l t i n g i n a

f a l l

i n t h e g r o w t h

r a t e .

1 /

R a n g a r a j a n

e t a l

( 1 9 9 0 )

have

a t t e m p t e d

t o p r o j e c t t h e g r o w t h o f

p u b l i c

d e b t

a n d i n t e r e s t

b u r d e n

b y f i r s t d e r i v i n g t h e

g r o w t h

o f n e t

p r i m a r y

d e f i c i t

t h r o u g h

e s t i m a t i n g n o n i n t e r e s t

r e v e n u e s

a n d n o n i n t e r e s t

e x p e n d i t u r e s o n t h e b a s i s o f

o b s e r v e d

e l a s t i c i t i e s ,

a n d

t h e n

e s t i m a t i n g

t h e

g r o w t h

o f i n t e r e s t a n d

d e b t

u s i n g t h e p r i m a r y

d e f i c i t

f i g u r e s , a n d

o n t h e b a s i s o f p l a u s i b l e

a s s u m p t i o n s

r e g a r d i n g r e l e v a n t k e y

p a r a m e t e r s .

A l t h o u g h t h e y have assumed t h e

same

g r o w t h r a t e o f

n o m i n a l

G DP a s i n o u r

e x e r c i s e ,

a n d

k e p t

c o n s t a n t t h e

r a t i o

o f e x t e r n a l b o r r o w i n g , a nd

b o r r o w -

i n g f r o m

R B I t o G D P , a s w e

have done,

t h e y a r r i v e a t

much

l a r g e r

e s t i -

mates o f

d e f i c i t

a n d debt/GDP r a t i o s t h a n o u r s . T h e i r e s t i m a t e s o f t h e

k e y r a t i o s f o r t h e y e a r 1999/2000 a r e a s g i v e n

b e l o w :

N o n i n t e r e s t

Revenue

1 6 . 0 5

As percent o f G DP i n

1999-2000

Noninterest

Expenditure

N et

Primary

Excluding Net

Lending

D e f i c i t

2 7 . 1 9

1 1 . 1

Gross

Primary

D e f i c i t Debt

1 9 . 5

1 4 9 . 7

1 / I n s t e a d o f a s s u m i n g t h a t

e a c h

m a j o r c o m p o n e n t o f d o m e s t i c b o r -

r o w i n g w o u l d

g r o w a s d u r i n g t h e

l a s t f i v e y e a r s ,

o n e c o u l d a s s u m e t h a t

t o t a l

d o m e s t i c b o r r o w i n g w o u l d

g r o w a t t h e s a m e r a t e ( 1 6 . 9 p e r c e n t p e r

a n n u m ) .

T h i s

w o u l d

i m p l y

i m p o s i n g

a

u n i f o r m

g r o w t h

r a t e

o n

a l l

c o m p o -

n e n t s e x c e p t

R B I

c r e d i t .

I f w e d i d

t h a t ,

t h e d e b t / G D P

r a t i o w o u l d

g r o w

l e s s l a s t

b u t n e v e r t h e l e s s , t h e s i t u a t i o n i n 2 0 0 0 / 0 1

w o u l d

b e q u i t e

g r a v e . T h e d e b t / G D P

r a t i o

w o u l d h a v e r i s e n t o 8 4 . 9 p e r c e n t a n d t h e

i n t e r e s t

b u r d e n

t o 7

p e r c e n t . C r o s s

i n t e r e s t

p a y m e n t s

w o u l d a b s o r b

4 9 p e r c e n t o f

r e v e n u e s

w i t h a

b u o y a n c y

o f 1 . 2 , a n d 6 2 p e r c e n t w i t h a

b u o y a n c y o f 1 . 0 .

D o m e s t i c

b o r r o w i n g w o u l d a b s o r b 4 8 . 7 p e r c e n t o f d o m e s -

t i c

s a v i n g , a s a g a i n s t 3 3 . 2 p e r c e n t i n 1 9 8 9 / 9 0 . E v e n

t h e s e f i g u r e s

i m p l y

s e v e r e d i s r u p t i o n

t o t h e e c o n o m y .


20/51

T

a

b

l

e

8

I

n

d

i

a

:

N

e

t

D

o

m

e

s

t

i

c

B

o

r

r

o

w

i

n

g

a

s

a

e

r

c

e

n

t

o

f

r

o

s

s

D

o

m

e

s

t

i

c

S

a

v

i

n

g

s

Y

e

a

r

1

9

8

9

/

9

0

1

9

9

0

/

9

1

1

9

9

1

/

9

2

1

9

9

2

/

9

3

1

9

9

3

/

9

4

1

9

9

4

/

9

5

1

9

9

5

/

9

6

1

9

9

6

/

9

7

1

9

9

7

/

9

8

1

9

9

8

/

9

9

1

9

9

9

/

0

0

G

D

P

R

s

.

r

o

r

e

4

3

8

,

0

9

7

4

9

0

,

6

6

9

5

4

9

5

4

9

6

1

5

4

9

5

6

8

9

3

5

4

7

7

2

,

0

7

7

8

6

4

,

7

2

6

9

6

8

,

4

9

3

1

,

0

8

4

,

7

1

2

1

2

1

4

8

7

7

1

3

6

6

6

3

G

r

o

s

s

D

o

m

e

s

t

i

c

S

a

v

i

n

g

s

R

s

.

C

r

o

r

e

9

2

,

0

0

0

1

0

4

,

0

2

2

1

1

7

6

0

3

1

1

5

0

2

7

9

1

6

9

,

8

5

7

1

9

1

,

9

6

9

2

1

6

9

4

2

2

4

5

1

4

5

2

7

6

9

9

2

3

1

2

9

5

2

G

r

o

s

s

D

o

m

e

s

t

i

c

S

a

v

i

n

g

s

t

o

G

(

)

2

1

.

0

0

2

1

.

2

0

2

1

.

4

0

2

1

.

6

0

2

1

.

8

0

2

2

.

0

0

2

2

.

2

0

2

2

.

4

0

2

2

.

6

0

2

2

.

8

0

2

3

.

0

0

N

e

t

D

o

m

e

s

t

i

c

B

o

r

r

o

w

i

n

g

A

s

s

u

m

p

t

i

o

n

I

R

s

.

C

r

o

r

e

3

0

,

4

9

8

3

4

3

5

8

1

5

6

7

7

8

6

9

9

5

6

8

3

1

1

4

7

2

2

1

1

8

4

,

3

0

0

2

3

2

,

0

6

7

A

s

s

u

m

p

t

i

o

n

I

R

s

.

C

r

o

r

e

3

0

,

4

9

8

3

4

1

5

1

3

8

,

2

4

9

4

4

7

9

7

9

5

6

0

1

8

5

6

7

,

4

0

7

7

8

4

5

5

5

9

N

D

o

m

e

s

t

i

c

B

o

r

r

o

w

i

n

g

t

o

A

s

s

u

m

p

t

i

o

n

I

(

)

3

3

.

1

5

3

4

.

9

5

3

7

.

0

6

3

9

.

5

3

4

4

5

.

8

4

4

9

.

8

4

5

6

0

.

0

5

6

6

.

5

4

7

4

.

1

5

A

s

s

u

m

p

t

i

o

n

I

(

)

3

3

.

1

5

3

2

.

8

3

3

2

.

5

2

3

2

.

2

2

3

1

.

9

3

3

1

.

6

4

3

1

.

3

5

3

1

.

0

7

3

0

.

8

0

3

0

.

5

3

3

0

.

2

6


21/51

- 17 -

The

main

r ea s on s f o r Ra n gara ja n and o t h e r s o b t a i n i n g l a r g e r e s t i -

mates than

und e r

our Assumption I

seem

t o be t h e h i g h e r e x p e n d i t u r e

e l a s t i c i t y d e r i v e d t h r o u g h t h e us e o f l o n g e r p e r i o d data (we

have

used

t h e t r e n d s o f t h e f i v e y e a r s p r e c e d i n g

1990/91)

and th e a p p l i c a t i o n o f

t h e m a r gi n a l r a t e o f

i n t e r e s t

t o t o t a l d e b t . On t h e o t h e r h an d , t h e y

seem t o be o v e r e s t i m a t i n g t h e r a t e o f

i n t e r e s t

r e c e i v e d by t h e G o v e r n -

ment. However t h a t may b e, t h e tw o e x e r c i s e s p o i n t t o t h esame con-

c l u s i o n ,

nam e l y ,

t h a t

w i t h th e

c o n t i n u a t i o n

o f t h e p r e s en t s ta n c e o f

f i s c a l

p o l i c y ,

t h e

debt/GDP r a t i o

and the

r a t i o

o f

i n t e r e s t

on p u b l i c

debt to GDP would co ntin ue to g r o w , and that by the

t u r n

o f t h e c e n t u r y ,

t h e f i s c a l

s i t u a t i o n

would

have

a l r e a d y c au se d g r e a t

harm

t o t h e

economy. A l t h o u g h t h e m a r g i na l r a t e o f

i n t e r e s t

on b o r r o wi n g i s s t i l l

b e l o w t h e assumed g r o w t h r a t e , w i t h p r i m ar y d e f i c i t r i s i n g a s a p e r c e n t

of

GDP, t h e

debt/GDP r a t i o

w oul d c o n ti n u e t o

r i s e

e v en

a f t e r

2001 unl es s

t h e r e

ar e r a d i c a l

p o l i c y

c o r r e c t i o n s .

I t

must

b e p o i n t e d out

that

we

have

c ou n t e d o n l y t h e b o r r o wi n g and

d e f i c i t of the GOI, which is of cour se the

ma jor

b o r r o w e r . B ut s t a t e

g o v e r nm e n t s a l s o b o r r o w from the market, from f i n a n c i a l

i n s t i t u t i o n s ,

and t h r ou g h p r o vi d en t fun d

d e p o s i t s .

B e s i d e s , s e l e c t e d

p u b l i c

e n t e r -

p r i s e s

have been

a l l o w e d t o b o r r o w from the market w i t h t a x c o n c e s s i o n s .

They have a l s o b e e n p e r m i t t e d to i n c u r

e x t e r n a l

d e b t . I t i s t h e t o t a l

demand f o r fu nd s o f t h e

p u b l i c s e c t o r t h at must

be k e p t i nmind w h i l e

c o n s i d e r i n g t h e p o s s i b i l i t y of crow ding out of p r i v a t e i n v e s t m e n t , th e

p r e s s u r e o n

i n t e r e s t

r a t e s , and the i m p l i c a t i o n s f o r b a l a n c e o f

payment s .

Government has a c a p t i v e market f r o m w h ic h i t a t t e m p t s t o o b t a i n a

g

The Growth of Indian Public Debt- Raja. J. Chelliah IMF Report

Documents

Transcript of The Growth of Indian Public Debt- Raja. J. Chelliah IMF Report