The Hindu Business Line : Why India is not sinking under huge public debt

On the one hand, as the International Monetary Fund's (IMF) Dr Kalpana Kochhar notes, the country's fiscal deficit (Centre and States combined), at 10.2 per cent of gross domestic product (GDP), is below just that of Turkey (19.2) and Argentina (12.8), while being higher than other crisis-prone emerging market economies. These include Hungary (9.5), Philippines (8.3), Brazil (4.7), Indonesia (1.8), Chile (1.4), South Africa (1.2), Russia (minus 0.7) and Ecuador (minus 0.8).

Equally disturbing, by end-2002, India had accumulated a sovereign debt-GDP ratio of 80.6 per cent, representing 441.2 per cent of annual governmental revenues. The corresponding percentages are better for Russia (34.7 and 92.9), Ecuador (57.8 and 223.9), South Africa (39.9 and 149.4), Hungary (49.9 and 135.8) and Turkey (81.2 and 289.4), while being comparable or worse than only Brazil (95.1 and 127), Argentina (174 and 668.2) and Philippines (99.4 and 573.8).

According to Dr Nouriel Roubini of the Stern School of Business, New York University, the fiscal deficit and debt-GDP ratios for India are way above the corresponding averages of 3.9 per cent and 61.2 per cent for countries with similar Moody's credit rating of `Ba1 to Ba3'. Worse, even lower rated economies (`B1 to C') enjoy better average fiscal deficit (4.5 per cent) and debt-revenue (372 per cent) ratios.

"In most developing countries, these numbers would presage an immediate currency crisis, with investors demanding an ever-increasing risk premium on their sovereign bond holdings, forcing Governments to raise interest rates, shorten their debt maturities and denominate them in foreign currency to hedge against prospective inflation and devaluation," says Prof Ricardo Hausmann of the Kennedy School of Government at Harvard University.

But India, as always, seems `different'. The markets clearly do not find the debt levels excessive, as nominal interest rates are declining, gilt maturities are elongating, foreign capital inflows are large and banks have ample liquidity to fund the private sector. Further, forex reserves have crossed $100 billion and the central bank is having to sterilise excessive inflows in order to prevent the rupee's undue appreciation!

So, why is India then `shining' and not `crashing', as per dire textbook model predictions? Prof Hausmann's explanation is simple. The authorities here have, no doubt, sinned by engaging in an unsustainable borrowing binge. But unlike in other countries, they have committed only the `domestic original sin' and not the `international' one of borrowing excessively in foreign currency. The ratio of India's external debt to total sovereign debt is only 10.4 per cent, whereas it is 81.9 for Russia, 80.9 for Ecuador, 64.4 for Argentina, 55.8 for Indonesia, 51.6 for Chile, 46.5 for Hungary, 43.4 for Philippines, 40.1 for Turkey, 26 for Brazil and 20.1 for South Africa.

In this sense, India is more like the industrialised market economies, which predominantly borrow in their own currencies.

Since the country's public debt has a very small foreign currency component exchange rate movements do not have any significant adverse fiscal impact. Conversely, piling up of sovereign debt in rupees does not also generate balance of payments vulnerabilities, leading to currency crises a la Brazil, Argentina or East Asia.