Lacking sinews

The Finance Ministry's latest quarterly report on the Centre's public debt management operations highlights certain redeeming features of its finances that should, nevertheless, not take the focus away from achieving fiscal consolidation. The report shows that out of the Rs 39 lakh crore of outstanding public debt owed by the Government of India as on September-end, external liabilities comprised less than a tenth — the first time it has fallen below double-digits. More than 90 per cent of the Centre's debts are held in rupees, owed to domestic banks, insurance companies, provident funds and others channelising the savings of the Indian public. Further, only a third of its outstanding market loans have a residual maturity below five years, with the weighted average coupon on these securities working out to just 7.95 per cent. All of this points to very low rollover risks in the Centre's overall debt portfolio.

The above features — much of the Centre's outstanding borrowings being denominated in local currency and bearing an average maturity of 10 years; a debt-GDP ratio of about 50 per cent that is lower than the levels in the US, the UK, European Union or Japan (where it is well above 200 per cent) — would make the country's fiscal position seem better than one would ordinarily assume. A conscious official policy of confining sovereign borrowings to largely in rupees has helped India not go the way of Greece, Spain or Italy, whose governments do not have the luxury of redeeming their debts in their own currencies. To that extent, there is no threat of a sovereign debt crisis engulfing the country, even as many Indian corporates are currently struggling to refinance their foreign currency convertible bonds, with some even defaulting on those coming up for redemption.

But all these are of little consolation for one simple reason. Much of the Government’s borrowings go to finance current consumption rather than towards building real assets on the ground. In today's context, this is unfortunate because most corporates, who invested aggressively in power, highways, telecom, or airport projects during the past boom phase, are now neck-deep in debt. They just have no money to invest further, even while the existing projects aren't generating sufficient cash flows. So that practically leaves the Government and the public sector undertakings; their role is crucial today for getting the investment cycle moving again. But that cannot happen without fiscal consolidation, which involves a fundamental redirection of governmental spending away from untargeted subsidies and other wasteful consumption to productive, asset-creating expenditures. Such consolidation is also necessary for the future, as and when private sector investments revive. The Government's deficits, at that point, should not lead to a ‘crowding-out’ of private borrowings and undermine their ability to raise resources.

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