The Government of India is likely to fall under the weight of its debt if economic growth falters. Government of India total outstanding borrowings is four times higher than its recurring revenues. A slow growing India would mean slow growth in revenues, which will in turn lead to rising budget deficits that will add to the outstanding debt of the government, which will take up borrowing costs that will make the governments borrow more to pay interest on borrowings.
The higher the interest outgo on borrowings, the less the government has to spend on infrastructure and other productive investments and this leads to further fall in GDP growth. The stock of debt to revenues will multiply leading to the government becoming insolvent.
A self fulfilling cycle that may take the economy to the brink of collapse.
How does this work?
The government earns tax revenues of Rs 13790 billion (Rs 13,79,000 crores) as per fiscal 2014-15 estimates.
Of the total tax collections, Rs 3877 billion (28.1%) is transferred to the states.
The net tax collections for the government is Rs 9864 billion.
Other recurring income for the central government is interest and dividends that amounts to Rs 970 billion.
Total recurring income for the central government is Rs 10,834 billion.
The total outstanding bonds issued by the government stands at Rs 35,400 billion as of February 2014. The government will add Rs 4570 billion to its debt in fiscal 2014-15, taking the stock of total outstanding bonds issued by the government to Rs 39,970 billion.
The government’s debt is almost four times higher than its recurring revenues. How can it every pay back its debtors or how can it even service the debt?
Government pays interest on its borrowings of Rs 4270 billion, which is 39% of recurring revenues.
Defence and subsidy payments total Rs 4680 billion. The total of interest payments plus defence and subsidy payments amounts to Rs 8950 billion or 83% of recurring revenues.
Apart for interest payments, defence and subsidy payments the government will have to pay the salaries of its bloated workforce, spend on recapitalising its banks that are falling under the weight of bad loans (well over 6% of advances) and also spend on infrastructure to boost growth. Given that 83% of recurring revenues is not available for other expenditure, the government has to rely on asset sales to boost revenues to pay for plan expenditure that helps the economy grow. The target for asset sales including disinvestments, spectrum auctions and other fees for fiscal 2014-15 is Rs 900 billion while earmarked plan expenditure is Rs 5553 billion. Asset sales fall way short of plan expenditure estimates.
How can the government spend to grow the economy if it earns just enough to pay interest and keep the country running? Hence it is vital that the economy grows at a fast pace that can increase recurring revenues and enable the government to service debt and spend on infrastructure.
The best scenario would be GDP growth with increase in tax to GDP ratio and decrease in the subsidy bill. Will it ever happen in India given its political structure?