Rising Debt, Falling Confidence

CEIC India Data Talk: India’s central government liabilities are expected to continue rising during the fiscal year ending in March 2014, to INR 58.11 trillion compared to the revised estimate of INR 51.99 trillion for 2012-2013. The projected central government liabilities comprise internal (domestic) liabilities of INR 54.69 trillion and external liabilities of INR 3.43 trillion; the increase is largely attributable to the INR 5.69 trillion projected rise in government debt, which includes INR 4.88 trillion of additional market loans. Central government liabilities stood at INR 40.60 trillion and INR 46.56 trillion as of the fiscal year ended March 2011 and 2012 respectively. Presently, as of the quarter ended June 2013, Ministry of Finance statistics place total central government debt at INR 49.25 trillion, comprising INR 38.91 trillion of domestic public debt (which includes market loans, treasury bills, bonds and other securities), INR 6.32 trillion in other domestic liabilities (which includes various savings, reserves and provident funds) and INR4.02 trillion in external public debt. Central Government market loans have contributed to the largest proportion of the total debt increase, having grown by INR4.93 trillion during June 2013, compared to the same month of the previous year. Central government debt has been placed under close scrutiny in the light of deteriorating economic conditions and recent fiscal initiatives, especially the controversial expansion of India's food subsidy programme. Under the food security ordinance, approximately 800 million poor people will be allocated 5 kg of grain monthly; critics of the scheme argue that the move is largely political given the coming 2014 election. The ordinance raises huge questions over the means of funding the expensive subsidy bill. Indeed, the introduction of the programme places doubt on the government's 2013-2014 Union Budget estimates, which projects a food subsidy bill of INR 900 trillion, a mere INR 50 trillion increase compared to the previous fiscal year. This is further exacerbated by the vicious cycle where the perceived inability of the administration in addressing these fiscal concerns – along with the widening current account deficit – has resulted in deteriorating foreign investment prospects in the country, hence placing further pressure on the administration to keep its books in order; India's current account deficit stands at an estimated 4.77% as of the fiscal year ended March 2013, widening from 2.70% and 4.19% during the fiscal years ended March 2011 and 2012 respectively. This, in turn, means that the administration faces escalating borrowing costs, with the yields on benchmark 10-year government securities rising to 8.78% as of August 2013 from 7.46% and 8.27% as of June and July 2013 respectively. Given the increasing risk aversion of global investors in light of the poor global economic outlook and anticipated US tapering, uncertainties over fiscal management have turned investment in India into an increasingly unattractive proposition, especially when considering the slow pace of reforms, poor regulatory environment and political weaknesses. The threat of a possible downgrade by rating agencies may further push the governments' borrowing cost upwards, reducing the viability of fiscal instruments as a means of putting the economy back on track. On the bright side, the relatively small proportion of government external debt somewhat insulates India from currency risk (especially as the Indian Rupee is depreciating). However, central government has much to do to manage its debt and reinvigorate the country to make it a better investment location to global investors. By Chan Yee Lui Google+ Author Profile - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
7th October 2013 Rising Debt, Falling Confidence

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