In debt we rise

In debt we rise

The current debt crisis in Greece reminds one of Kautilya’s perceptions about debt. He considered debt to be ‘instruments of decline’ for kings and governments alike. But modern governments seem to have come a long way and the Chanakyan prescription has truly become outdated. Today, good economics and good politics have become mutually exclusive. At least, so it seems. Sound economic policies need not necessarily yield political dividends to incumbent governments. Conversely, leaders and political parties may actually win renewed political mandates to government on the ‘strength’ of their ‘bad’ economic policies.

Thus, it is no secret that modern day governments ‘stimulate’ the economy by spending more and more and earning less and less to ensure their political continuity. In this ‘debt ridden world’, according to ‘The Economist’ magazine, the total current global debt is around $32 trillion. Based on the total world population of around 7 billion, this amounts to an average debt of around $4,600 or around Rs 2 lakh on every human being on this planet.

Recently the Indian government sought approval to spend an extra $6.6 billion in part to subsidise food and fertilisers and to halt the inflation. The average debt of an Indian citizen is nearly equal to his 10-month income, which on an annual basis has recently been estimated at Rs 38,000 by the Central Statistical Organisation (CSO) for a population of 115.4 crore. With the government adding about Rs 3,00,000 crore (Rs 3,000 billion) to the public debt annually in the last few years, the total public debt is estimated to zoom to a whopping Rs 34,06,322 crore (Rs 34.06 trillion) by March 2010, nearly double the amount recorded seven years ago.

This initiative to spend more than planned is affecting the yields on benchmark 10-year bond. Among the top 10 local-currency debt markets in Asia last year, Indian bonds were the worst performers (except Japan), handing investors a 5.1 per cent loss, as the government spent Rs 1.86 trillion to shield the economy from the global recession. India’s current public debt to GDP ratio is 58.2 per cent — almost close to the US position of 60.8 per cent — and we have much to learn from Uncle Sam.

Lessons from US debt

Backed by the US Congress, President Barack Obama recently signed into law an increase in the US national debt limit to $12.4 trillion. The US government posted a record $1.4 trillion deficit in the fiscal year ending Sept 30, 2009. The US government needs to spend more or ‘stimulate’ its economy. To facilitate this spending, it needs to borrow more and more to cover its deficit.

Historically, the lone super power has been living well beyond its means. Public debt in dollars quadrupled during the Reagan and Bush presidencies from 1980 to 1992, and remained at about the same level by the end of the Clinton presidency in 2000. The most important legacies of President George W Bush have been the rise in total public debt from $5.6 trillion in January 2001 to $10.7 trillion by December 2008. This was the quintessential lesson that the Bush Junior learned from the Bush Senior as the latter lost his re-election bid to Clinton purely due to his attempt to trim the US National Debt by increasing taxes, a far departure from his stated election promise. The trend is expected to continue as Barack Obama intends to spend more on war, health care reforms and social security, leading to a projection of total national US debt of around $20 trillion by 2015.

So who is funding this enormous US debt? In May 2009, the US owed China $772 billion. It also owed substantial money to others like Japan and Saudi Arabia. In reality the money that a Chinese saves is spent by an American. This has definitely posed critical economic and political risks for the United States. As America continues to borrow more especially from the Chinese, the rationale of economic superiority in the longer run for America would be in serious decline. China doesn’t intend to fish in the troubled waters at least for now purely due to lack of substantial alternative currency to the US dollar. However, even this is changing as seen from recent increase in diversifying its non US dollar based securities by oil rich countries and also by countries like India, China and Russia. Cumulatively, this poses an enormous challenge to the US dollar in the longer run.

The US has been able to withstand its national debt purely due to its economic and political dominance and the power of US dollar so far. But what about India? Obviously, the American approach cannot be blindly followed. Indeed, it is high time that our economic planners adopted a balanced approach which would require them to decrease deficits and trim our national debt. In the urge of economic prosperity we cannot go on borrow from others to spend at home, even if it means sacrificing some growth targets. Our fiscal discipline is quintessential to our long term national and economic security.  Its time that we look ourselves as a post-developing nation and make sound economic choices, though that may be politically very hard to accept. Nassim Nicholas Taleb, the author of ‘Black Swan’ recently said in a blog that “A lot of the growth (of America’s) of the past few years was fake growth from debt”.