Debt, like chaos, isn't a pit. Debt is a ladder to climb.
That's precisely what Littlefinger of the Game of Thrones fame would have said if he were to book balance nations' finances. But without needing any inspiration from the quick-witted fictional character, governments seem to be piling on debt -- good or bad -- in their quest for growth. This, despite, deficit scolds sending repeated reminders of apocalyptic scenarios, the sum and substance of which makes one believe in the Calvinist doctrine of surrendering everything to God and suffer, rather than borrow.
Indian government borrowings aren't really reckless. The world's fifth largest economy has never defaulted, over 90% of its debt is internal and on fixed interest rate limiting the risks of rate fluctuations. Yet, India is often reprimanded and reminded of the debt dangers.
Throughout its tenure till date, the NDA government has made fiscal rectitude a punchline of good accounting. The first term was notable for firefighting deficit, while the second term saw the government losing some of its marbles, courtesy the Covid-19 pandemic. If general government debt remained steady at 70% during NDA-I, it peaked in excess of 90% in 2021, taking deficit to a historic 9.4% -- a level last seen during the crisis-hit 1990s.
Interestingly, the UPA government's record on debt and deficits too was similar. If debt and deficit was under control during UPA-I, it went out of hand during UPA-II. Debt-GDP ratio fell from 83% to 71% and deficit corrected to 2.5% by FY09, one year ahead of the FY10 deadline. But the second term ran into an unforeseen challenge due to the 2009 global financial crisis, and the subsequent survival measures led by fiscal adventurism brought with it enough misfortune. Deficit breached 6.5% in FY10, but was reduced to 4.5% by FY14.
Yet, when Jaitely walked in, he was greeted with a nasty number, thanks to UPA-II's steep off-budget borrowings. In hindsight, this was also Jaitley's biggest mistake for continuing with the trend and allowing state-run entities like the Food Corporation of India to borrow beyond the budget estimates. Eventually, the job fell on Nirmala Sitharaman to wipe out the anomaly, embracing transparency and deficit realism.
During NDA's first term, despite missing his own targets twice, finance minister Arun Jaitley managed to anchor headline fiscal deficit at 3.4% by FY19. Luckily for him, oil prices stayed low and tax revenue haul was respectable. To this, Jaitley added a bit of expenditure compression here and there each year. Though Jaitley missed the overall deficit target, it was a remarkable feat given that he actually inherited a number that was higher than what was publicly disclosed.
Expenditure rationalisation has been another distinctive feature of all NDA budgets. For instance, from 13.9% expenditure-GDP ratio in FY14 to 12.2% by FY19, it was a tightrope walk, but the compression added 60 bps to the overall 90 bps deficit correction during the first term.
Even though the government didn't unleash a massive stimulus during its second term to counter the pandemic-induced recession, like the UPA-II's 2009 stimulus, both debt and deficit figures shot up largely due to higher expenditure, growth contraction, and revenue shortfall. After touching a high of over 90% of GDP in FY21, the IMF projects our general government gross debt to settle at 84% this fiscal. This is higher than that of many emerging economies, but better than the US, China, and Japan. The RBI, too, urged the central and state governments to cut debt to 66% by FY27, beyond which growth will be at risk.
As for deficit, it peaked to 9.4% in FY21, and was reduced to 6.7% by FY22. The current fiscal target is set at 6.4%, which analysts believe could come in lower at about 6.1% for a few reasons. For one, the NSO's first advance estimates peg nominal GDP growth at 15.4% for FY23 as against the 11% projected in budget. A higher nominal GDP number allows the government additional room of Rs 1 lakh crore without breaching higher deficit. Two, gross tax collections will likely overshoot budget estimates by as much as Rs 3-4 lakh crore, and minus the states' share and the Centre could be left with a Rs 2 lakh crore revenue. Even though total expenditure is likely to be higher by about Rs 2 lakh crore, thanks to higher food and fertilizer subsidies, the overall deficit may remain below 6.4%.
Finally, to make it to the 4.5% finish line by FY26, all it needs is a deficit correction of over 60 bps every year for three years in a row. Adding the fresh borrowings of a given fiscal, the annual reduction should be higher than the 30-40 bps correction seen in ordinary course. Is it possible? Some believe so, thanks in part to the anticipated decline in subsidy outgo next fiscal. In FY23, the Centre sought an additional Rs 3.26 lakh crore as supplementary demands for grants last month, of which Rs 1 lakh crore was for fertilizer and urea subsidies. In all, at about Rs 2.3-2.5 lakh crore, the current fiscal's outgo appears to be the second highest after the pandemic-driven record high of Rs 7 lakh crore in FY21. The good news is, it's expected to decline sharply in FY24, for which the Centre will likely peg the deficit target at about 5.4-5.7%.
That said, despite rising concerns over debt sustainability and as global rating agencies extol thrift and discourage debt, the deficit target with decimal precision stands junked with major G20 economies waving it a moral goodbye. Perhaps, the belief is getting deeply entrenched that even perpetual deficits are sustainable, as long as the economy expands faster than national debt and as long as interest rates on government debt stays lower than the annual growth rates.
But India doesn't have that luxury. Not because, it can't raise or service debt, but it's no secret that despite holding a zero default record, global ratings agencies remain indifferent to our sovereign borrowings. The big three -- S&P, Moody's and Fitch ratings -- have often downgraded our ratings to junk or to BBB-, the lowest investment grade denoting a high probability of default, affecting investor sentiment. Given both our ability and willingness to pay, such treatment seems incongruous, 'noisy, opaque and biased.'
The Economic Survey championed the cause first in 2017 and forcefully in 2021. Citing enormous research, it reasoned that India's ability to repay was so high that it can cut a cheque to clear all private debt and still be left with cash in its pocket! It also made a case for relaxing strict debt and deficit targets to allow the government fiscal space to increase spending, even if that means higher debt.
Yet, Sitharaman being Sitharaman, she took recourse in targeted counter-cyclical fiscal policy and carefully avoiding fiscal irresponsibility. Her resolve will be tested next fiscal, when growth rate is expected at 6.8%, which seems lower than the interest rate on government debt.