Post #10 of the Quarantine series - India's government debt amidst the pandemic

The unprecedented coronavirus crisis has severely pressured the government finances. Not only is there expectations from the government to spend more for relief measures amidst these challenging times but also limited economic activities is weighing on the revenues of the government. There is one popular number which is often discussed which is “fiscal deficit” and that as a % of GDP. This number measures the quantum of borrowing to finance the gap between governments’ revenues and expenditure. Over time, just like an individual, the government repays the amount borrowed and borrows afresh. The residual amount which the government is likely to repay as on any given date is called as "outstanding government debt". 

There has been a lot of discussion about widening of India’s government debt since the announcement of the economic package and the 15^th Finance Commission (which looks after setting targets of fiscal deficit and government debt) is set to meet on May 21 to decide on the fiscal consolidation roadmap for 2021-22 to 2025-26. This roadmap will tell the target of fiscal deficit and government debt which they have to keep in mind over the next few years. Thus, post #10 of the Quarantine Series delves on some basics of government debt and tracks India’s debt positions over the years. 

Q1. What is government debt and what are the different variations/terminologies associated with it?

A1. Government debt is the outstanding amount of loan to be repaid by the government as on a given point in time. Different terminologies associated with it are provided in the chart below:

• Internal debt is the part of the government debt in a country which is owed to the lenders within the country. This is in the form of GSec (government securities), treasury bills, cash management bills, ways and means advances.
• External debt is the part of the government debt in a country which owed to the lenders outside the country. This form of borrowing is done from other governments and multi-lateral financial institutions like World Bank, IMF, other private institutions. 
• Total internal debt plus external debt is equal to public debt.
• Apart from public debt, there are other liabilities of the government like borrowings from National Small Savings Fund, state provident funds and other reserve funds.

 An equation below summarizes the above mentioned details: 

 Q2. How much is India’s government debt?

A2. India’s total government debt stood at Rs 146.9 lakh crs in as of 2019-20. This is the total debt of Centre and all the state governments taken together. Out of the total debt, 70% is held by the Centre while the balance 30% is held by the states. Popularly, the country’s debt is measured as a % of GDP. In India’s case, the India’s total government debt stood at 69.6% of India’s GDP in 2019-20. Total debt of the Central government is 48.6% while the 24.9% is that of the state governments in 2019-20. The trends in India’s government debt (As a % of GDP) has been provided below:

Chart 1: Trends in Indian governments’ debt to GDP ratio over the year

Q3. Where does India’s government debt to GDP stand in comparison to other countries?

A3. Out of a list of 173 countries, India ranks 38 in the ratio of government debt to GDP ratio which is notably lower than a few advanced economies like Japan, Italy, United States, France and United Kingdom. However, India’s debt is higher than Asian few peers like China, Thailand Malaysia and Philippines.

Chart 2: Country-wise comparison of government debt to GDP (%)

Q4. Why are we discussing about India’s government debt? Has there been any change in the number recently?

A4. Two developments on account of the coronavirus pandemic could have a bearing on India’s government debt.

• One is the likely increase in the central government’s fiscal deficit which means that the central government is likely to borrow more. India’s central bank has responded to this by increasing the government’s market borrowings to Rs 12 lakh crs for FY21, which is Rs 4.2 lakh crs higher than what was originally budgeted.
• Second is the likely increase in the state government’s borrowing during FY21 and this can be understood by the recent announcement by the Finance Minister to allow states to borrow additionally 2% of the GDP (out of which 0.5% is unconditional), subject to adherence to certain conditions. Even if the states avail the facility of additional borrowings, this could lead to states borrowing around Rs 2 lakh crs more from the market. 

So to put this in very simple terms, it means that as the governments are likely to spend more, they will have to fund the deficit by borrowing more and this could further add to the government debt. A back of the envelope calculation shows that India’s government debt to GDP ratio (both centre and states) could increase to 76-77% of GDP, from the current level of close to 70%. It was during 2002-05 when this ratio was little over 80%.

Q5. How has this number declined by almost 10% over the last 2 decades ? Is there some regulation implemented to monitor this?

A5. The governments have taken conscious efforts over the years to reduce the fiscal deficits over the years as the same has been mandated in the Fiscal Responsibility and Budget Management Act, 2003. Initially, the Act mandated the fiscal deficit to be reduced to 3% of GDP and only the recent FRBM Committee Review in May 2016 stated that this ratio should be targeted at 2.5% by 2023. In addition, the committee in 2016 also suggested using debt as a primary target and it was set at 60% of GDP (40% for the Centre and 20% for the states). In short, the committee has recommended that the government achieves a target of 60% by 2023. Given the uncertain times we are facing, a revision in the initial targets look likely.

Q6. Why is this increasing government debt number worrisome for the country?             

A6. The rising government debt has implications in the future in the form of additional interest cost for the government, puts pressure on interest rates which in turn can crowd out resources from the private sector and no additional fiscal space to deal with future shocks. In addition, two economists Reinhart and Rogoff have shown that for emerging economies there is a sustained increase in inflation in the country as the debt to GDP ratio increases.

 To end, I will like to pose a question to the readers: Will increasing government debt lead to higher inflation in coming years for a country like India or will we face deflationary trends like the one seen in advanced economies like Japan? Let's understand this point with some inputs from Irving Fisher's idea of the debt-deflationary trap in Post #11 of the Quarantine series. So do check out this space for the idea discussed above.  

Post #9 of Quarantine Series - An economic package for the Agriculture sector

Tranche 3.0 of the Finance Minister’s economic package gave me a feeling that I am watching Day 3 of a Test Match because the last announcement for the batsmen (i.e the farmer) on Day 2 was the starting point and focus area of Day 3 of the announcements. There were new batsmen of the team (animal husbandry, fisheries, bee-keepers, herbal cultivators) batting today and they held fort till the end of the day. However, today’s announcements were more of a long term solutions to address the concerns of the agriculture sector rather than an immediate action to help the agriculture community suffering from the pandemic.

Today’s announcement means that the aggregate amount has now reached Rs 17.67 lakh crs out of the stated Rs 20 lakh crs, meaning that a balance of Rs 2.33 lakh crs will be announced in the next few days (probably all analyst need to have patience like Rahul Dravid and hold fort for 2 more days).

A quick snapshot of today's announcement:

Announcements  on May 15	Amt (Rs crs)	Details	For what?
1)       Agriculture Infrastructure Fund	1,00,000	·     The government plans to create an infrastructure fund	·       For funding agriculture infrastructure projects like cold chains ·       Due to lack of adequate cold-chain and post -harvest management facility
2)       Micro food enterprises	10,000	·   To formalize the micro food enterprises, farmer producer organisations	·       The unorganized units  will be upgraded to improve their standards, integration with retail markets
3)       Fisheries	20,000	·   Under an existing scheme, Pradhan Mantri Matsya Sampada Yojana, the government will spend Rs 20,000 crs over the next few years	·       The spending will be done to improve and develop the marine and inland fisheries (including infrastructure)
4)       National Animal Disease Control Programme	13,343	·       Vaccination of the livestock	·       This will control foot and mouth diseases and brucellosis
5)       Animal Dairy infrastructure fund	15,000	·       An already existing fund which will get funding via NABARD	·       This additional funding is done boost the animal husbandry sector ·       Also drive private investment in dairy processing and cattle feed infrastructure
6)       Herbal cultivation	4,000	·       The spending will be done by the government over the next 2 years for cultivation of medicinal plants	·       Will get around 10 lakh hectares under herbal cultivation ·       Generate Rs 5000 crs of income
7)       Beekeeping	500	·   To spend to support the livelihood of beekeepers ·   The spending will be on infrastructure and implementation of standards	·       This will improve quality of crops and yields ·       Increase income of beekeepers
8)       Operation Green	500	·   To widen the ambit of an existing scheme named “Operation Green” by including all the fruits and vegetables	·       This will provide subsidy to the farmers to transport the fruits and vegetables from areas of surplus production to consumption centres
Total	1,63,343

Some key concepts:

Under 1) Agriculture Infrastructure Fund

a.    Who will fund this amount of Rs 1 lakh crs ?

Ans. The amount of funding will not be done by the Government of India, but will be done by National Bank for Agriculture and Rural Development. The clarity will be required on whether this funding will be via market borrowings or equity infusion into the NABARD. Most likely it looks like the former.

Under 2) Micro food enterprises:

a.     What are micro food enterprises/ farmer producer organisations?

Ans.  Micro food enterprises are manufacturers of packaged food products and having investments of less than Rs 25 lakhs for manufacturing entities and Rs 10 lakhs for services. Small and marginalized farmers come together and form an organisation called as farmer producer organisation.

b.    What is a cluster based approach?

Ans. A cluster is formed when several small firms come together and forms a hub. This is the exact example which the Finance Minister gave in her conference where she mentioned that commodities in which a state specializes will be identified and grouped together and formed into a cluster.  

Under 3) : Fisheries

a.     What is the Pradhan Mantri Matsya Sampada Yojana?

Ans. A scheme which was launched on July 5, 2019 aims to increase the fish and aquatic products through appropriate policy, marketing and infrastructure support. The idea is to build a robust fishery management framework.

Under 5) Animal Husbandry Infrastructure Development fund?

a.     What is this fund about?

Ans. This fund was created in March 2018 for the purpose of financing infrastructure requirement of animal husbandry sector with an initial corpus of Rs 2,450 crs. Today’s announcement will add Rs 15,000 crs into the already existing fund the money will be raised by NABARD.

Under 8) Operation Green

a.     What is the Operation Green scheme?

Ans. This is a scheme which was announced in Budget 2019 which will aid farmers to control the erratic fluctuations in the prices of tomatoes , onions and potatoes (TOP). In today’s announcement, the government has widened the definition from the TOP vegetables to all fruits and vegetables. Furthermore, the scheme states that it will provide 50% subsidy on transportation of the produce from surplus to deficient markets and 50% subsidy on storage.

What is the fiscal impact on the government?

The critical point to note in today’s announcement is not the actual cash outflow which the Government will undertake in one single year but how it will spread this across multiple years. For example, it has stated that the for herbal cultivation, the money will be spread across 2 years. Another example is the National Animal Disease Control Programe, where expenditure will be incurred across next 5 years.

Another important point to note is the outlay on different funds will not be done by the Government, but by the NABARD. Now, we have to wait for the details of how NABARD will raise the money (via equity or market borrowings)

Therefore, the impact on the finances of the government is not possible to calculate in FY21.

What are the 3 governance and administrative reforms announced by the Government ?

a.       Amendments to the Essential Commodities Act by which agriculture food stuffs including cereals, edible oils, oilseeds, pulses, onions are to be deregulated which means that any stock limit on these commodities will be imposed only under exceptional circumstances. In normal scenarios, there will be no stocking limit imposed on the producers producing these commodities.

b.      Agriculture Marketing Reforms where the Central Government plans to formulate a lawto provide:

a.       Adequate choices to farmer to sell the produce at the right price

b.      Barrier free Inter-state trade

c.       And build an e-trading framework

This will allow farmers to have more options in selling one’s agriculture produce not restrict oneself to only a few people in the APMCs.

c.       A legal framework to be created or farmers to engage with processors, aggregators, large retailers for producing those commodities which will provide assured returns.

Post #8 of Quarantine Series - A package for the Lower Strata

The Finance Minister announced the details of the second tranche of the special economic package with a focus on providing liquidity support to farmers, street vendors and food relief to the migrant workers. There were also announcements made for the mudra loanees, affordable housing sector and for employment generation for tribals. 

The total value of the economic package announced so far is Rs 16.04 lakh crs and thus the balance Rs 3.96 lakh crores will be announced subsequently in other tranches. 

Total liquidity infusion as per today’s package adds up to Rs 3.16 lakh crs, of which only Rs 5,000 crs will be an outflow from the Government. The balance liquidity measures will be undertaken by banks and other financial institutions.

Breakup of total value of the economic package is summarized below:

Announcements	Amount (Rs lakh crs)
PM Garib Kalyan Yojana	1.7
RBI	5.24
Athmanirbar 1.0 (May 13)	5.94
Athmanirbar 2.0 (May 14)	3.16
Total so far	16.04
Total package	20
To be announced	3.96

The breakup of the Athmanirbar economic package 2.0 announced today is detailed below:

Specific announcements	Amount (Rs crs)
Free food to  migrants	3,500
Interest subvention on Mudra loans	1,500
Credit line for street vendors	5,000
Credit Linked Subisidy Scheme for housing	70,000
Farmers refinance via NABARD	30,000
Kisan Credit Card	2,00,000
CAMPA funds	6,000
Total	3,16,000

The specific scheme wise announcements are detailed below:

1.       Migrants

a.       Free food grains supply to all migrants for the next 2 months 

·       Migrants who are non-ration card holders (neither NFSA nor state card) will be provided 5 kg of wheat or rice per person and 1 kg of chana per family per month for the next 2 months.

·       The government will spend Rs 3,500 crs for this in the next 2 months

·       The responsibility of the implementation, identification and distribution will be with the states.

·       The food supply of 5 kg wheat or rice to 80 crs poor people (As announced under the PM Garib Kalyan Yojana) will continue separately

What is the benefit: Based on the identification and implementation by the state governments, this will provide food relief to the migrants

Cost to the government: Rs 3,500 crs (assuming this is not a part of any budget scheme)

b.       National Portability of the Ration Cards – One Nation, One Ration Card: 

·       This scheme will enable migrant beneficiary to access public distribution system from any fair price shop in the country.

·       This means that if a migrant is a resident of Bihar and is working in Maharashtra, then he will be able to show his ration card at a fair price shop in Maharashtra and avail the food supply.

·       67 cr beneficiaries (83% of the PDS population) in 23 states will be covered by August 2020 while the balance will be covered by March 2021.

What is the benefit: This is medium and long term solution and at the moment no one will benefit from this scheme. So need to wait!

Cost to the government: Nil

c.    Affordable Rental Housing Complex for migrant workers: A scheme under the Pradhan Mantri Awas Yojana (PMAY) for migrant and urban poor will be launched to provide ease of living at affordable rents. This will be done by 3 ways:

§  converting government funded housing in the cities into Affordable Rental Housing Complexes

§  Incentivising manufacturing units/ industries to develop affordable rental housing complex on their private land

§  Also incentivising state government agencies/ central government organisations for the same

In simple terms this means the government is only encouraging various manufacturing units/ industries/ government agencies to convert any open land into affordable housing units.

What is the benefit: This is again a medium/long term solution with no immediate benefit. We need to wait for the specific details under this scheme.

Cost to the government: NIL

2.       Mudra Loans (only Shishu Loans)

a.       Interest subvention scheme for Mudra – Shishu loans – 

·       The Government will provide an interest subvention scheme of 2% for prompt payees for a period of 12 months after the 3 month moratorium period (extended by the RBI) is over.

·       Interest subvention is like a grant given by the Government on the loanees behalf to the banks. So if the interest outgo is Rs 10, Rs 8/- will be borne by the loanee and the  Rs 2/- by the government.

What is the benefit: Lower interest to be paid by these mudra-shishu loanees. The catch here is the word “prompt payees”. I am assuming everyone has been promptly paying.

Cost to the government: Rs 1,500 crs (estimated)

3.       Street Vendors

a.       Special credit facility for street vendors: 

·       The Government will launch a special working capital loan facility within 1 month of around Rs 5,000 crs for the street vendors.

·       The initial working capital of Rs 10,000/- per street vendor will be provided. This will benefit around 50 lakh street vendors.

·       The credit facility is likely to be extended by the banks/ financial instiutions.

What is the benefit: Liquidity support to the street vendors (estimated to be around 50 lakhs as per the FM) to restart their business activity. Need to check up with nearby “bhel-wala bhaiyaaji” if he will avail this working capital facility.

Cost to the government: Nil

4.       Affordable Housing

a.       Extension of Credit Linked Subsidy scheme (CLSS)- 

·       Let’s first understand what CLSS is: The CLSS is a scheme under the Pradhan Mantri Awas Yojana which provides interest subsidy to the home owners availing the loan facility under this scheme.

·       So, if you have an income between Rs 6 lakh and Rs 18 lakhs (consider yourself as Middle income person), then you can avail the loan from the financial institutions at a lower interest cost.

·       The differential interest (between actual interest – say 12% and the lower interest as per the scheme say 8%) will be borne by the government.

·       The government has already budgeted Rs 500 crs under this scheme.

·       This scheme for the middle income group  is to be extended till March 31, 2021 and this is likely to benefit 2.5 middle income families during FY21.

What is the benefit: Will provide interest benefit (3-4%) to those middle income families who want to purchase a new house/ renovations/ additions to the new houses and avail the loan under this scheme. For my friends, in case you want to purchase a house, you can avail this benefit.

What is the benefit of Rs 70,000 crs then? The government is expecting the loans to be taken by these middle income families which will help in building/ renovating houses. Therefore, they expect investment of Rs 70,000 crs in the housing sector and demand for various materials like steel, cements which will also generate employment.

Cost to the government: Already budgeted in FY21. So NIL.

5.        Employee creation for tribals

a.       CAMPA (Compensatory Afforestation Management and Planning Authority) funds to be utilised for employment generation: 

·       The government will approve plans worth Rs 6,000 crs which will help the state to utilise funds for various activities like afforestation and plantation work.

·       These are unutilised funds and the government will approve the various projects which will help in kick-starting these projects by utilising the unutilised funds. This in turn will help in job creation in the tribal areas.

What is the benefit: Employment generation for tribal community

Cost to the government: Nil

6.       Farmers

a.       Rs 30,000 crores – additional emergency working capital fund for the farmers through the NABARD: 

·       The NABARD will extend additional refinancing support of Rs 30,000 crs (over the current Rs 90,000 crs) to the farmers. This will benefit around 3 crore farmers.

·       NABARD will provide these funds to the various cooperative banks/ regional rural banks. This will help in on-lending this money to the farming community.

What is the benefit: Additional liquidity support to the farmers for undertaking post harvest (rabi) and current kharif requirements 

Cost to the government: Nil

b.      Rs 2 lakh crores concessional credit boost under Kisan Credit card- 

·   There will be a special drive to provide Rs 3 lakh crs of concessional credit to PM-KISAN beneficiaries through Kisan Credit Cards. This will also include fishermen and animal husbandry farmers and will benefit 2.5 crore families.

What is the benefit: The farmers can avail institutional credit at concessional rate and this additional support to the farming community.

Cost to the government: Nil