India: Fiscal Deficit and Bank Loans

In the 11th document for a five-year plan, it was projected that in order to meet the proposed investment needs by year 2008-09, around 50% debt receipts worth Rs. 63,207 crores would be mobilized as domestic banks’ credit. However, the figures of revised budget estimates for 2008-09 states that market loans (amounting Rs. 261,972 Crores) are more than 80% of total debt receipt by the GoI.

The increased flow of subsidized bank loans to GoI for financing fiscal deficit is creating problems for economic growth of the economy because banks find it difficult to increase the supply of cheaper credit to the private sector at a time when they need it to minimize their output cost and combat recession.

It is observed that due to a fall in international demand, the availability of equity finance or cheaper credit sources have affected the business confidence. The equity financial sources are drying up after a reversal of capital flows from stock markets due to the global meltdown. External Commercial Borrowings (ECBs) and Export Credits have also declined.  This has all affected the growth rate for industries.

ahmad_graph_for_fiscal_deficit_and_bank_loans_512.gif

Besides evaluating a fall in the annual growth rate of Gross Domestic Product (GDP) from 9.0% in 2007-08 to 6.7% in 2008-09, it would also be important to analyze the growth trend for different industries during last year. The Manufacturing industry employing a majority of non-agricultural workers observed the deepest decline where its annual growth rate fell to 2.4% in 2008-09 compared to 8.2% in 2007-08. Similarly the annual growth rate of agriculture, forestry and fishing fell to 1.6% in 2008-09 against 4.9% a year ago.

However, the annual growth rate for Community, Social and personal services has remarkably increased to 13.1% in 2008-09 as compared to 6.8% in 2007-08 reflecting the impact of increased expenditures by the Government through financing schemes like NREGS.  It is important to notice that such expenditures have not only increased the fiscal deficit beyond the estimated budget for 2009-10, but only 9% of the Indian workforce engaged in Community, Social, and Personal services expected to be benefited through it. Thus the excess flow of subsidized bank credits to GoI for financing the budget deficit is ultimately restraining the economic growth.

2 Responses to "India: Fiscal Deficit and Bank Loans"

  1. Guest   July 11, 2009 at 8:05 pm

    Why are you still worried out irrelevant issues? US government is facing a 500-1500 billion shortfall as calculated by Hayman Capital. And now Japan is also joining the world with a tin cup in hand. Where are we really heading?

  2. Guest   July 14, 2009 at 1:33 pm

    I completely agree with this analysis, further i would add that almost 65% of the proposed expenditure in the budget has to be borrowed while the total debt to GDP is close to 90%. This does not include off balance sheet items and the subsidies the govt continues to dole out. Given this circumstances and growing population (mostly young people without proper prospects) i cannot foresee how India could grow at the same rate when the rest of the world is limping. Most of the growth in recent years was financed by external capital flow which are drying up.Just wanted to add a recent letter from the FtFrom Ms Maya Bhandari.Sir, Your editorial “A budget for India” (July 8) posits that at 6.8 per cent, India’s deficit is “not a shock, nor much to get worked up about … and hardly excessive compared with US and UK deficits [that are] twice as large”. If only this were true. The 6.8 per cent figure is the centre’s deficit alone – the states’ deficit is expected at 4.5 per cent of gross domestic product this fiscal year. Once you add in “off-balance sheet” food and fuel subsidies, which are usually between 2 and 3 per cent of GDP, the total deficit to GDP ratio falls between 13.5 per cent and 14 per cent.India’s deficit is therefore a fair bit higher than both the US and UK as a share of GDP; a structural, not cyclical, deficit, which with no Indian recession means major “crowding out”; and generally wasteful, as increased spending is allocated to higher public sector wages, distortive subsidies and loan write-offs. India has no bank bail-outs/deflation risks to speak of.The impact of debt mismanagement on this scale will be severe – with its 90 per cent debt to GDP ratio and large government financing gap, India could be a debt crisis in the making. This could result in much reduced trend growth.In a more positive scenario, private sector investment is crowded out. Indian growth last year was only slightly below its 7 per cent trend, and inflation on all measures (bar the unbelievable wholesale price inflation) is running at between 8 and 9½ per cent.Reducing the stagflation threat with a tighter budget, not non-existent deflation with a looser one, should have been the focal issue. Unfortunately it was not. Real growth could be down to 4-4½ per cent next year, and inflation should easily reach double digits. Stagflation is on course.Maya Bhandari,Senior Economist,Lombard Street Research,London EC4, UK