The death-knail of debt trap

The slowdown in the economy and consequential slippage in the tax collection are likely to increase the government’s market borrowings in this fiscal. In an overall situation, this might not be a good news for the investors, but in short term this may make them happy as this would lead to increase in the interest rate.

The industrial slowdown has further aggravated in the current fiscal. According to an estimate by ICICI Securities, the industrial production in the first two months of current fiscal has grown by only around 2 to 2.5 per cent against 3.2 per cent in the January-March 2001.

According to the estimate, the likely shortfall in the revenue collection will be around Rs 15,000 crore. The main shortfall is likely to come from the customs collection because of the lower global oil prices and low growth of non-oil imports. In the excise duty front also, the tax collection is likely to be affected by the low demand. Another factor which might affect the collection is very low inflation in the manufactured products where the price index remained stagnant in the last seven months.

The non-tax revenue might also face a shortfall of another Rs 4,600 crore, the I-Sec report pointed out.

The government will have to act to turnaround the economy. According to one estimate, besides asking all the departments to spend their allocated funds to generate demand in the economy, the government will have to spend another Rs 5,000-8,500 crore in the current fiscal.

If all this extra expenditures and shortfall in the revenue collections are adjusted, the government will have to borrow an additional amount of Rs 25,000 crore from the market.

Besides this, if the government works out a bailout package for US-64 fiasco, the borrowing requirements will further increase. According to a conservative estimate, any bailout package will be of Rs 4,000 crore –difference of the current net asset value of around Rs 9.75 of the unit and the normal repurchase price of around Rs 13 per unit offered by the trust to the investors. This will further add to the fiscal slippage.

In the first three months (by July 6) in the current fiscal, government has already borrowed Rs 57,250 crore from the market against the total budgeted amount of Rs 1.2 lakh crore. If the market borrowings increase further by around Rs 30,000 crore, there will be tightening in the liquidity position.

The aggressive borrowings of the government in the first three months have not impacted the interest rate much mainly because of the slow credit off-take by corporates. The non-food credit (borrowings of the industrial sector) has gone down by Rs 22,429 crore by June 22, 2001 over April 6, 2001 level. But, if the industrial demand picks up to maintain even a single digit growth, there would be increase in the corporate borrowings.

These two factors might push the interest rates upward. Particularly, after the monsoon when the busy season will start, the interest rates are likely to firm up. As the wholesale price index is not increasing on account of import pressure, any increase in the interest rate will increase the net return to investors.

But the fiscal slippage will have a negative impact in the long term on the economy. In fact, the country is slipping into a kind of debt-trap where the government’s revenue falls short of debt servicing obligation. Not only this, it would not be taken lightly by the international rating agencies which have warned the government to follow strict fiscal discipline, otherwise to face the possible downgrading.

What do you think?