Borrowings, Microeconomics

Borrowings:

The widening fiscal gap led to a steep rise in the outstanding liabilities of the Central Government. The outstanding domestic debt of the Central Government as a ratio to GDP is budgeted to rise. According to a report by the Comptroller and Auditor General of India (CAG) aggregate fiscal liabilities of the Government rose but its average growth rate has been decelerating over the years. Internal liabilities constituted the bulk as external debt comprised just over 11 per cent in 2003-04 and grew at an average annual rate of 11.88 per cent from 1992 to the financial year 2004. Of internal liabilities, domestic debt accounted for around two-thirds of total liability in 2003-04 and grew at an annual average growth rate of 16.81 per cent from 1992 to 2003-04, while public account liabilities had the lowest growth rate of 10.79 per cent. Aggregate fiscal liabilities - GDP ratio peaked during 1991-92 when it reached 65.43 per cent of GDP. In the last two years, while the ratio of fiscal liabilities to GDP rose to 62.69 per cent in 2002-03, it came down to 59.87 per cent in 2003-04, close to the long-term trend levels. The long-term tendency of the ratio of fiscal liabilities to GDP ratio was of acceleration at an average annual rate of shift of 0.17 per cent during 1985-2004. If various components of fiscal liabilities in 1985-86 are set to 100, the index value of internal debt, external debt and total liabilities in 2003-04 would be 1,607; 691 and 1,137 respectively (The Economic Times, May 7, 2005).    

Borrowing would not in itself be a serious source of concern if it could serve the purpose of developmental requirements. But borrowing to meet current consumption cannot necessarily ensure adequate return to meet the interest burden and repayment of loan liabilities. The distortions created by the present fiscal structure would lead to an unsustainable accumulation of the Government debt. When is debt sustainable? Although economic theory has no answer to what the prudent debt/GDP ratio should be, it is well understood that a continuously rising ratio can lead to a situation where the Government can default on its debt obligations. A high debt ratio is a long-term consequence of a Government running high fiscal deficits. The rising debt service burden has already started crowding out productive Government expenditure. What is the debt being used for? The use of debt for consumption makes servicing difficult in the future.

Posted Date: 11/15/2012 2:00:52 AM | Location : United States







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