India's Biggest Risk Gets Even Bigger

When compared to developed nations, namely the US, UK and Japan, India has the edge given that its GDP has been growing and is expected to grow at a much faster pace going forward.

What is more, India seems to be in a better position than its peers even when it comes to the total debt that has been amassed. In a bid to bolster their economies, the US, UK and Japan have accumulated debts that are set to exceed or equal the size of their economies.

India in that sense is slightly better off as the government's total debt would still remain well below the country's GDP size. The total debt of the US, UK and Japan has already reached a size of about US$ 17 trillion, nearly 25 times of that in India's. Therefore, while there is a valid rationale as far as these three countries are concerned for resorting to such gargantuan borrowings in the near term given the scale of the crisis, in the longer term repaying this debt will emerge as a pressing concern.

To add fuel to the fire, if you juxtapose this rising debt issue with their rapidly shrinking economies, you get a debt to GDP figure that will only chart the upward path.

In India's case too; while in comparison the country may seem to be in a better position, when seen by itself India's mounting debt is definitely a matter of concern. India has also been borrowing heavily to support the growth of its economy, which has slowed down due to the global financial crisis. Once again, the large scale borrowings may provide the much needed boost, but India has a bigger problem to deal with, namely its burgeoning fiscal deficit.

Wasteful expenditure, huge interest payments and salaries of government employees are already taking a toll on the government's finances. Add to that the farm loan waivers and various subsidies, especially in the fertiliser and the energy sector, and you have a very challenging task indeed of bringing this deficit down.

Leading global rating agency S&P, for instance, has pegged India's fiscal deficit as set to increase 6.5% of GDP, which will be the highest in almost two decades. And this is excluding the off-budget liabilities, such as fertiliser subsidies and compensation to state-run oil companies. Together these liabilities are estimated to be another 4% of GDP, thus taking the total deficit into double digits.

The deficit situation can be considered even worse but for the higher revenues that are expected to come from selling 3G spectrum to telecom companies and stake sale in public sector units. While these additional revenues will help the government narrow the deficit, it will still remain very high this year. "Fiscal risk in India is among the highest globally. It'll be difficult for the government to address this issue at least for another year," remarks a senior official from S&P.

Certainly, the Finance Minister will be kept on his toes in his present term and it will be interesting to watch how he manages to tackle this problem.

Comments

[Mad Hedge F...:]

Since China is so overbought short term, India is my first pick. You want to buy countries that have to build infrastructure and a middle class, and China has already done that. India’s recent election of a more pro business government is the trigger. I aggressively pushed India at the beginning of the year (www.madhedgefundtrader...), and it has doubled since then. Buy on the dip.

Jun 23 10:14 AM