Tuesday, 7 July 2009

Borrow like there's no tomorrow

The Indian Union Budget was presented yesterday – normally this is presented on the last day of February, but this year because of the elections and the new government, it is being presented now.

A zillion columns have been, and will be, written on the budget. The stock market reacted yesterday by tanking 6%. Many experts will dissect the budget and depending on where they come from, will either laud it or criticize it.

The budget is full of jargon and incomprehensible to a layman. It also carries tons of detail and is a very tough read. I had argued some months back on the budget being “the Great Indian Rope trick” – Click here and here to read it. And when Pranabda presented the interim budget in February, I argued that even the rope is gone.

In this post I’m focusing on one theme, and to me the dominant theme – the borrowing binge that’s going on.

After rehashing the government presented numbers, the overall situation is somewhat like this. Government will get cash inflows of Rs 7.2 trillion. And it will spend Rs 12.2 trillion. How does it bridge the gap. It simply borrows. Now this is the central government. Every state government does the same thing.

Now which sensible person will earn 7 and spend 12 ? And keep doing something like this year after year. Today a full one third of all revenues goes just towards meeting interest payments. And this number keeps rising year after year.

If this were a company and not the government, it would have gone into liquidation by now. The market would have hammered its share price down to zero. Unfortunately there is no stakeholder to really control the government.

Indian tradition is one of thrift. Of spending and living within your means. Not borrowing like a madman.

How does one drill some sense of responsibility into governments to spend only what they earn ? A futile cause, I'm afraid. Doesn't work in this world. Just turn to the state of California for inspiration on recklessness.


le embrouille blogueur said...

Unlike the country which is now staggering under enormous financial crisis....India truly has a tradition of thrift ....plastic used to be the "not so popular spending medium" and cash was the control ticket .....looks like the fever of over spending has caught on ....the CA mention is very apt ....!!!

Ajay said...

I think the present global economic scenario might not be the best of times to practice thrift. I think governemnts do need to increase spending and boost demand. As Bernanke had said that the cost of inaction would be much higher than the cost of this action (he was referring to the bailout packages).
What is deplorable is that for the Indian Govt this deficit has been on the rise forever now. And trade deficit too.

Ramesh said...

@blogueur - The average Indian is still thrifty - savings rate continues to be comparitively high. It's the government that has gone bonkers spending way beyond its means

@Ajay - The Indian deficit problem is structural and not really related to the so called stimulus. The need for stimulus is low - India's banks haven't been in death throes and domestic demand is holding up well in most sectors. Our deficit is because of huge interest payments, massive food and fertiliser subsidy and unchecked government expenditure. Witness the non plan expenditure being much higher than plan expenditure. There is no excuse for the Indian government not spending only what it earns.

rads said...

Obviously...they earn 7 and spend 12meaning they borrow the other 4 coz 4 out of the original 7 that the country earns goes into these budget makers' pockets...atleast that's what I could make out from the figures

Ramesh said...

@rads - interesting perspective. perhaps close to the truth ....

Ajay said...

I feel farm subsidies are a total waste of taxpayer's money. As they are really not helping the small farmers. Agricultural income is non-taxable, loans are often waived, and, electricity, fertilisers and seeds are subsidised - and what is the productivity per unit area of land? Somewhere around the time of the Green Revolution. No significant inprovement in that.

Anonymous said...

Exkalibur 666

What could be the solution to this problem. Go back to basics, concentrate on infrastructure, building a self sufficient economy, work on improving the lives of common people and promoting literacy and promoting entrepreneurship. Not to worry too much about the stock indices. Definitely solutions are not short term.

Ramesh said...

@Ajay - Agree completely. There's some logic for food subsidy as it is a poverty alleviation measure, but the rest .... The worst id free power.

@Exkalibur - Solution is simple - spend only what you have. If you have only 7, don't spend 12; spend only 7.

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