Indian Public Debt On Verge of Explosion ???

By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

About a week and a half ago, my colleague Dwayne Ramakrishnan did an outstanding analysis of the new budget presented by the Indian government. And it stimulated a number of conversations in the office about India and its economy, both present and future.

After several of these chats, it seemed a good idea to get at least some of the substance on record, so Dwayne and I sat down to talk about a bit more about what is going on in that huge and ever-more important country.

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While I certainly have my own hopes for what India will become – Asia’s first “buy” economy, based on the fact its growth has been based around the IMPORT of “high value added” jobs,

basically outsourced by Western companies taking advantage of the country’s unique combination of English as a “native” language / high education / and, of course, MUCH lower wages than equivalent jobs in the US / Europe / Australia etc,

Dwayne is more familiar than I with the current inner dynamics of India’s economy.

So this time, I asked a lot of questions, and Dwayne did most of the talking – a situation that caused no end of delight in the Economy Watch “inner sanctum.”

We hope the results will be as illuminating for our readers as the conversation was for each of us.

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David Caploe [DC]: Okay, dude, so you seemed pretty optimistic in your piece on the most recent Indian budget, and quoted a lot of sources, both Indian and Western who concurred. That said, what do you think is India’s biggest problem from the point of view of economic growth?

Dwayne Ramakrishnan [DR]: Well, let me say I think India actually has three major problems. First and foremost, as I pointed out, there is both a historical culture of, and structural set-up for, immense corruption. While standardization and getting rid of some of the internal boundaries will help, there’s got to be a serious effort – starting at the top, which of course has hardly been immune, but going all the way through – to change not just corrupt practices, but the whole culture of corruption.

DC: Well, that’s not going to be very easy now, is it ???

DR: [Laughing] No, it won’t, and I don’t even mind that interruption, my friend, because it leads to my second point, which is that, as I also said, India is almost ungovernable, not least because, unlike its neighbor China – and I know, David, you’re obsessed with promoting Indo / Chinese friendship, so you can spare everyone that speech again [laughs] – India IS, a political democracy, which, as your country the US shows, often means a prescription for paralysis –

DC: [Laughing] especially when there’s a crisis like the one the US has been going through since the start of the Millennium …

DR: True, but the good news is that – while India is in SOME ways ALWAYS going through a crisis – things really ARE pretty good right now, as I wrote last week.

That said, there IS one very serious third problem, if you will, which is its huge governmental debt, currently running at around some 80% of GDP, which raises both short-and long-term problems.

DC: Ok, but in that case, why aren’t we hearing all sorts of noise about potential horror stories as we are with Greece, which also has a level of debt almost equal to its GDP ??? Is it because the government of India was too smart to get involved with Goldman Sachs [snickers] ???

DR: Hahahaha, no, it has nothing to do with your favorite whipping boys GS, who are actually quite smart and bullish when it comes to India, but the fact that, UN-like Greece, which owes about 80% of its debt to foreigners, whether public or private, about 90% of India’s debt is owed to its own people and corporations. This means India doesn’t have to worry about being “foreclosed,” to use the language of your sub-prime crisis [laughs], but it DOES have to worry about how to keep operating on a day to day basis.

Let me put it this way: the government cannot easily borrow more money without significantly driving up interest rates, which makes it more difficult for the private sector to borrow – after all, we’re not talking about America or Japan here with zero interest rates – so there’s a lot riding on this, as you Yanks say.

DC: [Laughing] I thought I told you the US has a DERIVATIVES, not sub-prime, crisis. Jeez. Ok, so how is it going to deal with this debt problem? Usually, there’s no easy way out of a situation like that, unless your domestic currency is the global currency, as is the case with my own dear country.

DR: Well, this goes back to your “inextricable linkage between politics and economics”, but there actually IS a relatively easy, even short-term economic solution – but it has HUGE political drawbacks, especially for Congress, which is now in power, but the same would be true even for a BJP government, which is in principle much more “free market oriented” than Congress.

DC: Always glad to get that political economic mojo going, but don’t keep us in suspense – what is it?

DR: Basically, while Congress was building India up in its early post-Independence days, it created a large number of public corporations. This made sense at the time, especially given its semi-socialist ideology, and allowed both the creation and active participation in national economic life of unions.

Your beloved New York Times summed it up nicely:

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After independence in 1947, Indian leaders created companies like Steel Authority of India Ltd. to help the country leapfrog from its agrarian roots to an industrial future; they also nationalized private companies like Air India and most of the country’s banks.

These companies became the backbone of political patronage, providing, for example, relatively secure and high-paying jobs to members of powerful unions. As a result, India’s leaders have found it hard to let go of the companies.

Adding to the country’s fiscal woes, in recent years India also raised public-sector wages and significantly increased spending on social programs and subsidies, including loan waivers for farmers. And last year the government cut taxes and subsidized exports to bolster the economy.

Those efforts appear to have helped lift growth to an annual pace of 7.9 percent in the three months ended Sept. 30, from 6.1 percent in the previous quarter.

But the increased spending has led to higher inflation — consumer prices were up 15 percent in December from a year earlier — while limiting the amount of money policy makers can spend on longer-term needs.

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So you can see how difficult it is politically for ANY government – especially Congress, which founded most of these companies – to let go of them, since it gives them HUGE power, especially given the “culture of corruption” we talked about before.

But these longer-term needs are becoming more pressing now, from both an economic and political point of view.

DC: Ok, Dwayne-san, how so ???

DR: Put bluntly, the government is now spending more money servicing this damn debt than it is on our vaunted military – which, as you correctly pointed out, doesn’t have much problem handling Pakistan, but China is again, a different story –

DC: Well, let’s just pray it never again comes to an armed conflict between India and China …

DR: Amen … [laughing] but it’s not just the military losing resources to the debt, it’s also education and health care. Of course, it’s still better and cheaper than in the US, but even so … [laughs] …

DC: Hey, man, you won’t get any fight from me on that one either … [laughs], but I DO see what you’re saying:

the government COULD raise money by privatizing or at least selling off at least some significant amount of those public corporations, but it would be almost suicidal politically to do so – have I got it?

DR: Unfortunately, that’s about it. And it becomes a generational issue, because whatever tax payments that are collected – remember the historical and structural tendency towards corruption – are not only barely being spent on today’s taxpayers, but with all this debt accumulating, a huge burden is being shifted onto future generations.

DC: Hmmm. Well, let’s get some basic numbers here. How many companies, how much are they worth, how much of the total economy do they comprise?

DR: Finally, an easy question, at least for me. The government owns a little less than 500 companies, which together are worth about USD 500 billion – so averaging a billion apiece, which is no small change – and that’s somewhere between 40 and 50% of India’s GDP.

DC: Well, that is impressive, but even if they sold off everything – that is, fully privatized, there would still be a significant amount of debt remaining.

DR: Which brings us back to the political question. Remember, despite our massive and rapid growth since BJP’s first term, when they really tore into the whole Congress power structure AND mentality, a lot of people don’t even want to consider total privatization – it’s too radical, and would cause too much disruption.

The government IS selling off parts of these public corporations – it really has no choice – but even that is controversial.

Remember, in some of the most prosperous parts of the country, the Communist parties – which are completely political and non-violent – are VERY popular. The violent Maoists, the so-called Naxalites, are ALSO popular in certain poorer areas, and they TOO oppose any “sacrifice” of the public sector to capitalism.

So it’s a very dicey situation for Congress to handle, even though there is no Communist participation in the current coalition.

DC: But given the debt level, they don’t have much choice BUT that, do they – I mean, just as a way of raising cash and cutting down on what are obviously oppressive interest payments ???

DR: Indeed, that’s exactly why the government has been selling off more or less significant shares of these corporations. But the debt is not disappearing AND there are also other actors – both foreign AND domestic – that want to completely undo India’s historic state-centered corporate structure, and go whole hog into privatization.

DC: But that sounds like it could re-legitimize the Communists and also help the Naxalites, hence making it more difficult for Congress, but if they in turn lose to the BJP …

DR: The situation could get even MORE tricky … you’ve gotten it exactly. So this is why the debt issue in India is so potentially explosive – it’s truly a damned if you do, damned if you don’t kind of situation.

DC: Well, on that cheery note, Dwayne, I think we’ve gotten MORE than we anticipated, so, is it cool with you if we end here, dude???

DR: As you would say, David, totally. Thanks so much for suggesting this. This gets at a lot of stuff I wasn’t able to get into the previous piece, so I appreciate it.

DC: Always happy to help out a fellow writer, my friend. Shukria to you and the family!

David Caploe PhD

Chief Political Economist

EconomyWatch.com