Bharat Jhunjhunwala
The Government has adopted the policy of taking loans in large amounts to tide over the crisis brought by the Corona Pandemic. The total borrowings of the Central Government were 74 percent of GDP in December 2019. This has increased to 90 percent in December 2020. The Finance Minister has announced in the Budget for 2020-21 that the Government will continue to make heavy borrowings to tide over the first wave of the pandemic. The borrowings will only rise due to the second- and possibly the third and the fourth wave.
The money obtained as loans are put to use in two different ways. They can be invested in productive activities. The borrower can pay the interest and principal amount from the additional earnings. This is like an industrialist borrowing money from the banks to put up an industry and paying the interest and principal from the additional earnings made. Alternatively, the money can be used to coverup the losses. In this case, additional earnings are not made. As a result, the interest has to be paid out of the already meager earnings. Say, a worker loses her job. She takes loan to manage the household. Let us say she gets the same job at the same salary after a few months. Now, she has to pay interest on the borrowings made during the period of joblessness out of the same earnings as before. Her standard of living is now reduced. In effect, she has transferred the hardship of joblessness to the future because of the additional burden of interest.
The loans being taken by the Government of India and large numbers of developing countries is like the loan taken by the worker to tide over the period of joblessness. These are being used to maintain the present levels of Government consumption and not for new investments. The World Bank has, therefore, warned that this policy will create more trouble in the long run. The Bank has given the example of Venezuela which is not able to even provide food to its citizens because of the huge burden of debt. At least six developing countries namely, Zambia, Ecuador, Lebanon, Belize, Suriname and Argentina have defaulted on their loan repayments. Further, as many as 90 countries have approached the International Monetary Fund for emergency loans. It is clear that the loans taken by the developing countries in the past are becoming and unbearable burden yet they are pushing themselves deeper into the same quagmire by borrowing more.
The use of moneys from the loans taken by the Governments of United States (US) and China are somewhat different. The US has made direct cash transfers to its citizens out of the loans and also invested in new technologies. For example, the US Government has provided huge grants to explore the use of “phages” that are available in nature for therapy including that of the Covid patients. Similarly, China has invested in building its own space station independent of the US and Russia, making temperatures as high as those of the sun, landing her satellite on the mars and making her own fighter jets. The loans taken by the governments of the US and China are, therefore, more like the loans taken by the industrialist for putting up factory and less like the loan taken by the worker to tide over her period of joblessness. The loans taken by the Government of India are more like the latter.
We should not be distracted by some contrary indicators. The GST collections in April 2021 were Rs 1.41 lakh crore against Rs 1.23 lakh crore in March and about Rs 1.0 lakh crore per month in the last two years. Other economic indicators, however, point in the other direction. A survey done by McKinsey has reported that 86 percent people of India were positive about their economic future in January 2021. Only 64 percent are positive in April 2021. A paper published in the Diplomat magazine has reported that the Purchase Manager’s Index (PMI) has fallen. A 50+ PMI indicates that purchase managers of the businesses are positive; while 50- PMI indicates they are negative. It is reported that the PMI has fallen from 54.6 in March 2021 to 54.0 in April 2021. The consumption of petrol in April 2021 was less by 6.3 percent, consumption of diesel was less by 1.7 percent, sale of cars was less by 7 percent and the numbers of inter-state e-way bills issued was less by 17 percent in April 2021 as compared to March 2021. Therefore, the basic indicators show a downward trend in April as compared to March. The reasons for the increase in GST collections in April is a mystery to me. I do not preclude the possibility that the Government may have asked the Public Sector Enterprises to pay advance GST in order to prop up the data. Remember that rating agencies have warned to reduce India’s rating from present B— to “junk” if the borrowings of the Government continue to rise. That would lead to capital flight and a host of other problems. Be that as it may, it is to be seen whether the rise in GST collections sustains in the coming months especially in the light of the lockdowns due to the second wave of the pandemic.
The Government must take the following steps in this difficult circumstance. One, it must make a steep increase in the import duty on fuel oil. I am in favour of a fourfold increase so that the retail price of petrol becomes about Rs 150 per liter. Diesel likewise. This will lead to a reduction in oil consumption. The revenues earned must be used to reduce the debt so that we can stand during the third- and maybe fourth wave of the pandemic. Two, the Government must cut its consumption. The salaries of the Government servants, excepting frontline workers, who appointed to “serve” the people must be cut to one-half in proportion to the reduction of the incomes of the poor people to serve whom they have been appointed. It is a tragedy of majestic proportions that the “served” is suffering while the “server” is doing okay. Three, the Government must make huge investments in new technologies. It is a shame that the supplier of vaccines to the world is importing vaccines for her own use.
(The author is formerly Professor of Economics at IIM Bengaluru)
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