Stimulus packages have been the magic wand that almost every government and central bank has waved since the beginning of the financial crisis last year. Most are still wary of withdrawing the same lest their GDP growth trajectory gets derailed and investors get a glimpse of real ailments hurting their economies. But what they do not seem to be realizing is that the debt that they have accumulated under the guise of offering stimuli is leading to insurmountable risks. Risks that hint at the possibility of an eventual sovereign debt crisis.
The Obama-led US government insists that it understands the risks posed by deficits and ever-increasing debt. However, as the US runs up a trillion-dollar deficit this year, with trillions in debt for years to come, it needs to look no further than Japan to see how overspending can ravage an economy. Tokyo's new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive by way of taxes for the first time since the years after World War II.
Years of stimulus spending on expensive dams and roads have inflated Japan's gross public debt to twice the size of its US$ 5 trillion economy (189% of GDP to be precise) making it the highest debt to GDP ratio in recent history. The US, UK and India have each accumulated debt that is nearly 60% of their respective GDPs. Just paying the interest on its debt consumed a fifth of Japan's budget for 2008, compared with debt payments that compose about a tenth of the US' budget. In comparison, China's government debt is less than 20% of its GDP, despite giving out one of the most generous doses of stimuli.
One important difference that needs to be noted is that Japan like India is rich in personal savings and assets and owes less than 10% of its debt to foreigners. By comparison, about 46% of the US' debt is held overseas by countries such as China and Japan. However, that does not diminish the risk of currency devaluation for Japan.
As per Economist, the average debt of every Indian has been estimated to soar to about Rs 30,000 by the end of this fiscal with the central government stepping up its borrowing programme to fund public expenditures and offer subsidies. The average debt of an Indian citizen would then be nearly equal to his 10-month income, which on an annual basis has recently been estimated at Rs 38,000 by the Central Statistical Organisation (CSO). Also, with the Indian government adding about Rs 3 trillion to the public debt annually in the last few years (largely to fund subsidies), the total public debt is estimated to zoom to a whooping Rs 34 trillion by March 2010, nearly double the amount recorded seven years ago.
While corporate India has been championing the cause of continuing the stimulus packages so as to rein in inflation and pump prime their businesses, the larger economic issue cannot be sidelined. Else we in India may also be allowing this risk to our economy and currency, assume gargantuan proportions. It is time the government and the central bank do some independent thinking.