Sovereign Debt, National debt, Fiscal deficit VS public debt, Public Debt to GDP Ratio, Significance of Public Debt to GDP Ratio, How to control debt

 

National debt /Sovereign Debt /Public Debt :

• Debt taken by the governments is national debt.
• It is said to be national as it is backed by the government which is national power.
• Public debt consists of budgetary as well as extra budgetary borrowings of the govt.
• Public debt is the accumulated borrowings of the govt over a period of time
• This type of debts are most reliable in the sense that such debt can't default as government is backing such debt.
• Default on national debt means government has failed .
• It can be from internal sources as well as external sources.

Internal debt can be of following types :

●       Market loans

●       Market Stabilisation Bills / Bonds

●       Treasury Bills

●       Other Special Securities issued to RBI

●       Ways and Means Advances /14 days T-Bills

●       Securities against Small Savings

●       Cash Management Bills

Special Securities Issued to Public Sector Banks

External National debt includes:

• External Debt under the ‘External Assistance’ programme 
• Multilateral loans (debt from Multilateral Creditors such as the International Development Association (IDA), International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB) etc. 
• Bilateral Debt (debt from sovereign countries with whom sovereign and non-sovereign entities enter into one-to-one loan arrangements). 
• Other Government Debt includes IMF Loans, FPI investment in G-sec and defence debt .

Fiscal deficit VS public debt:

1. Fiscal Deficit includes exclusively the budgetary borrowings.
2. Fiscal deficit is the borrowings of the government for the current year

                                            while 

1. public debt consists of budgetary as well as extra budgetary borrowings of the govt. 
2. public debt provides a better and holistic picture as compared to fiscal deficit.

Public Debt to GDP Ratio:

The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP).

Significance of Public Debt to GDP Ratio:

By comparing country's debt, with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts. As per FRBM Act, the Debt to GDP ratio should be around 60%.

•        40% for Central Government

•        20% for the State Government.

Centre’s outstanding debt reduced from 50.5% of GDP in 2013-14 to 48.1% in 2018-19 .Subsequently, it shot up to 50.7% in 2019-20 and 60.8% in 2020-21, before marginally dipping to 55.9% in 2022-23, 56.9% in 2023-24 and a budgeted 56% in 2024-25 .Increase in debt was on account of additional public health and social safety net expenditure requirements – amid a drying up of revenues during  Covid-19.

India’s public debt (combined liabilities of the Central and State governments) to gross domestic product (GDP), at constant prices, increased to a record high of 105.23 per cent in 2021(Economic survey 2023). 

Across the world, General government debt climbed from 108.7% of GDP in 2019 to 133.5% in 2020 and 121.4% in 2022 for the US; from 97.4% to 115.1% and 111.7% for France; from 85.5% to 105.6% and 101.4% for the United Kingdom; and from 60.4% to 70.1% and 77.1% for China during these years. 

Impact of High Debt to GDP ratio on Economy:

•        Crowding Out Effect.

•        Major Part of Budget going to Interest Payments.

•        Poor ratings by Credit Rating Agencies.

•        Higher Borrowing Cost.

•        Privatisation of Loss-making PSUs

How to control debt:

 Public Debt to GDP Ratio is usually quoted as:

 Public Debt ratio / GDP at current market prices. 

Higher the denominator, lower the ratio 

Denominator is directly proportional to ----------GDP and inflation. So GDP and inflation should be higher to lessen public debt to GDP ratio.

During 2003-04 to 2010-11 when general government debt plunged from 84.4% to 66.4% of GDP. That period, also witnessed an average annual GDP growth of 7.4% in real and 15%-plus in nominal terms after adding inflation, thus reining in public debt to GDP ratio.

Reasons for increase in Public Debt Ratio :

• Bank Recapitalisation,
• UDAY bonds,
• Small Share of Taxes in National Income, 
• Imperfect Tax System 
• Increase in public spending in response to Covid-19, and the fall in tax revenue and economic activity, 

Is falling /devaluation /depreciation of Rupee good for the economy ?

 People often says Rupee is depreciating or falling and depreciation of Rupee is harmful for the economy. What is the reality. lets try to understand the economics behind falling of the INR.

                Recent SBI Report about depreciation of  INR in the TRUMP 2.0 regime

First we will understand different terms like devaluation and depreciation .

DEVALUATION: 

• Devaluation is a deliberate action of the government to downward adjustment of the currency with relation to other foreign currency. 
• It takes place in a pegged / Fixed exchange rate system.
• In the present times, governments avoid devaluation with certain exceptions. Like China many times has opted for devaluation so as to promote its exports. In response ,countries used to get involved in competitive devaluation of their currncies leading to "currency war".

DEPRECIATION:

• Fall in the  currency value is  controlled by market factors like economic fundamentals political stability and other related factors. 
• It takes place in a floating Exchange rate regime.
• In the present times ,this is the prevalent mechanism.

***********The devaluation and depreciation similar in the sense of their after effects .They only differ in the sense of how value of currency is falling if it is through market then it is depreciation and if it is by government order then devaluation.

Lets  understand what happens to our exports /imports if INR depreciates /devaluates.

Lets say,on 12.11.2024:

1 $=80 Rs 

On 12.12.2024, INR depreciated to the value of 

1 $ =90 Rs 

Now we have to understand the economic implication of depreciation in case of trade:

Suppose there is a buyer of pen in the international market with 10 dollars in his  pocket and the  cost of Indian pen is Rs 50.

Now in case 1 on date 12.11.2024,when he was in the market then he could buy 80*10/50=16 Indian pen

In case 2 ,On 12.12.2024,Everything remains same except depreciation of INR ie 1 $ =90 Rs, so on 12.12.2024, he can buy :90*10/50=18 Indian pen,

From the above example, it is clear that buyer can buy more pen when INR is depreciated ie in case 2 , now we can conclude that :

Export of Indian goods increases when INR is depreciated or devalued which is good for the Indian economy as it earns foreign currency.

But it does not mean that depreciating INR is always good for the economy. Depreciating rupee can be manifestation of the relative weakening of the economy (demand of INR decreases). So on arrival of Trump2.0 in USA , SBI report published in 2nd week of November 2024 says that INR may depreciate 8-10 % against dollar . 

Depreciating INR can also result in :

• Increased cost of imports 
• Increased inflation
• Increased cost of foreign borrowings 
• Reduce foreign investments because of weak economy

Maintaining the value of INR within a band is a tight rope walk which is to be ensured by RBI so as to maintain economy stable.

So, from next time don't be judge -mental merely on the sloganeering rather decipher the reality and make the people aware .

NRI Accounts: Non-Resident External (NRE) Account,Non-Resident Ordinary (NRO) Account, Foreign Currency Non-Resident Account (FCNR)

 

What are the types of NRI Accounts?

There are various types of NRI Accounts that are available to an NRI Investor. Some of the major ones are-

●       Non-Resident External (NRE) Savings Account/ Fixed Deposit Account

●       Non-Resident Ordinary (NRO) Savings Account/ Fixed Deposit Account

●       Foreign Currency Non -Resident (FCNR) Fixed Deposit Account

NRE Savings Account /Fixed Deposit Account :

• The NRE account is an Indian rupee-denominated account opened by an NRI in an Indian bank.
• NRI uses this account to deposit earnings in the foreign land.
• It offers  savings, current, recurring, or fixed deposits. 
• Interest income earned on the amount in an NRE account is non-taxable in India.

How NRE account works :

Foreign Currency earned outside India (thats why it is NRE-External)

                                     ↓

Foreign Currency converted to INR

                                    ↓

Deposits in the form of INR

                                    ↓

 Repatriation of funds (Principal & Interest amount) to a foreign account on maturity .

Non-Resident Ordinary (NRO) Savings Account/ Fixed Deposit Account:

• The NRO account is an Indian rupee-denominated account opened by an NRI in an Indian bank.
• NRI uses this account to deposit income generated from within India.
• It offers  savings, current, recurring, or fixed deposits. 
• Interest income earned on the amount in an NRO account is taxable in India.
• The funds of NRO are easily accessible to your family members in India
• The amount deposited  and the earnings on this account can be Repatriated to the country of residence  up to 1 million USD per financial year. 

How NRO account works :

Income generated by an NRI  in  India 

                                     ↓

Deposits in the form of INR

                                    ↓

Repatriation of funds  to a foreign account on maturity  with limits .

Foreign Currency Non-Resident Account (FCNR Account): 

• The FCNR account is a foreign currency denominated account opened by an NRI in an Indian bank.
• There is no risk of exchange rate fluctuations as it is foreign currency denominated account
• It offers exclusively fixed deposits. 
• NRI uses this account to deposit earnings in the foreign land.
• FCNR (A) was introduced in 1975 to encourage NRI deposits. In 1993, RBI introduced FCNR (B), to replace FCNR (A).
• At present there is no FCNR (A) account and only FCNR (B) account is there.
• Interest income earned on the amount in an NRE account is non-taxable in India 

How FCNR  account works :

Foreign Currency earned outside India 

                                     ↓

Foreign Currency converted to INR

                                    ↓

Deposits in the form of INR

                                    ↓

 Repatriation of funds (Principal & Interest amount) to a foreign account on maturity .

Securities and Exchange Board of India (SEBI) ,Objectives of SEBI, Functions of SEBI,

 

The Securities and Exchange Board of India (SEBI) :

SEBI is the regulator of Securities market of India. The main functions of SEBI is :

"...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto“.It was established in the year 1988 and given statutory powers on 12 April 1992 through the SEBI Act, 1992.

Objectives of SEBI:

•         To regulate the activities of stock exchange.
•         To protect the rights of investors and ensuring safety to their investment.
•         To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations.
•         To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

Functions of SEBI:

The SEBI performs following important functions to meet its objectives:

1. Protective functions   
2.  Developmental functions  
3. Regulatory functions.

1. Protective Functions:

These functions are performed by SEBI to protect the interest of investor and provide safety of investment.

As protective functions SEBI performs following functions:

• SEBI Checks Price Rigging:
• SEBI Prohibits Insider trading:
• SEBI prohibits fraudulent and Unfair Trade Practices
• SEBI undertakes steps to educate investors .
• SEBI promotes fair practices and code of conduct in security market

Developmental Functions:

These functions are performed by the SEBI to promote and develop activities in stock exchange and increase the business in stock exchange. Under developmental category:

• SEBI promotes training of intermediaries of the securities market, 
• SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach .

Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange by framing rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers, underwriters, etc.

• SEBI registers and regulates the working of various stakeholders like stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers etc.
• SEBI registers and regulates the working of mutual funds etc.
• SEBI regulates takeover, merger and aquisition-of the companies. 
• SEBI conducts inquiries and audit of stock exchanges.

CLASSIFICATION OF BUDGET: Balanced Budget, Surplus Budget, Deficit Budget, Budgetary deficit, Fiscal Deficit, Non-debt creating capital receipts, Twin deficit,Gross Primary Deficit,Monetised Deficit,Effective Revenue Deficit

 

CLASSIFICATION OF BUDGET:

Budgets are broadly categorized into three main types based on their financial outcomes, each playing a distinct role in fiscal planning:

●        Balanced Budget

●        Surplus Budget

●        Deficit Budget

 

A balanced budget occurs when planned revenue match or exceed the amount of planned expenses. A balanced budget occurs when tax revenue is equal to government spending.

A surplus budget is a condition when incomes exceeds the expenditures. In simpler words, when government revenue exceeds the expenses then it is known as a surplus budget.

A budget deficit occurs when expenditures exceeds revenue. In simpler words, when government revenue is less than the expenses then it is known as a deficit budget.

Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts.

 Revenue deficit = Revenue expenditure – Revenue receipts.

The revenue deficit includes only such transactions that affect the current income and expenditure of the government. When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

Budgetary deficit :

• It is the difference between all receipts and expenses in both revenue and capital account of the government. 
• Budgetary deficit is the sum of revenue account deficit and capital account deficit. 
• Budgetary deficit is usually expressed as a percentage of GDP. 
• Prior to 1997, GOI  used the following methods for making budget deficit zero:

1.Printing of new currency

2.Borrowing from RBI.

But after 1991 reforms ,Sukhmoy Chakraborty committee recommended for FISCAL DEFICIT.

Fiscal Deficit: Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).

From financing side:

Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad.

Net borrowing at home includes directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR). 

Non-debt creating capital receipts:

Those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.

The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.

TWIN DEFICIT / DOUBLE DEFICIT :

• When a country has both current account deficit and fiscal deficit, it is said to be twin/double deficit. 
• This means the country's economy is importing more than it is exporting, and the country's government is spending more money than it is generating.

Gross Primary Deficit:

• It is Gross Fiscal Deficit less interest payments of the current fiscal year .
• This deficit is about actual liability for the particular year.
•  A shrinking primary deficit indicates progress towards fiscal health as it shows that your deficit in the current year is decreasing . 
• When the primary deficit is zero, the fiscal deficit becomes equal to the interest payment. 
• This means that the government has resorted to borrowings just to pay off the interest payments. Further, nothing is added to the existing loan.

Monetised Deficit: 

• Monetised deficit means the increase in the net RBI credit to the central government without increasing public debt, such that the monetary needs of the government could be met easily. 
• Making money from a deficit means printing more money in layman’s terms. 
• It results in increase in High powered money. 
• RBI does so by purchasing government securities directly in the primary market. Monetisation of deficit was in practice in India till 1997, whereby the central bank automatically monetised government deficit through the issuance of ad-hoc treasury bills. 
• Two agreements were signed between the government and RBI in 1994 and 1997 to completely phase out funding through ad-hoc treasury bills.
• And later on, with the enactment of FRBM Act, 2003, RBI was completely barred from subscribing to the primary issuances of the government from April 1,2006.
•  Post 1997, monetisation is done  indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
• As the  government started borrowing in the open market, interest rates went up. High interest rates incentivized saving and thereby spurred investment and growth.

EFFECTIVE REVENUE DEFICIT (ERD):

• Effective Revenue deficit is a new term introduced in the Union Budget 2011-12. 
• The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure.
• Revenue deficit is the difference between revenue receipts and revenue expenditure but  the present accounting system includes all grants from the Union Government to the state governments/Union territories/other bodies as revenue expenditure, even if they are used to create assets. 
• Such assets created by the sub-national governments/bodies are owned by them and not by the Union Government. Nevertheless they do result in the creation of durable assets. 
• According to the Finance Ministry, such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature.
• Effective Revenue Deficit signifies that amount of revenue deficit that is being used for actual consumption expenditure of the Government and not for creating the assets. 
• ERD is revenue deficit excluding capital expenditures  used for creating durable assets out of revenue expenditure .