Popularism today is Economic collapse tomorrow

I know I am not qualified enough in Fiscal policies and am on thin ice as I write this blog. But considering some general buzz around me and a bit of recent reading I undertook, I felt it was important for me to make a point here.

I started reading ‘The Great Degeneration’ by Niall Fergusson exactly 10 days back, where he made an attempt to place some concepts like government debt, debt to GDP ratio and its implications along with effects of debt corrections and accumulation that pose a potent danger on generation that are not even born as yet.

Fast on its heels has come the railway budget from the one month old Modi government and some strong correction measures towards the fare structure has attracted the much anticipated public outcry. A fare hike of an average of 14% in passenger fares and 6.5% on freight has resulted in the opposition out on the streets. Not to mention, the average Mumbaikar is unhappy when his lifeline, the Mumbai Suburban network getting twice as much dearer as a monthly pass of Rs. 200 now will cost Rs. 435.

The cynics are already call it, ‘Modi ke acche din’. But if we just scrape under the surface and try to understand the scenario, we would realise that this is a small step towards a whole mountain of debt that needs to be levelled to lay the tracks to move ahead. So how big is this mountain… well I tried to look up on the Indian Railway Finance Corporation (IRFC) website but sadly could not get a figure- what I could definitely spot is that in November, the Railways raised Rs. 10,000 Cr. through tax free bonds. Why so much money raised in debt?

Just think of the sources of revenue for the Railways. Passenger fares (including ticket-less travel fines), freight charges; possibly sale of some scrap, commercial rights for advertising inside railway stations and wagons and possibly movie shoots. But let us place these heads against their expense heads. Running a railway network has operations costs of fuel/electricity, maintenance of older rolling stock and engines along with track side maintenance. Not to forget capital expenses can far outrun revenue if purchase of new wagons and engines, network expansion and infrastructure development is put together.

But the killer blow to all this is the man power cost. Indian Railways is the largest single employer in the world with a 24 x 7, 365 day operations to run this vast network smoothly. As with any employer; they need to pay their employees at the end of each month. Not to forget, every employee gets a pension which is a part of the welfare policies. And yes, every there are also hefty accident compensations.

So how deep in debt are we? And is there a reason to panic?

Honestly what the railways has experienced, we can extrapolate to the entire economy at present. A debt is nothing but a loan. Government raise this from people in the form of bonds as well as borrowings from the World Bank and the International Monetary Fund. Every loan has a period and comes at an interest rate. The loans and its interest is repaid by means of the GDP of the country. The Debt to GDP ratio is usually an indication of how well a country can repay the debt. This ratio of India at present is 67.2% (highest amongst BRIC), which in isolation may not have much to suggest. But this figure combined with an economic slowdown and unrest looming in Iraq implies that there is likelihood that India will default on repayment of debts. And lest we forget, the overall external debt figure for India is up from USD 112 Billion in 2004 to USD 426 Billion in December 2013. So if left unattended, it is most likely to result in a debt bubble which will shackles of debt for the future generations .

Let me paint the larger picture a little better. Agriculture is offered a subsidy towards seeds, fertilizers, power and water. The government fixes a basic minimum price to safeguard farmers. In any eventuality, farmers are compensated to maintain their livelihood. We have a food safety bill, social medical set ups and rural employment scheme. We maintain a sizable defense force. Government employees and the armed forces are paid when they are working and even after they retire through pension. We have a subsidy on basic fuel and gas for households and various

So how can the government offer such subsidies and schemes? 

Technically, all this is something which can function through all forms of taxes paid. But the government is pushing SEZ in various sectors to raise the output and the GDP by offering tax holidays. Bottom-line, there is a gap between funds available and funding required. Public and external borrowings are short term solutions to a larger problem.

India is in a difficult debt cycle where we are borrowing for today against possible repayments for the future. If not controlled right now, it has the possibility to spiral into a situation of complete bankruptcy- much like what Greece suffered last year. The possible ways to control this is either to push the GDP higher (which is dependent on many external factors) or cut down on subsidies to manage this account better. The present government has chosen the latter, but before we get too critical on it decision, let us answer this in our mind- Are you in favour of policies of Popularism for today and ready to see an Economic collapse for the future generations; make your choice.