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World of Debt

Debt is world's oldest mode of trade and finance. Private and Public sector debt in advanced economices had surged to unprecedented highs in the past four decades, irsing further in the pandemic. — Anil Javalekar


Debt has a history of more than 5000 years and it must be the oldest mode of trade finance. Debt is still the primary mode of trade and finance. For Indians, Debt or credit is routine affair as most have borrowed from banks or relatives for this or that purpose and are more indebted now than earlier. Many of us may be remembering the financial crisis of 2008 due to housing bubble in US that affected world economies. The fact is that the debt has become the prime source of development finance and the idea of development through credit is an established practice everywhere. Everything we do today, construct or buy house, purchase consumer goods, organise events like marriage, educate our children, become entrepreneur is with borrowed money. And living on borrowed money has gone up. We are all indebted now for some or other reason.  As many of us know, the debt is owed by government, households and corporates or companies and has impact on the money supply and inflation. Debt and credit are also closely linked to financial crises, the evolution of the business cycle, and to the likelihood of negative tail events. The 24th Geneva Report on the World Economy- ‘Debt: The Eye of the Storm’, published in February 2022 by the International Center for Monetary and Banking Studies (ICMB), Geneva and The Centre for Economic Policy Research (CEPR) London, explored this subject and found that the debt levels of households, companies and sovereigns are at historical highs relative to output. The report is about the state of debt in the world today and what it portends. It is therefore desirable to check what is happening to debt in the world as also to know the status of Indian debt situation. 

The 24th Geneva Report

The 24th Geneva Report says that Public and private sector debt in advanced economies and emerging market economies had surged to unprecedented highs in the past four decades, before rising further in the pandemic. However, that long-term trend played out against a backdrop of abundant funding from three main sources – the savings gluts of the old, the rich and the rest of the world – and a context of weak investment. It further said that declining real interest rates in both advanced and emerging market economies over the same period suggest that the urge of creditors to acquire more debt has far outpaced any shifts in borrowers’ desire to issue more debt. The report has brought to the notice that the household debt in advanced economies, which was the main culprit in the global financial crisis, declined post-crisis and has not increased significantly in the pandemic. While house prices are surging, this is not a credit-fuelled boom and thus is unlikely to be a major source of systemic risk. However, corporate and household debt in emerging market economies has risen strongly over the past decade. Household debt in emerging market economies now stands at levels seen in advanced economies in the early 2000s. This bears watching as household debt booms predict financial crises and recessions that are deeper and longer. The report has mentioned that Public debt in advanced economies has surged due to the pandemic, but borrowing costs are close to an all-time low and concluded that neither the surge in government debt per se, nor its monetisation, necessarily herald an era of significantly higher inflation because despite short-run inflation pressures, longer-term forward inflation expectations remain anchored (so far), slack in labour markets is ample, and accelerated digitalisation and automation keeping  wage pressures in check. Also, the increase in savings has been helping to absorb debt and holding back inflation pressure due to debt.

Indian debt situation 

India has also adopted the strategy of development through credit and banks were nationalised for the purpose. Many other financial institutions came up for the distribution of credit. Thus, Indian commons have access to the bank money and this led to their indebtedness. So, the credit disbursement has increased many folds. Indian government is also borrowing heavily. Central Government’s total outstanding liabilities were at Rs117.04 lakh crore at end-March 2021. Public Debt accounted for 89.9 per cent of total liabilities. The Central Government debt has gone up from 49.1 per cent of GDP in 2019-20 to 59.3 per cent of GDP in 2020-21. As per RBI data, the total liabilities of household sector under loans and advances were at Rs 6.64 lakh crore at the end of March 2020 and has been increasing consistently since 1980. Total credit, food and non-food, of scheduled commercial banks was at Rs 109.50 lakh crores by March 2021 with a consistent increase since 1960s. The National Statistical Office (NSO) conducted All India Debt & Investment (AIDIS) survey in the rural and urban areas of the country during the period January to December, 2019 and found that 35% of households in rural areas and 22% of Households in urban areas were indebted with average amount of debt of about Rs 60000 in rural area and Rs 1.20 lakh in urban areas. The cultivators were more indebted (40%). 

Debt is good but not indebtedness 

Credit or debt as such is not bad and the idea of development through credit is good if it results in real development that increases income of commons and provide them the opportunity to be entrepreneurially creative and industrious. True, debt has increased all the way and has also been resulting in economic development. The institutional credit has helped poor to come out of poverty and Indian middleclass is able to live a better life because of borrowed money. This apart, overall indebtedness is on rise and even the government is borrowing to meet its revenue deficit and spending more on welfare measures like direct transfer benefits that may not necessarily help development. The firms and companies or corporates are diverting the loan money to non intended activities and are defaulting on repayments. Frauds in banks are on rise and the tendency to default on loan repayment is also increasing. The loan waiver demand is more frequent now from farmers and is a matter of concern. All these are matter of concern and need action to make debt world clean and sustainable.

Neither ignore nor fear the debt

The Geneva report has rightly concluded that ‘Abundant savings relative to investment have driven interest rates down, elevated asset prices and encouraged (some) households, firms and governments to borrow more. Today, with sky-high asset prices, indicators of net household wealth look solid, debt-to asset ratios are moderate and debt service costs are at record lows despite record debt levels.’ ‘The greatest challenge’ according to the report ‘will be the management of public debt in the years to come. Countries need to maintain the necessary fiscal space to manage future shocks while at the same time financing the transition to greener economies as well as the pension and health demands of ageing populations.’ Report hopes that ‘If credit supply remains plentiful relative to debt issuance, and thus interest rates remain low, higher levels of debt are sustainable’. The report, however, cautioned that ‘in a world awash with debt, negative shocks will generate more bouts of instability, which will inevitably spill over onto innocent bystanders in a globalised economy’ and advised that ‘Debt should not be ignored. But neither should it be feared.’ For Indians and Indian government, the advice of not ignoring debt is more important than not fearing it.     

For further reading:

DEBT: THE EYE OF THE STORM- Geneva Reports on the World Economy 24


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