Hyderabad: On 25th October, 2023, Chinese authorities took a rare policy decision. The country’s top parliamentary body approved the issuance of bonds worth one trillion Yuan ($137 billion), in order to facilitate the rebuilding of areas that were hit by recent floods and also to improve its urban infrastructure. This decision of the world’s second largest economy is going to increase its budget deficit to 3.8 percent of its GDP, for 2023 from the already set target of 03 percent.
However, in the wake of already rising Chinese Government Debt, there are rising concerns over the China’s shift to a debt driven growth model, instead of achieving economic growth, driven by consumer spending and savings. The economic growth edifice built on the foundations of large debt is bound to be shaky and Chinese now face that imminent threat.
The piling up Government debt in China not only threatens its stability, but also poses threat to global economy, given the strategic economic importance that the country wields. It is in this context we need to understand how the Dragon got mired in the debt heap.
How the Dragon Got Trapped in Debt:
Although there have been news of rising Chinese government debt earlier also, the issue attracted global attention in May 2023, with local government of Guizhou, a far western province in China, expressed its inability to defuse its debt related risks. Later in September, inner Mongolia also announced a huge borrowing of $ 9 billion to repay its debt which it took before 2018.
To put it simply, the local governments in China were borrowing in order to repay the earlier borrowings. They were borrowing through the government controlled corporate find raising platforms called, Local Government Financing Vehicles (LGFVs), at higher interest rates, by issuing bonds to banks and households.
However in the Post Covid period, particularly in 2022, taxes and land sales for property development took a hit in China. These two segments were the major sources of revenue for the local governments there. With the key revenues falling, and the real estate sector’s poor growth, local governments found it difficult to manage its finances and resorted to further borrowings, which increased the debt burden of the country.
In addition to this, the earlier measures taken by the Chinese authorities in 2018, to ‘discipline’ the banking system there, made it difficult for the LGFVs to raise funds in the market. Moreover the returns on investments made by the local governments also started falling. Thus falling revenues, liquidity crunch, dwindling real estate sector threw the local governments into a debt spiral in China.
Last but not the least, China’s fiscal structure is also partly responsible for today’s state of its fiscal affairs.
Where Do We Stand?
In the wake of rising Chinese debt, it is obvious that parallels are drawn between India and China, with both the countries being key players in the Asian region and also given their significance in the global economy, due to size of their respective economies. On 27th October, 2023, S&P Global ratings suggested that India’s public finances are not likely to improve to their pre-covid levels in the next two to three years.
According their report, India’s general government deficit (combined deficit of state and the Union Government) is the weakest part in India’s credit profile. India’s fiscal deficit at present stands at 5.9 percent of its GDP, and the Government aims at bringing it down to 4.5 percent by 2025-26. In the wake of upcoming general elections and the elections for several sate assemblies, it is difficult to expect that fiscal deficits would come down soon.
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This is due to the fact that running low fiscal deficit means tightening of expenditure. Normally governments abstain from taking unpopular measures in election year and more over they may announce more schemes that could further put pressure on fiscal deficit. The latest International Monetary Fund’s projections estimate that the country’s general government debt is expected to increase from 81.0 percent of GDP in 2022 to 81.9 percent in 2023 and further expected to rise to 82.3 percent in 2024.
However it is expected to decline gradually to 80.5 percent in 2028. It should be noted that, as per the recommendations of FRBM Review Committee, the combined government debt should be reduced to 60 percent of GDP i.e, 40 percent for the Centre and 20 percent for states. However, in 2022-23, states' debt stood at 29.5 percent of GDP according to their budget estimates.
In this context, excessive borrowings by some states is a worrisome trend. Thus it is pertinent to remember the Chinese experience, where the local government’s debt burden spiraled out of control, and jeopardized the country’s economic prospects.
Tackling the Debt:
Any policy discourse on managing the country’s debt need to focus two components of the debt. The first one is the private debt and the other one is the public debt. To manage the private debt, there is a need for the policies that aims at monitoring of house hold as well as non- financial corporate debt levels in the country, on a continuous basis.
On the other hand, an effective public debt management calls for having a fool proof fiscal frame work in place, which could further guide the balancing of expenditure and debt sustainability. For a developing country like India, there is a need to further improve its capacity to bring in additional tax revenues, while keeping a cap on unproductive expenditure simultaneously.
On the other hand, states need to be cautious enough with their borrowings, and abstain from huge unproductive expenditure for electoral gains. Instead a focus on improving the quality of expenditure and attracting more investments could put them in a better fiscal position. As a growing economy, India needs enough capital to fund its growth story and this in turn requires a fiscal policy that ensures there is a less debt burden.
This in turn creates enough fiscal space for the country and promotes fresh investments and propels economic growth.
