Harini Calamur: A dummies guide to understanding the debt crisis

Most of us incur debt in our everyday lives. Buying goods on a credit card is undertaking debt. Buying a house with a loan is debt. So is buying a car. Taking a loan from a bank to expand business is debt. Most of us are very aware that we need to pay back the debt.

The debt that we incur has two components to it: Principal, a proportion of the money borrowed, and interest, the cost of money.

Debt is undertaken to plug the gap between current and expected future incomes, and is also a way of plugging the gap between current income and current expenditure.

Debt is of two types: the first is borrowing for a perceived sure investment. For example, home loans or education loans help us build assets that would come in handy in the future.

The second reason for taking on debt is expenditure. A new wardrobe, new furniture, money for wedding expenses, etc fall under expenditure. These have no ‘resale’ value. Once spent, there is no return on it. It is money that is gone for good.

When you can’t repay a loan or the interest on a loan, you are said to default on payments. The effect of default is different for different types of loans.

If you default a secured loan that is guaranteed by an asset — property, vehicle, machinery — it is likely that you will lose that asset. If you default an unsecured loan — like a credit card — you may have recovery agents coming to your place of residence or work and creating mayhem.

With individuals and companies it is relatively easy to recover debt. Sell off everything. Pay off those you owe. And start life again. For many, like farmers in Vidarbha, the starting life again is not an option. They choose to end it.

Governments, like individuals, borrow to cover the gap between their current income and current expenses. The government’s income is in the form of taxes. Its expenses are in the form of all the ‘work’ that they undertake.

This would include education, defence, health, infrastructure, agricultural subsidies, and social welfare schemes — like food for all or NREGA. Many of these are thought of as investment. Today’s children in school will grow up to earn better money. Similarly, a well-nourished, healthy workforce means greater output. Greater output would lead to greater growth.

Similarly, defence expenditure would ensure security, which will allow people to go about their business without the fear of being invaded. Most of this works more or less across the world.
But a number of things throw this equation out of synch.

The first is leakages — also called corruption. People don’t get what they are supposed to, and remain in poverty. The government’s expenditure is no longer an ‘investment’ but a method of lining pockets.

The second is lack of a regulatory framework that allows greed to overcome prudence. For example, a half-decent regulator would have prevented the US sub-prime crisis. The loss caused by the crisis required bailouts worth billions.

The third is regulation based on dogma that curtails investment and thereby growth. For example, the dogma against FDI in India. That dogma has prevented investment, expansion, jobs and growth.

Number four is war. War has a way of increasing expenses with no return. And finally, there is a demographic shift. A younger nation could mean potentially more tax payers. A greying nation would mean potentially fewer tax payers to pay for all the spending that the government undertakes.

Today the world’s governments are facing a debt crisis. They have borrowed vast amounts of money — and they need to at least pay the interest on the borrowings. So can government cut spending? Not really. Not if it wants to stay in power. Can it increase taxes? Not really. Not if it wants to stay in power.  It can only pay off its debt by enabling growth. Higher growth means higher GDP.

GDP is the total value of all goods and services produced in an economy in a given period. The Indian sovereign debt is Rs37,000 billion, or 53% of our GDP. In contrast, China’s sovereign debt is Rs41,625 billion. And this is 17.3% of their GDP. The difference is that the 17.3% and the 53% is growth. That is what India needs.

The simplest way to achieve it is to plug leakages, regulate against greed, and throw away regulation based on dogma. 20 years ago this process was begun.

It needs to be taken forward for a better future for all of us.

Harini Calamur is a media entrepreneur, writer, blogger, teacher, & the main slave to an imperious hound. She blogs at calamur.org/gargi and @calamur on Twitter