The Congress led United Progressive Alliance (UPA) government has turned India into a big Ponzi scheme. Allow me to explain.
Most governments all over the world spend more than they earn. This difference is referred to as the fiscal deficit and is financed through borrowing. Any government borrows by selling bonds. On these bonds a certain rate of interest is paid every year by the government to the investor who has bought these bonds.
The bonds also have a certain maturity period and once they mature the money invested in the bonds needs to be repaid by the government to the investor who had bought these bonds.
The trouble is that India has reached a stage where the sum of the interest that the government needs to pay on the existing bonds along with the money the government requires to repay the maturing bonds is greater than the value of fresh bonds being issued (which is equal to the value of the fiscal deficit).
Take the current financial year 2013-2014 (i.e. the period between April 2013 and March 2014). The interest to be paid on existing bonds amounts to Rs 3,80,067 crore. The amount that needs to be paid to investors who hold bonds that are maturing is Rs 1,63,200 crore. This total, referred to as the debt servicing cost, comes to Rs 5,43,267 crore (as can be seen in the following table).
The ratio of the debt servicing cost divided by fiscal deficit(referred to as the Ponzi ratio in the above table) for the year 2013-2014 comes to 1.04 (Rs 5,43,267 crore/ Rs 5,24,539 crore). What this means in simple English is that the government is issuing fresh bonds and raising money to repay maturing bonds as well as to pay interest on the existing bonds.
This is akin to a Ponzi scheme, in which money brought in by new investors is used to redeem the payment that is due to existing investors. So investors buying new bonds issued by the government are providing it with money, to repay the older investors, whose interest is due and whose bonds are maturing. The Ponzi scheme runs till the money being brought in by the new investors is greater than the money being paid out by the existing investors.
In the Indian case, the Ponziness has gone up over the years. In 2009-2010, the Ponzi ratio was at 0.70. This means that money raised by 70% of the new bonds issued by the government went towards meeting the debt servicing cost. In 2013-2014, the Ponzi ratio touched 1.04. This means that the money raised through all the fresh bonds issued were used to pay for the interest on existing bonds and repay the maturing bonds.
In fact, the projection for 2014-2015 (i.e. the period between April 2014 and March 31, 2015) puts the Ponzi ratio at 1.28. This means that all the money collected through issuing fresh bonds will go towards debt servicing. But over and above that a certain portion of the government earnings will also go towards meeting the debt servicing cost.
The increasing level of the Ponzi ratio from 0.70 in 2009-2010 to 1.28 in 2014-2015, is a clear indication of the fiscal profligacy that the Congress led UPA government has indulged in over the last few years. This has led to a situation where the expenditure of the government has shot up much faster than its earnings. This difference has been financed by the government issuing more bonds. Now its gradually reached a stage wherein the government needs to issue more and more new bonds to pay interest on the existing bonds and repay the maturing bonds.
This is nothing but a giant Ponzi scheme. To unravel, this Ponzi scheme the next government will have to cut down on expenditure dramatically. At the same time it will have to look at various ways of increasing its earnings.
The article originally appeared on www.firstpost.com on February 18, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)