Please look at the chart below to find out whether you’re gaining or losing by investing in so-called safe avenues after the above window dressing by the Govt? Thus Govt’s borrowing rate goes down and GDP goes up, thus window dressing the Debt / GDP ratio. So, you have inflation going up – you’ve already seen it happening – it was 4.06% in Jan 2021 and the forecast for Apr 2021 is 5.6%, ie, about 37.9% up.Īnd small savings rate is going down. Which is the easiest place to decrease Govt debt? Decrease interest rates on borrowings which Govt takes directly from the citizens, that is, the small savings, given in the table at the beginning of this article. The Debt/ GDP ratio improves then.īut then, letting inflation run amok is also suicidal. This increases the overall prices of same amount of things.
If the prices increase, the GDP increases even if the actual goods produced remain the same! Hence, the Govt is likely to allow the inflation to go up more and not control it as aggressively as it has done in the past, of course within certain parameters. It will be good to bring out here what is GDP? GDP (Gross Domestic Product) is the final value of the goods and services produced within the geographic boundaries of a country during a year. But if somehow the prices of the same things can be increased, the total GDP increases. GDP cannot be increased on its own right now since even the economic activity is very low due to the pandemic. We call the process as ‘Window Dressing’!!
It cannot do anything to the ‘Debt’ part because the economy and the poor people have to be supported right now. So, what can the Govt do to reduce the Debt to GDP Ratio? India had a fiscal deficit of Rs 18,45,655 crores (9.5% of GDP) in Financial Year 2020-21 and there is likely to be a further additional deficit of Rs 15,06,812 crores this financial year on top of it – these are really huge amounts of fiscal deficits. And this number is now inching up to 90% of GDP, which is not sustainable. Compared to that, our debt has traditionally been around about 70% of the GDP, which already used to be on the higher side. Most of the emerging economies have government debt that is around 40% to 50% of their GDP. Government Debts shoot up to support the economy and the people, as we all already know. But what happens when a crisis like the Covid pandemic strikes? This impacts its Sovereign Credit Ratings (published by Standard & Poor (S&P), Moody’s, Fitch etc regularly), external capital coming into the country, interest rates that outsiders will charge for lending to the country and its public institutions, or even the sentiment of investing in the country as a whole.Īll countries like to keep this ratio healthy and thus keep a high Sovereign Rating. A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called ‘public debts’), which are any balances owed to outside lenders. It basically measures the financial leverage of an economy. The Debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP). Let us introduce a very important metric here:ĭebt to GDP Ratio = Total Debt of a Country Read on – why? Why are the interest rates going down? Aren’t they low enough already? Please realise that cutting interest rates so drastically was an act of fiscal desperation. How long will the old rates hold? Probably till the next quarter or maybe one more. Probably not because of the outcry but realising the official faux pas – elections in 7 states! Govt announced the following rates for small savings:-Īll hell broke loose – Twitteratti, Whatsappers, media and more were livid. Who do you align with – Mr Hardcore FDs (HFD) Or Mr Growth Bhai (GB)?ģ1st March 2021.Savers have no choice now! Get Into Stock Markets ASAP….
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