A Debt Trap Looms

India has a floundering economy, flat profits and salaries, and a credit culture that got established in good times. The result is that it's not just businesses that are having trouble repaying or even just servicing loans. Here's a high-level view of a typical case. P is a youngish executive with an annual income of Rs 10 lakh. Over the last few years, he has taken massive loans for all sorts of reasons. So much so that last year, his annual EMIs amounted to a total of Rs 5.4 lakh. What's worse is that he is also unable to cut down on his expenses by much. Last year, he spent a total of almost Rs 16 lakh.

To finance the spending and the EMIs, he took fresh loans of Rs 5.25 lakh. He has borrowed from everywhere--on the many credit cards he has, against his property, informal loans from friends and relatives, from his employers and probably from some more sources I don't know about.

In just the last year, he has actually borrowed almost as much as the old EMIs he has paid so he is now roughly borrowing as much as he is repaying in interest and principle. P's problem is that he in incurable optimist. Every year, he is convinced that he will get a big salary hike and bonuses and then starts spending under this assumption. Of course, the increased income never lives up to his fantasies so he eventually finds himself out of pocket. He then makes some attempts to control his expenses but is never as successful as he needs to be. The inevitable result--even more loans.

This year is no different. He is so convinced that he will get a big bonanza from his employer that he has gone ahead and taken a vehicle loan to buy a fancy new car. However, when I looked over his finances, I was shocked. It seems that even if he gets the salary and bonus he is hoping for, the repayment on the old loans will be an even bigger proportion of his income.

I guess by now some of my readers would have figured out who P is. He's no friend of mine--he is the Government of India. The numbers above are pretty much accurate, except that they've been scaled down to an individual level by dividing them by a crore. P's income is Rs 10 lakh and the government's total revenue is Rs 10.3 lakh crore. P has paid Rs 5.4 lakh as EMIs while the government has paid Rs 5.4 lakh crore for debt servicing.

When each year's budget is presented, attention is scattered on a lot of different parts. In recent years, this has often been just the fiscal deficit number, fresh subsidies and such.

There's much about a government's budget that is difficult for the man on the street to understand. Outside the world of professional analysts, if people have to focus on what is important in recent budgets, it should be the humongous borrowing of the government and the way it is growing. A basic comparison of debt and income, and the fact that debt will have to be paid for in the future is something that everyone understands. In personal finance, the idea that someone with an income of Rs 10 lakh should be paying Rs 5.25 lakh as EMIs is alarming, as is the equivalent fact for governments.

During the UPA 2 regime, total government debt has increased to three times what it used to be, which is an increase at the rate of 21 per cent a year. Nothing else in the economy is growing at that rate. It's fine for people to feel that the coming general election would be a step forward. However, it looks as if the current government has already exhausted the legitimate borrowing capacity of our economy for the next five years. Now, all that remains is to bend our backs and repay it.