Debt and Investment in India: Current Status
Government liabilities have been broadly classified as debt contracted against the Consolidated Fund of India (defined as Public Debt) and liabilities in the Public Account, called Other Liabilities. Public debt is further classified into internal and external debt. Internal debt consists of marketable debt and nonmarketable debt. Government dated securities and Treasury Bills, issued through auctions, together comprises marketable debt. Intermediate Treasury Bills (14 days ITB) issued to State Governments and select Central Banks, special securities issued to National Small Savings Fund (NSSF), securities issued to international financial institutions, etc., are part of non-marketable internal debt. Other Liabilities include liabilities on account of Provident Funds, Reserve Funds and Deposits, Other Accounts, etc.
Fiscal consolidation effort of the Centre under the umbrella of FRBM Act resulted in reduction of total liabilities from 47.5 per cent of GDP in March, 2014 to 45.9 per cent of GDP in March, 2017. The increase in March, 2018 is primarily on account of special securities issued for recapitalisation of PSBs. However, the increase in General Government Debt (GGD)-GDP ratio from 67.1% (2013- 14) to 68.2% (2017-18) is primarily on account of higher borrowing by the States.
93.8 per cent of total Central Government debt at end-March 2018 was denominated in Indian currency. External debt constituted 2.9 per cent of GDP at end-March 2018, implying low currency risk to GoI debt portfolio and its impact on balance of payments remains insignificant. The limited external debt is entirely from official sources, providing safety from volatility in the international capital markets.
The share of marketable securities in total internal debt, which was at 43 per cent of public debt (35.8 per cent of total liabilities) in 2000-01 increased to 93.0 per cent (82.1 per cent of total liabilities) at end-March 2018. The Government has also progressively moved towards alignment of administered interest rates with the market rates; revisions in interest rates on small savings schemes, General Provident Fund and similar funds, etc. are undertaken on a quarterly basis.
The Government is continuing with its efforts to elongate the maturity profile of its debt portfolio with a view to reduce the roll-over risk. The weighted average residual maturity of outstanding dated Government securities at end-March 2018 was 10.6 years which is higher compared to international standards with tenure of the longest security issued being 40 years. At end-March 2018, only about 26.1 per cent of outstanding stock of dated government securities had a residual maturity of up to 5 years, indicating a relatively lower roll-over risk in medium-term, which is further supported by active debt management operations in terms of switches and buybacks. This ensures that redemptions are handled smoothly.
The largely domestic and institutional investor profile contributes to stable demand for government securities. Ownership pattern of dated securities indicates a gradual broadening of market over time. The commercial banks remain the dominant holders even as their share declined from 61 per cent at end-March 2001 to 42.7 per cent at end-March 2018, which may partly be attributed to reduction in SLR requirements (from 25 per cent of NDTL of banks to current requirement of 19.50 per cent). The Insurance Companies and Provident Funds account for 23.5 per cent and 5.9 per cent respectively, of government securities; creating stable demand for long-term securities.
The debt sustainability indicators point out that debt is sustainable. IP-RR ratio (interest payments to revenue receipts) of Centre has decreased to 35.3 per cent in 2017-18 from about 52 per cent in the beginning of 2000s. Centre’s Average Interest Cost (AIC) has declined to 7.2 per cent in 2017- 18 from 8.1 per cent in 2000-01. A similar declining trend is also observed for States. The IP- RR ratio and Average Interest Cost (AIC) for States at end-March 2018 stands at 11.9 per cent and 7.7 per cent, respectively. The AIC is stable and well below the nominal GDP growth rate, which indicates that India is comfortably placed in terms of sustainability parameters of public debt.
The Government of India has taken significant initiatives to strengthen the economic credentials of the country and make it one of the strongest economies in the world. India is fast becoming home to start-ups focused on high growth areas such as mobility, e-commerce and other vertical specific solutions – creating new markets and driving innovation.
India’s Gross Fixed Capital Formation at constant prices was Rs 40.88 lakh crore (US$ 561.44 billion) in 2017-18. The Government of India forecasts capital expenditure to increase by 30 per cent from Rs 3 lakh crore (US$ 41.2 billion) in 2017-18 to Rs 3.9 lakh crore (US$ 53.6 billion) in 2019-20. Investments by Domestic Institutional Investors (DIIs) reached Rs 97,739.02 crore (US$ 14.00 billion) in 2018. The total number of investor accounts with active mutual fund houses in India rose to a record 81.7 million at the end of February 2019, according to the data from Association of Mutual Funds in India (Amfi). India has emerged as one of the strongest performers in terms of deals related to mergers and acquisitions (M&A). The M&A activity in India reached record US$ 129.4 billion in 2018 while private equity (PE) and venture capital (VC) investments reached US$ 20.5 billion.
- Assets under management (AUM) by mutual funds in India reached Rs 23.16 trillion (US$ 334.82 billion) in February 2019.
- Indian automobile industry start-ups received investments of US$ 491 million in 2018, led by Essel Green Mobility’s US$ 300 million investment in Zipgo.
- As of March 2019, the Oil and Natural Gas Corp (ONGC) is planning to invest over US$ 500 million in its flagship asset, Mumbai High.
- In March 2019, the Tata group entered the airports sector in India by agreeing to invest Rs 8,000 crore (US$ 1.16 billion) in the GMR group along with two other investors.
- Oyo Rooms will invest about US$ 200 million towards capital expenditure, technology and leadership in its India and South Asia business over 2019.
- Proceeds through Initial Public Offers (IPO) in India reached US$ 5.5 billion in 2018 and US$ 0.9 billion in Q1 2018-19.
- Reliance Industries Limited (RIL) is planning to invest over Rs 10,000 crore (US$ 1.37 billion) in Uttar Pradesh and Rs 5,000 crore (US$ 687 million) in West Bengal over the next three years.
- Vedanta Resources Plc is planning to invest about US$ 9 billion in India over the next few years to expand its hydrocarbons and metals and mining businesses.
- In February 2019, the Government of India approved the National Policy on Software Products – 2019, to develop the country as a software hub.
- The National Mineral Policy 2019, National Electronics Policy 2019 and Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles (FAME II) have also been approved by the Government of India in 2019.
- In November 2018, the Government of India launched a support and outreach programme for the Micro, Small and Medium Enterprises (MSME) sector. It involves 12 key initiatives which will help the growth, expansion and facilitation of MSMEs across the country.
- In September 2018, the National Digital Communications Policy (NDCP) has been approved by Government of India with the objectives of attracting US$ 100 billion in investments, improved broadband connectivity and generation of four million jobs in the telecom sector.
- Securities and Exchange Board of India (SEBI) doubled the maximum investment by angel funds in venture capital undertakings to Rs 10 crore (US$ 1.37 million).
- The Government of India has decided to invest Rs 2.1 trillion (US$ 28.8 billion) to recapitalise public sector banks over the next two years and Rs 7 trillion (US$ 95.9 billion) for construction of new roads and highways over the next five years.
- India and Japan have joined hands for infrastructure development in India’s north-eastern states and are also setting up an India-Japan Coordination Forum for Development of North East to undertake strategic infrastructure projects in the northeast.
- Union Ministry of Shipping plans to raise US$ 15.8 billion in dollar equivalents at the interest rate of three per cent, for developing ships, building ports and improving inland waterways.
- Ministry of environment and forests has granted environment clearance for 35-km coastal road connecting south and north Mumbai. The coastal road project is part of the US$ 9.52 billion transport infrastructure projects being undertaken by the state government and is expected to require an investment of US$ 1.34 billion.
- The Government of India will provide soft loan of US$ 1 billion to sugar mills to help them clear part of their US$ 3.33 billion dues to farmers. The money shall be directly credited to the farmer’s bank accounts through the Pradhan Mantri Jan-Dhan Yojana.
Growth and Development experience
India’s GDP increased 7.2 per cent in 2017-18 and 7 per cent in 2018-19. India has retained its position as the third largest startup base in the world with over 4,750 technology start-ups. India’s labour force is expected to touch 160-170 million by 2020, based on rate of population growth, increased labour force participation, and higher education enrolment, among other factors, according to a study by ASSOCHAM and Thought Arbitrage Research Institute. India’s foreign exchange reserves were US$ 405.64 billion in the week up to March 15, 2019, according to data from the RBI.
- During 2018-19 (up to February 2019), merchandise exports from India have increased 8.85 per cent year-on-year to US$ 298.47 billion, while services exports have grown 8.54 per cent year-on-year to US$ 185.51 billion.
- Nikkei India Manufacturing Purchasing Managers’ Index (PMI) reached a 14-month high in February 2019 and stood at 54.3.
- Net direct tax collection for 2018-19 had crossed Rs 10 trillion (US$ 144.57 billion) by March 16, 2019, while goods and services tax (GST) collection stood at Rs 10.70 trillion (US$ 154.69 billion) as of February 2019.
- Proceeds through Initial Public Offers (IPO) in India reached US$ 5.5 billion in 2018 and US$ 0.9 billion in Q1 2018-19.
- India’s Foreign Direct Investment (FDI) equity inflows reached US$ 409.15 billion between April 2000 and December 2018, with maximum contribution from services, computer software and hardware, telecommunications, construction, trading and automobiles.
- India’s Index of Industrial Production (IIP) rose 4.4 per cent year-on-year in 2018-19 (up to January 2019).
- Consumer Price Index (CPI) inflation stood at 2.57 per cent in February 2019.
- Net employment generation in the country reached a 17-month high in January 2019.
The interim Union Budget for 2019-20 was announced by Mr Piyush Goyal, Union Minister for Finance, Corporate Affairs, Railways and Coal, Government of India, in Parliament on February 01, 2019. It focuses on supporting the needy farmers, economically less privileged, workers in the unorganised sector and salaried employees, while continuing the Government of India’s push towards better physical and social infrastructure. Total expenditure for 2019-20 is budgeted at Rs 2,784,200 crore (US$ 391.53 billion), an increase of 13.30 per cent from 2018-19 (revised estimates).
Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India and Digital India. Mr. Narendra Modi, Prime Minister of India, has launched the Make in India initiative with an aim to boost the manufacturing sector of Indian economy, to increase the purchasing power of an average Indian consumer, which would further boost demand, and hence spur development, in addition to benefiting investors. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP from the current 17 per cent. Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.
India’s gross domestic product (GDP) is expected to reach US$ 6 trillion by FY27 and achieve upper-middle income status on the back of digitisation, globalisation, favourable demographics, and reforms. India’s revenue receipts are estimated to touch Rs 28-30 trillion (US$ 385-412 billion) by 2019, owing to Government of India’s measures to strengthen infrastructure and reforms like demonetisation and Goods and Services Tax (GST). India is also focusing on renewable sources to generate energy. It is planning to achieve 40 per cent of its energy from non-fossil sources by 2030 which is currently 30 per cent and also have plans to increase its renewable energy capacity from to 175 GW by 2022. India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer behaviour and expenditure pattern, according to a Boston Consulting Group (BCG) report; and is estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by the year 2040, according to a report by PricewaterhouseCoopers.