What would be the CIBIL Score of the Indian Government?!

Published: October 26, 2016 at 11:44 am

Last Updated on

Did you know that the govenment would collapse if it did not borrow money?! Its expenditure is much more than its income (revenue), aka fiscal deficit. It has borrow considerably sums of money from you and me (diretly or indirectly) to service its debt. Therefore, the government is in a debt trap (which is quite common!).

If a bank is requested to lend money to us, it wants to know how credit-worthy we are or what our CIBIL score is. We lend money to the government all the time – as often as each month (or less). Do we stop to ask, What would be the CIBIL Score of the Indian Government?!

A few days ago, the government of India announced the publication of a consolidated status paper on Government debt, detailing its nature, history, sustainability and outlook.  Here are a few excerpts.

The classification of government Debt

government-debt-india-2

 

 

The composition of government debt

government-debt-india-components
Source: Page 26 of the Consolidated Status Paper (link below)

Observations:

The government debt is predominantly public in nature.

And much of the public debt is internal – by us the citizens.

External debt is comfortably small and therefore our ability to service debt (debt sustainability) is not influenced by currency risk.

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

Government debt is gradually becoming more and more market linked in nature. This is good for the government since more and more entities will buy government securities making it easier to borrow.

Interest rates of fixed income instruments have also become market linked – at least on paper:Why are PPF and Sukanya Samriddhi interest rates still so high?!

However, the securities have a fixed interest rate with very long maturies (decades!). This is good for both the lender (us) and the borrower(the govt) and provides a shield against rate volatility and roll over risk (borrower has to pay more if rates are high upon maturity). Floating rate securities constitute only 0.4% of internal debt. This is also true for a country like the USA which has a much larger government debt to GDP ratio than India – US is the 1st, India the 10th.

The report notes that insurers and provident funds hold 28% of government securities largely eating into the share held by commercial banks.

Government debt as a percentage of GDP

government-debt-india-ratio-gdp
Source: Page 23 of the Consolidated Status Paper (link below)

There is a marginal decrease in government debt as a percentage of the gross domestic product (GDP). This neither good nor bad. A high debt to GDP ratio does not mean much. What matter is the ability of the government to handle payments. Over the long term, what matters is a good grown in GDP rather than a reduction in debt. The government needs to borrow to develop infrastructure and that is a good thing. The key is that infrastructrue should contribute directly or indirectly to economic growth.

The report also carries a debt sustainbaility analysis which says that the debt situation is stable – primarily because of domestic participation in the fixed income market. I do not understand this well enough to share it here.

When we lend to the government, we often take it for granted that the sum is guaranteed. While this is largely true, it is important for us to recognize that the ability of the government to service debt (pay regular interest and return the principal) depends on its ability to handle fiscal deficit – expenditure which has always been greater than its revenue.

What would be the CIBIL Score of the Indian Government?!

Now where would the needle in this dial point for the government. Not this government, let us leave politicis out of it. Governance is a contiguous process.

cibil-score
Figure adapted for illustation only from https://www.cibil.com/sites/default/files/pdf/understanding-cir-ctc.pdf

As long as the medium-term view of the economy is sound, I am happy to place the needle close to 699-700 border. How about you?

References

  1. Press release announcing the Consolidated Status Paper
  2. The consolidated status paper
Do share if you found this useful
Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!)

About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

About freefincal & its content policy

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News
Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication.Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our Publications


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingThis book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
  

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new

This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download) 

Free Apps for your Android Phone

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

1 Comment

  1. Hi, great article. I read recently that cibil identity theft has become common these days. This scares me a lot, is there a way to avoid them?

Comments are closed.