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

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.

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

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. 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.

Do let us know what you think about the article