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Covid-19 Finance

Why can’t India do big stimulus to get out of pandemic blues?

Answer is not in near future.Let me explain why that is not easy than said.

When i read that every american will receive their checks as part of stimulus from US govt i was curious about mera time kab ayega in India and then came notes from Indian govt that they are planning series of measure to bolster the struggling economy due to Covid-19.I started googling for more information and eventually there was a press briefing by Finance Minister of India result is not much for salaried or who laid off by pandemic.I was thinking why not me why only Americans have luxury of getting stimulus boost.Not just one factor to blame for and there are host of things that are at play.

Too much description boring let’s read more with viz to get the facts

Printing money

Any  sovereign state cannot print money as they wish and its against the principles of economy,but still if they do it then examples are clear we will end up having hyperinflation.It’s not going to end there internal unrest…list goes on.

Not just hyperinflation but exchange crisis and classic example is Venezula.

1 USD = 182,932 VES (US dollar to Venezuelan Sovereign Bolívar).
1 EUR = 199,764 VES (Euro to Venezuelan Sovereign Bolívar).  

You will have to get your notes in truck to go for shopping…

Countries work like any corporate company generate revenues through various taxes and spend for various programs.What if a corporate company need funds raise through financial institutions.Companies with AAA rating can raise money at attractive rates while companies with below investment grade rating may not get money at even at higher rates.Countries are no different when it comes to raising money to fund stimulus.Lets read more to understand math behind raising money to fund stimulus……

Government Debt

Closely look at the numbers most of the western world countries running debt of any where between 75 to 100% of GDP and while India its between 25-50% of GDP.

No one is going to pay all the debt it owes by end of each financial year and they will do only when debt matures,it can be 100 years  or less than a year.Even if they have to repay debt simply roll over i.e take new debt and pay old one with new debt.

Its common sense that India got less debt and she can borrow a lot to send every one their check to spend,but things not going to work that way.Lets get more metrics to see the bigger picture.

Inflation Numbers

Lets look at inflation numbers of different countries while India’s inflation is close 6% where as Americas inflation almost 0%.

Lets look at government bond yield’s,( aka interest rate at which governments borrow money to fund various expenditures including stimulus packages )of various countries.While India borrows at ~6% America does it at ~0%.So every one is ready lend to Uncle Sam at free of cost but that’s not the case with India.

With ~1.8 trillion debt India need to pay each year ~90 billion dollars(6 lakh crores) while Uncle Sam pays ~390 billion dollars for its debt.Below is US Federal Budget 2019 with 3.5 trillion dollars that not a big deal for USA where as paying 90 billions from ~300 billion dollar revenues is a big big for India.So India can’t keep borrowing of course it can if we are growing at double digit as a economy.Borrowing close to 3 trillion dollars by USA to fund stimulus doesn’t make fiscal numbers very different for them as it will only increase the interest payout slightly.

Lets go ahead borrow to stimulate economy

India can go ahead and borrow as much as it want to stimulate the economy but it will catch the attention of rating agencies.This puts India  between a rock and a hard place.

 list of countries by credit rating 

Currently what India doing is monetary stimulus through RBI by lowering interest rates.

I wish soon India can join nations with AA/AAA rating coupled with low inflation to get money at near zero rates.

(To be continued..)