We feast on debt, and our kids will pay it off

The fiscal deficit for the current financial year 2021-22 has been revised to 15.9 trillion. When this year’s budget was presented last February, the fiscal deficit was expected to come down 15.1 trillion. Fiscal deficit is the difference between what the government earns and what it spends.

The government meets a major part of its deficit by issuing bonds and borrowing money. In 2021-22, approx. Its borrowings of ₹8.8 trillion are expected to be met through issuance of bonds. It states that the total fiscal deficit is not financed by bonds alone. The second major way is to get money in the small savings schemes of the post office. Every year, some of the investments made by people in such schemes in the previous years mature and need to be repaid. This year, the government expects almost 6.8 trillion is to be invested in these schemes. redemption expected 86,749 crores, which leaves approx. 5.9 trillion.

This 5.9 trillion will be used to meet the fiscal deficit. Therefore, a large part of the government’s fiscal deficit is financed by borrowing through the issuance of bonds and money invested in small savings schemes.

This is where things get interesting. When the budget was presented last February, the government had assumed that 4.8 trillion will be invested in these schemes during 2021-22. Ahead, 91,343 crore will be redeemed, except 3.9 trillion, which will go towards financing the fiscal deficit.

Instead 3.9 trillion, has ended with the government 5.9 trillion, which is 2 trillion more. why did this happen? The repo rate or the interest rate at which RBI lends money to banks was 6.5% in January 2019. By February 2020, when the COVID pandemic hit, the RBI had reduced it to 5.15%. Till May 2020, the central bank further reduced the repo rate to 4%, which has remained the same since then.

Before the pandemic struck, the idea was to push down interest rates so that people would borrow and spend more, and corporates would borrow and expand, thus helping the economy, which was going through a moribund phase. After the pandemic, the idea was also to help the government borrow at lower interest rates.

Along with cutting its key interest rate, RBI also printed and pumped money into the economy. Post-Covid, bank credit growth collapsed, leading to a further fall in interest rates on fixed deposits with banks.

With a major chunk of Indian household financial savings being in bank deposits, this hurt families and prompted them to look for higher returns. The stock markets indicated. On an average, around 420,000 demat accounts were opened every month in 2019-20. This number reached 2.76 million demat accounts in 2021-22. A similar boom has been seen in the case of mutual funds, through which people buy stocks indirectly. As the Securities and Exchange Board of India states in its latest monthly bulletin: “on average” [2.39 million] New investor folios are being added every month.

Not everyone wants to take on the increased risk that comes with stocks. Therefore, many individuals have increased their investment in small savings schemes. Though the interest rates on these schemes are lower than before, they are still higher as compared to bank deposits. This explains why the investment in these schemes has increased dramatically this year and the net of repayment is 2 trillion more than what the Center expected.

It shows us the indirect impact of monetary policy and its impact on the Union Budget. Low interest rates pushed people towards small savings schemes, which increased the total receipts of the government. With the help of this increase in receipts, along with increase in tax collection, the government increased its expenditure for the year. 37.7 trillion against 34.8 trillion was earmarked for this.

The matter does not end here. It will also have an effect. As mentioned earlier, money invested in small savings schemes matures over time and needs to be repaid. It is repaid using the fresh money being invested in these schemes in the year of maturity of the previous investments. In that sense, these schemes have a pyramid structure, where old investors are paid using funds brought in by new ones.

This essentially means that the coming generation will pay for the expenses of the present generation. Of course, all long-term government debt is like that. The trouble is that in such tough times, the ideas of inter-generational equity go for a toss.

As Arun Jaitley said in his first budget speech: “Fiscal prudence is paramount to me because of the ideas of inter-generational equality. We cannot leave a legacy of debt to our future generations.” But that is exactly what is happening and the reason is simple: generations to come do not yet have the vote. They will have to bear the cost of our free lunch.

Vivek Kaul is the author of ‘Bad Money’.