Junk realities and the long road ahead

If your EMI for a home loan is more than half the take-home income, you would be considered to be in a severe state of indebtedness. Now, the Centre8217;s interest payment on the debt alone that does not include repayment of loans went up from 42 per cent of revenues in 1992 to 53.4 per cent in 2001-02. In fact, for two years, more than half of the revenue receipts of the Centre went to merely pay interest on debt. Matters improved in 2002-03, primarily because interest rates went down, and the last fiscal proved to have very high economic growth. But the basic situation remains challenging. According to rating agency Standard 038; Poors, countries are broadly classified into investment grade and speculative grade. The latter are considered fairly risky investments, and are often prohibited from the investment portfolios of pension funds.

Countries with the lowest credit rating that manage to make it into investment grade tend to have interest payments that are only 9 per cent of revenue revenue receipts. With a number of 42 per cent, India is in a bad situation, which is part of the reason why it has been classified into the speculative grade, also called 8220;Junk8221;.Projections by the Kelkar Task Force show that if present trends continue, this number is likely to remain at around 42 per cent for the next five years. In other words, after going through the herculean task of collecting tax and non-tax revenues, 42 per cent of that inflow would go away in merely paying interest.

If Kelkar8217;s proposed reforms are implemented, this ratio is projected to come down sharply to 32 per cent by 2008-09. This would give breathing space to a government coping with the huge stock of debt, and may suffice to push India into investment grade.

How will they do it? The proposals work at two levels. The first channel is by increasing tax revenues. A simpler, more rational tax system with fewer exemptions and lower rates is projected to increase tax revenues. In addition, the burgeoning services sector is being brought into the tax net.

The second channel lies through accelerating GDP growth.

Taking our home loan analogy, this is akin to higher income reducing your EMI. The Task Force proposals accelerate GDP growth by moving towards a Single National Market, by setting the stage for massive export-oriented manufacturing.