We are living at a time when it is not unusual for a sovereign entity, particularly in Europe, to have Credit Default Swaps (CDS) trade at higher spreads than corporates, although — and thankfully — the bond yield is lower.
It is estimated that European governments will need to borrow Euro 2,200 billion (19 per cent of GDP; Rs 1.2 lakh crore) from the capital market in 2010 to finance large deficits and roll over existing debt. This figure represents a marginal increase on 2009, which Fitch estimates to have been close to Euro 2,120 billion (17 per cent of GDP) — possibly the largest borrowing requirement seen in the post-world war years.
What of growth? The euro zone shrank last year, by minus four per cent, and is expected to grow by one per cent in 2010 — a moderate increase from earlier estimates, but low by historical standards. The euro zone should see anaemic growth on the back of the withdrawal of the policy stimulus.
India, too, expects to have record borrowings this year. The central government alone expects to borrow just over Rs 4,00,000 crore from the market this financial year. But, in sharp contrast, the growth rate, which had fallen to 6.7 per cent in 2008-09 (from 9.2 per cent in the previous year), is estimated to move up to 7.2 per cent this March, and further to 8.7 per cent by the end of the next financial year. India is, clearly, on a different trajectory. While the Economic Survey does not compare and contrast, its tone is distinctly self-congratulatory.
Commenting on the resilience of the economy, this year’s Economic Survey highlights that the economy will be back to its new normal — now at the 9 per cent level — by 2011-12. If growth is back, expect (gradual) withdrawal of stimulus. As the Prime Minister’s Economic Advisory Council also talks about a withdrawal in its most recent report, this appears to be certain.
The Survey points to the high level of food inflation and warns this could spread to other sectors. This is a pointer that serious policy changes are needed in the agricultural/rural sector. Last week’s fertiliser price increase, read with the Survey, suggest that agriculture will soon cease to be a holy cow. If a billion-plus mouths are to be fed, and growth is to be pegged at 9 per cent, expect policy changes. These could be in the manner subsidy is targeted, to the way foodgrain is distributed.
As in most years, the Survey talks of fiscal consolidation. This year, the Thirteenth Finance Commission adds its weight to this. At an estimated 6.5 per cent fiscal deficit in 2009-10, it may be lower than many other economies will see this year, but at a debt to GDP ratio of 80-plus per cent, the clock is ticking.