Understanding Global and National debt is very important for sustained growth. With Global debt at a whopping 226 trillion USD lot of concern there in Planning circles. In this article, we are analysing the facts to bring comfort to these planners that these are pointers to good growth and not a liability as per the conventional definition of debt. There are mostly internal and very little external and all countries in principle are in debt with their own people who have given this and in a way, this becomes a degree of prosperity index. It should however be noted these have to be paid back and we are giving a solution for this also to get the nations to be debt-free so the Global Economy be devoid of debt of this magnitude which has risen in the pandemic situation.
Overview of Global Debt
Global debt rose to a new record high of nearly US$226 trillion in the second quarter, but the debt-to-GDP ratio declined for the first time since the start of the pandemic as economic growth rebounded. The rise in debt levels was the sharpest among emerging markets, with total debt rising US$3.5 trillion in the second quarter from the preceding three months to reach almost US$92 trillion. Debt as a share of the gross domestic product fell to around 353% in the second quarter, from a record high of 362% in the first three months of this year.
But in many cases, the recovery had not been strong enough to push debt ratios back below pre-pandemic levels. According to the IIF, total debt-to-GDP ratios excluding the financial sector are below pre-pandemic levels in just five countries: Mexico, Argentina, Denmark, Ireland, and Lebanon.
The IIF noted that after a slight decline in the first quarter, debt among developed economies — especially the euro area — rose again in the second quarter. In the United States, debt accumulation of around $490 billion was the slowest since the start of the pandemic, although household debt increased at a record pace.
Globally, household debt rose by $1.5 trillion in the first six months of this year to $55 trillion. The IIF noted that almost a third of the countries in its study saw an increase in household debt in the first half. The rise in household debt has been in line with rising house prices in almost every major economy in the world. A few selected countries external debts and external debt to GDP is given below:
DEBT POSITION OF THE GOVERNMENT OF INDIA
The outstanding internal and external debt and other liabilities of the Government of India at the end of 2021-2022 is estimated to amount to INR. 13,586,975.52 crore, as against INR. 12,121,959.24 crore at the end of 2020-2021. Broad details are as follows:
Internal Debt comprises loans raised in the open market, compensation, and other bonds, etc. It also includes borrowings through treasury bills including treasury bills issued to State Governments, Commercial Banks and other Investors, as well as nonnegotiable, non-interest-bearing rupee securities issued to International Financial Institutions. An analysis of the public debt outstanding at the beginning of the First Five Year Plan and close of each year from 2016-2017 to 2019-2020 and that estimated to be outstanding at the close of 2020-2021 and2021-2022 is given in the Statement of Liabilities. The amount outstanding under internal and external debt reflects the liability of the Government as represented by the book value of the outstanding debt. The outstanding stock of external liabilities is reckoned at historical rates of exchange on which the liability was initially accounted for in the books of accounts after netting the repayments made at current exchange rates.
In addition, Government is liable to repay the outstanding against the various Small Savings schemes, Provident Fundssecurities issued to Industrial Development Bank of India, UnitTrust of India and Nationalised Banks, Oil marketing companies, Fertilizer companies, Food Corporation of India and deposits under the Special Deposit Scheme and depreciation and other interest-bearing reserve funds of departmental commercial undertakings, etc., deposits of local funds and civil deposits. Details of such liabilities are shown in the Statement of Liabilities.
The present state of tacking the economic slowdown
The results of the Government Financing Support Programmes for Businesseshighlightthose Global countries have taken efforts to amend and introduce programmes that provide more appropriate support for companies affected by COVID-19 measures. However, as governments grapple with two issues,
- The need for continued or broader support for companies that face continued financial constraints due to the second and possibly third wave of COVID-19 infections and associated confinement measures, and
- With the increasing vaccine rollouts and economic recovery prospects, policymakers will need to ensure that exit strategies fit into a holistic toolkit of policies to ensure a resilient economic recovery that does not undermine market functioning or financial stability.
Exit strategies that facilitate borrowers’ exit from programmes should, and are often, built into the terms of the financing programmes. When market and borrowing conditions normalise, borrowers would have an incentive to switch back to private or financial sector sources of capital. In this manner, at least some of the exit strategies:
- Have pricing that is higher than borrowing costs during normal lending conditions, although that may not be categorically true across all facilities and programmes.
- Are flexible enough to allow borrowers to pre-pay loans, and
- Have certain restrictions that incentivise firm management to exit the programmes when the economic recovery materialises and business revenues normalise.
However, governments and companies are likely to face the following challenges on exit:
Higher leverage: Current programmes and market conditions allow companies to take on debt with little cost attached. This has consequences for the overall level of corporate debt and leverage within companies which have increased sharply. To face this problem some governments, such as Switzerland, have decided that up to a certain amount of government-guaranteed credit raised through the programme would not be regarded as debt for a defined period to avoid excessive leverage, yet a higher debt level could still lead to a notable spike in indebtedness and risk defaults.
Refinancing challenges: Refinancing issues are likely to emerge if interest rates and medium-term yields start to rise, which could happen due to a myriad of factors, particularly as inflation expectations increase, with governments having the flexibility to adjust interest rates according to market developments. In addition, loan foreclosure incentives for banks may arise as the termination of guarantees approach, which would reduce collateral values for loans, thus increasing banks’ risk of holding NPLs.
Insolvency issues: While it is difficult to foresee the effect on insolvencies as programmes are still in place and vulnerabilities are likely to remain contained in the short term, they will probably merge over time. In this respect, a strategic research paper points to a two-year lag between rising in vulnerabilities and peak exits. Some countries have implemented extensions to repayment, or thresholds for debt repayment depending on the annual turnover and growth of companies, allowing them to repay debt at a lesser burden. In some cases, governments have also set a cap to the maximum loss of the portfolio of loans which can not be exceeded.
While the solvency risk phase of the pandemic may not have materialised thus far, the confluence of elevated market valuations, excessive corporate leverage, and growing interconnectedness has created conditions for a fragile recovery that remains highly dependent upon unprecedented monetary and fiscal policies. However, losses could rise sharply when crisis programmes are dismantled, depending in part on how businesses are able to refinance themselves thereafter. Therefore, it will be important to ensure that the timing and sequencing of exit from support programmes is carefully managed so that the materialization of risk does not undermine the recovery. Moreover, governments will need to strengthen insolvency regimes so that they can preserve value. They should allow for more pre-insolvency flexibility such as moratoria on payment of liabilities taken on during the crisis, and consideration of debt-equity swaps. While some jurisdictions have equity programmes, governments may need to provide additional equity or equity-like programmes and incentivise businesses to tap equity through public and private markets, well before programme exit occurs.
Tailoring restructuring procedures: Restructuring procedures, mainly geared to larger firms, are broadly effective for non-crisis periods, yet during crisis periods standard restructuring procedures can face market constraints as attracting capital can be difficult in a short time frame and as creditor co-ordination problems become more serious. Therefore, to streamline these procedures and provide support for a wider range of companies, including SMEs, policymakers could consider the following:
- Centralised out-of-court debt restructuring approaches, such as the ‘London approach’ in which different lenders (often banks) agree to not appoint receivers to the debtor in distress (a standstill), share information (one bank is appointed as the lead creditor), decide together on terms under which a firm should be given a lifeline and set rules on the voting power of minority creditors.
- Establishing specific procedures for SMEs, including promoting informal debt restructuring to avoid the risk of liquidation in formal insolvency processes.
Strengthening insolvency regimes. Many countries have modified their insolvency frameworks to support companies in the short-term, for example, this has included the relaxing of obligations for directors to file for bankruptcy once insolvent (e.g., France, Germany, Luxembourg, Portugal and Spain) or by relaxing creditors’ rights to initiate insolvency proceedings as done in Italy, Spain, Switzerland and Turkey. In addition to this, policymakers should consider structural changes to the features of insolvency regimes to help to coordinate creditors claims in a manner that is consistent with preserving firm viability, for example by:
- Establishing legal conditions that would increase incentives for investors to provide new financing to financially distressed firms.
- Favouring pre-insolvency procedures that are associated with a higher rate of success.
- Establishing specific out-of-court procedures that have proven to be effective in times of crisis.
- Ensuring efficient liquidation processes and providing the institutional conditions for a ‘fresh start’ to unlock productive resources.
The need to address excessive leverage in the system. COVID-19 financing support programmes, which largely include debt-based support, have been successful in easing immediate liquidity constraints, yet this may have exacerbated underlying structural vulnerabilities in the corporate sector, including the rise of corporate debt to GDP and already high levels of leverage in many countries. The 2020 report, COVID-19 GovernmentFinancing Support Programmes for Businesses included simulation analysis that suggested that the greater use of equity or equity-like support could provide better financial flexibility for firms to
absorb falling operating cash flows and avoid distress, thereby allowing firms to grow and invest into the recovery. The recent Global Economic Outlook supports this by suggesting that government financing support should continue for companies but should be refocused to consider grants and equity rather than debt. To this end, policymakers could consider:
- Potential caps on leverage for existing financing support programmes, such that companies can only tap debt facilities if they do not increase their leverage (i.e. supplementing reduced debt or by paring this with new equity investment at the pre-borrowing debt/equity ratio).
- Suspensions of dividends or cash pay-outs to equity holders during the period in which government debt or preferred equity is provided to reduce leverage.
- Increase the size of equity financing, through venture capital financing, including co-financing with private investors, or government investment / sovereign wealth funds. This could also include the reorientation of private sector investment programmes towards equity investment in certain industries.
- Consider ways to reduce the relative capital charge on private equity for some market participants or rebalance tax policy to limit the relative advantage of debt financing in some jurisdictions.
- Encourage new equity investment for SMEs, by increasing ease of investment, accessibility of information, and temporary tax incentives for equity participation in approved SMEs.
Longer-term considerations and creating adequate financing markets for non-investment-grade corporates and SMEs. Preparing solvent firms for recovery and future economic growth should be an important component of financial support measures. In doing this, creating a market that can provide continued financing at appropriate rates for companies following an exit from any government support is vital. In this respect, the crisis also provides an opportunity to improve the policy framework for financing and open new channels that can support companies with the potential to contribute to productivity-led growth. Furthermore, financial support should increasingly be focused on strengthening the recovery and resilience of firms, in particular SMEs, by strengthening their capacity to adopt digital technologies, skills, and innovation. Therefore, policymakers could:
- Build on programmes that involve investment vehicles with banks as senior in the capital structure and government as junior, to extend the buying of SME loans originated by banks.
- Expand asset purchase programmes’ criteria for collateral to further support primary and secondary markets for SME loans.
- Use technology to standardise loan and cash flow documentation, as well as introduce artificial intelligence (AI) and blockchain at the credit assessment and loan distribution stage(particularly for online banks and financing for SMEs) to support timely review and approval of loan applications, and of efficient disbursement.
Sustainability and climate-related considerations in government support programmes. In the past decade, governments, international organisations and private institutions in many
countries have advanced efforts to implement climate policies to help improve sustainability reporting and catalyse a low-carbon transition. A few jurisdictions have taken steps to integrate sustainability or climate-related considerations into financial support programmes, yet this is more prevalent in government economic recovery plans. In facilitating the assessment of sustainability and climate-related risks and opportunities, the latest research suggests that insufficient data, financially material metrics, and analytical tools to measure sustainability remain a critical constraint, not only for corporates but also for financial institutions and the financial market regulators.
Overall, the COVID-19 Government Financing Support Programmes for Businesseshighlights that the array of financing support programmes helped distressed firms to meet their immediate financial commitments and avoid widespread defaults. However, given the potential for unintended consequences – most notably the rise of corporate debt – to undermine the recovery phase, the Committee on Financial Markets should give greater attention to how COVID-19 programmes have affected market financing and leverage, and what implications this may have for current exit strategies.
Secured Governance Strategy
Due to lack of irrigation, or unfavourable climate, some lands are not cultivated and are categorized as either culturable or unculturable wastelands. Culturable wastelands include gullied and/or ravenous land, undulating upland, surface waterlogged land and marsh, salt-affected land, shifting cultivation area, degraded forest area, degraded non-forest plantation, sandy area, mining and industrial wasteland, and pasture and grazing lands. Compared to this, unculturable wastelands include barren, rocky, stony wastes, sheetrock areas, steep sloping areas and snow-covered and/or glacial areas.
People friendly action programme helps local people and organisations in rehabilitating and improving the degraded lands. “Turning wasteland into a successful ‘Smart city’” the wasteland in India which has been abandoned is being transformed into a Smart City for sustainable economic growth. The main objective of the secured governance concept is to develop a deprived land area into a dynamic creative zone, where knowledge, innovation, culture, and creativity meet and mutually reinforce.
The Blue Economy concept is a tool to implement Smart City development in the Islands for the economic growth of the nation. These new smart cities will be constructed around the work-live-play lifestyle in a vibrant environment with technology and the cities aspire to be clean and green while some want to leverage heritage and other unique features.
These smart city projects would require huge capital investment initiatives that could be brought about by public-private partnerships for developing sustainable smart cities. These islands represent an opportunity to boost the local economy and create huge employment opportunities in knowledge-intensive economic sectors. The development of smart cities in the Indian Islands could be a plethora of investment opportunities and assist to meet the financial obligations of the nation.
It is noted that there is a hanging dragon in the form of Global debt of 226 trillion $. A proper analysis of this makes this dragon a bouquet of this amount as this amount is not a liability to be paid back to any third country or entity but bulk to its own people or enterprises and other internal financial instruments. Through Secured Governance even this notional debt can be taken off by having a range of long-term large value development projects taking Smart Cities to Village level and in a small part say 5% of wastelands, all Islands etc. These Multiple Trillion $ projects should have a part of their Funds as Bonds offered to the entities who have given debts that can take care of the existing and future inflow giving a circular economy in the system for perpetual growth.
Dr P. Sekhar, Chairman,
Unleashing India Global Smart City Panel & MTGF
Dr Uppiliappan Gopalan,
Global Industrial promotion expert,
Advisory Panel of World Economic Forum