An addiction to deficit.

"The favourable external environment of the past few years has changed to one that is very challenging. Oil prices have shot up and global interest rates are set to increase, raising the prospects of capital flowing back from emerging markets to safer havens," wrote MS Ahluwalia, Deputy Chairman of the scrapped Planning Commission from 2004-2014. Our government debt is too high. "High fiscal deficits lead to high debt levels and our government debt-to-GDP ratio is 69%, higher than most emerging nations countries." The government borrows to finance fiscal deficit which diverts savings to government consumption, starving the private sector of funds, and high debt results in increased interest payments. The combined fiscal deficit of the Center and states rose to 8-9% of GDP in the 1980s and stayed their until 1990-91 when we suffered a balance of payments crisis, wrote S Acharya. "Fiscal virtue returned after 2002/3" and lasted till 2007 when the combined deficit hit a record low of 4.7% in 2007/8. But, "India's fiscal deficit trends are a bit like an alcoholic trying, unsuccessfully, to reform." Increased spending to win the general election in 2009 resulted in the Central government deficit rising to 6.46%. Retail inflation rose to nearly 11% in 2013 and the Congress was trounced in the 2014 general elections. The government budgeted a higher deficit target for this year but even that looks optimistic in view of general election next year. Borrowing by states can be controlled by charging  higher interest rates for profligate states and banks should determine credit worthiness of a state before lending to it. But states can add to debt by other means, such as by supplying free electricity to farmers. Banks will have to write off $38 billion, Rs 2.5 trillion, bad loans, out of a total of $178 billion, Rs 11.7 trillion, in the power sector. States raise money by issuing development bonds (SDLs). "The aggregate gross annual issuance of SDLs has also increased at a compound annual growth rate (CAGR) of 21.2% between 2012-13 and 2016-17 to Rs 3.8 lakh crore..." "In contrast, the Union government's fiscal deficit expanded at a relatively modest CAGR of 2.2% between 2012-13 and 2016-17 - to Rs 5.3 lakh crore from Rs 4.9 lakh crore." The government plans to spend heavily to increase the feelgood factor before the election and this may add to the deficit. GDP growth is being driven almost entirely by government expenditure with money from high taxes on oil, wrote A Krishnan. With oil prices going up the government could be in a quandary. If only Ahluwalia had written this article in 2008, the Congress may still have been in power.