Calcutta Notebook

Borrowing for Consumption

Bharat Jhunjhunwala

The Covid-19 pandemic has had led to a decline of GDP by about 8% in the last year. The tax revenue of the Government has declined in tandem. However, the expenditures of the government have not only been maintained but they have increased. As a result, the gap between the income and expenditure of the Government has increased. This has led the Government to borrow large amounts of money. Normally heavy borrowing is frowned upon by international investors. However, the present international consensus that the normal rules of fiscal management do not apply in situations such as the present pandemic. This is just as a sick person selling his family silver to undergo a heart surgery. Of what use is silver if he does not live? Similarly, in situations such as the present pandemic, the government is justified in borrowing more money to tide over the immediate difficulties.

However, this borrowing is not free. It comes with its costs. The Government has to pay interest as well as the principal amount on this amount in future. At that time, the future government will have to impose higher taxes on the future people to raise the money to pay the interest and the principal amount on the monies borrowed in the past. In other words, borrowing today imposes a tax on future generations. The money borrowed today is used for consumption today; but it has to be repaid by future generations.

The government has two options to avoid making such intergenera-tional injustice. It can impose high taxes today; or it can reduce its expenditures today.

The Government imposes tax on the present generation for raising additional revenues for facing the pandemic faced by the present generation—perhaps due to its own folly.

The future income of the country is more if the government borrows money for making, say, a highway. First of all, demand is generated for cement, steel and machines. The producers of cement, steel and machines pay taxes such as the GST to the Government. Secondly, employment is generated in the production of cement etc. as well as the highway. The workers, in turn, buy goods from the market and that leads to an increase in demand. Third, the highway enables the goods to reach the destination quicker and at a lower cost. The cost of goods in the market is less and the economy is speeded. There is more productive activity. The Government gets more taxes and it can repay the loan with these additional taxes. On the other hand if the government borrows and buys, let us say, Rafale fighter jets, then the demand is generated in France. The geopolitical benefits of Rafale jets do not cancel the economic costs. Or, if the Government uses the borrowed money to pay increased salaries to the government servants, then the demand is substantially generated in buying gold, investing in foreign properties, etc. because the consumption needs of the government servants is already met with their current incomes. Such expenditures do not generate additional taxes for the government with which the loans could be repaid. The revenues of the government remain stagnant while the burden of interest and repayment of the principal leads to a decline of income in the future.

Therefore, two questions are involved in the present fiscal policy. First, whether the government is justified in borrowing and shifting burden upon future generations instead of imposing taxes on the present generation. Second, whether the government has used the borrowed money for productive investment or for increasing government consumption.

In the present situation, the Government of India has borrowed instead of imposing taxes. The Government could have imposed higher taxes, especially on imports. Higher import taxes on oil, coal, Swiss chocolates and other goods would have led to higher revenues. The price of these goods would have increased and consumption of would have declined. That would create some negative effect. The electricity would have become expensive due to higher import taxes on imported coal. People would have used less electricity. However, there would be no consequence on future generations. The present difficulties would have been managed by reduced consumption of the present generation.

Secondly, the borrowing during the pandemic has mainly been used to maintain government consumption—statues, new parliament house and salaries of the government servants. The capital expenditures in the present year 2021-22 have been increased by a meager Rs 115,000 crore. However, at the same time the receipts from the sale of capital assets have been increased by Rs 142,000 crore. Therefore, the increase in investments are being made from the sale of capital assets and not from the borrowings. The money borrowed is being used wholly for government consumption.

It is unfortunate that the Government has ignored the consequence of this borrowing on future generations and borrowed heavily for maintaining its consumption which will impact the growth of the country in the coming time and will delay the Government's objective of making India into a 5 trillion dollar economy.

[Formerly Professor of Economics at IIM Bengaluru]

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Vol. 54, No. 19, Nov 7 - 13, 2021