By the time the summer is over, the summer of 2015 is set to be one of the most dramatic in recent memory.
With a global debt-to-GDP ratio of over 180%, it is difficult to envisage that a quarter of the world’s population is living on less than $1.25 a day.
With that kind of situation, a country such as India, which has a gross domestic product (GDP) of $1,900bn and a debt of $5,000bn, will soon need to borrow almost $1 trillion to keep its economy afloat.
At the moment, the debt is coming from a combination of government and corporate bonds.
But what about the other half of the debt, which is the non-government debt that banks are holding on to and which is now going to be the focus of interest?
This portion of the country’s debt has already doubled in the past five years, from $1tn to $2tn.
In the last five years alone, India has spent $1bn on its non-financial non-interest loans, including about $2.5bn on the Rs 2,000 note, which it is now being forced to sell to cover its debt.
This is largely due to a slowdown in the world economy, which the government blames on the rupee.
However, there are two important points to remember when assessing the debt.
First, this debt is not all-inclusive.
A significant part of this debt has been taken out by non-bank financial institutions (NBIs) such as banks and insurers.
This debt is, however, subject to government control, meaning that banks cannot borrow from NBIs, for example, to finance a capital project.
Second, this non-governmental debt is actually very, very small in terms of the amount of debt that is held by NBI institutions.
A large portion of this non bank debt is held on government securities, such as corporate bonds and bonds issued by non state entities (NSEs).
The government has also recently taken some action to reduce this debt, by introducing an indirect tax on NBI-issued debt, and by limiting the number of days an NBI can hold a bond.
All of this has led to a large increase in the amount that is being held on NBEs, which will lead to the creation of new loans, and new debt, as these NBE lenders are not yet in the business of lending to borrowers.
The Reserve Bank of India (RBI) is yet to publish a definitive figure on the total debt of NBI lenders, but it is estimated that there are about 100,000 NBI banks, of which around 40,000 are non-state entities (NGOs).
This suggests that the government is taking on debt to meet the growing needs of the economy, but there is still some room for improvement.
As an example, there is an additional $1-2tn of non-NBI debt held by the government, which does not directly fall into the government’s financial portfolio.
This will be made available by the new indirect tax levied by the central government on NBOs.
However, this new indirect taxation does not include the debt held on non-NGOs, such that the amount held by these non-NCOs is also likely to be higher than the amount in the financial portfolio, and hence the total NPAs of the government.
As we discussed above, the indirect tax will not apply to loans taken out from NBE banks, nor will it apply to other forms of debt held indirectly by NBO banks, such an asset-backed securities, which are also subject to tax.
The indirect tax also does not cover interest on NDEs, the interest that is charged on the NBI bond.
As the interest on these NPAs will not be taxed, this means that there will be no new borrowing for NBI.
So, in essence, it seems that the current indirect tax, which includes the NBE debt, is only the first step in the process of increasing the amount the government will have to borrow to keep the economy afloat and that will in turn increase the size of the NPAs that are held on these NBI assets.
It is possible, of course, that this indirect tax could increase as the government seeks to make more loans to NBI, as the NDE debt will have a large impact on the amount it is borrowing.
This would increase the government debt in an economy that is currently in a debt-fuelled cycle.
The RBI has announced that this tax will be in place from January 1, 2019, but that it is unlikely that the indirect taxes will be applied to loans made from February 1, 2020, until the end of 2021.
This is because the interest rate on the indirect debt will be at a fixed rate of 8.75% and, thus, the direct tax rate will have little impact on lending to NBO lenders.
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