A recent article in economic times caught my eye...it was about increasing levels of India's public debt. Considering that this, along with inflation, is quoted to be the primary reason of money flowing out of the country, I thought let me put a few points together to put this in a little more perspective for those who don't understand these terms well.
Consider this:
India's GDP is approximately USD 1.5 Trillion (that's USD 1,500,000,000,000)...almost equivalent to the monetary base of the US Federal Reserve (i.e. amount of money floating with the public in US + commercial bank reserves with the central bank). This amount is what all the products and services produced in India within 1 year are worth.
India's Public Debt, or total government debt, is approx. USD 636 bn, which comes to roughly 40% of the GDP. This is the amount the Indian government has raised to finance its projects, and the difference between its revenues (through taxes) and expenditure (salaries, infrastructure, etc.), also known as the fiscal deficit. Every year, some of this debt will come due (mature) and government will decide whether to take on more debt or not depending on its requirements from deficit. Also, every year, Indian government will need to pay interest on servicing this loan, pretty much similar to our EMIs. Any economy that's not growing at all, will have to service this interest burden by either printing more money, or by taking on more debt equivalent to the interest amount. In such a scenario, it becomes almost imperative for the countries to grow just to avoid the debt trap.
Just to put this in perspective, here is a list of some other countries where the public debt is at fairly high levels:
- Japan - 200%
- Greece - 144%
- Iceland - 123%
- Italy - 118%
- Belgium - 102%
- Singapore - 102%
- Ireland - 98%
- France - 83.5%
- Portugal - 83.2%
- UK - 76.5%
- Germany - 75%
- Brazil - 60%
- US - 64%
US GDP is approx. USD 14.7 trillion, which puts their public debt at over USD 9 trillion....or nearly 6 times of India's GDP! The total amount that US would have to pay as interest just in 2011 is over approx. USD 3.5 trillion...and some people even say that by 2020, whatever US earns as revenue, the entire amount will go into paying interest on the debt ! An interesting website to look at for knowing and understanding these figures is the usdebtclock.org.
But the problem is not just with the US, the entire continent of North America has an average of 62% public debt, and a close second is Europe with an average public debt of around 56%. Asia, Africa, South America and Oceania regions all have an average under 45%.
From the look of it, everyone is in a worse situation than the other one, and unlike in EU, most others still have the flexibility to print their way out of their mess. US being the world's largest economy, is also dealing with far larger figures on every front - so a mere 0.1% increase in unemployment makes huge waves in the financial circuit.
As for India, the debt and inflation are high, and so is fiscal deficit at over 5.2% of GDP, but three major points supporting India are growth, demographics, and ability to print money. Moreover, a majority of the debt is payable internally, and terms and conditions with internal parties can be negotiated without bringing in IMF into account in the worst case of sovereign default.
Given this, to me, the fall in the markets, the flight (outwards) of the money, looks like a temporary phenomenon, which is probably also a very good (even last!) chance of buying the lower levels in the market. And as for Gold, till US is printing money, I wouldn't care much about its fall, its primary trend will remain up.
