This article is from a series appearing in the magazine Abhiyan.
Mr. Rashmin Sanghvi, a chartered accountant will be analysing various investment alternatives which are at present available to the Indian investor. He is warning the investors and exposing the risks in different investments. Some fundamental issues which we all know and yet do not relate to our own investments are stated in this series of weekly articles. Altogether, it is planned to publish about 10 articles in this series.
There are some facts which we all ignore in our day to day life. Some times, we consciously avoid such facts - because they hurt our mental peace.
Investment is one such idea.
When the share market index is rising and all experts are projecting rosy pictures and phenomenal appreciation, everyone is happy. Circulation of financial magazines and newspapers goes up. And when the index crashes, circulation also crashes. No one wants to read sad stories. Most people do not count their losses. They wait till the next boom comes. Whereas the correct time to study and take action may be when the market is low.
Most reader-investors must have studied company balance sheets. Let us, in this article look at Central Government's balance sheet. All of us may be keenly interested because - all of us have invested in national savings certificates, public provident funds and similar other tax saving instruments. All these investments, in a sense are our loans to the Central Government of India. Let us see how solvent is our borrower.
The Balance Sheet as on March, 96 is summarised here : (All figures in Rs. Crores).
|1. Internal Debt, Market loans, Treasury bonds, Special Bearer Bonds etc.||3,03,359||1. Capital Expense for :|
|2. External Debt||52,666||1.1 Defence & other services||61,202|
|3. Small Saving Schemes||92,820||1.2 Social Services||5,811|
|4. Provident funds including P.P.F.||1,24,751||1.3 Economic Services||1,51,151|
|5. Others||32,114||2. Loans given to :|
|2.1 State Government etc.||1,30,763|
|2.2 PSUs, Port Trusts etc. etc.||47,026|
|Gross Total Of Assets & Liabilities : 6,05,710|
This balance sheet means :
1. Your investment in small savings schemes togather amounts to Rs. 92,820 crores.
2. Government provident funds, public provident funds and the deposits with Government by private provident funds together amount to Rs. 1,24,751 crores.
In other words, direct loans to Government by you and me amount to Rs.2,17,571 crores. (92,820 + 1,24,751).
3. The liability side needs an adjustment.
Government accounts the external loans at the rupee conversion rates prevailing on the date of borrowal. For example, Government had taken a loan of $ 1 million when the rate was Rs.18= 1 U.S. $. This loan will still be taken in accounts as Rs. 18 million. At the current market rate of Rs.34.50=$1; the loan should be stated as Rs.34.50 millions.
The external Debt figure of Rs.52,666 must be converted into the amount which is payable as on balance sheet date. If we consider total external debt of U.S. $ 95 billions and convert the same at current rate of Rs.34.50=$1; the total loan will be - Rs.3,27,750 crores. This means that the total liabilities are understated by Rs.2,75,084 crores (3,27,750 - 52,666).
This means that Government's accumulated loss is Rs.4,84,841 crores (2,75,084 + 2,09,757).
4. A loss of almost Rs.5 lakh crores means that all your savings certificates and provident funds (total Rs.2,17,571 crores) are already lost by Government of India - twice over.
A summary of the whole analysis is - you may be fondly hoping that you are saving the money for your old age, that there can be no safer investment than a Government security, so when you grow old, you will live on the loans you have given to Government. But the Government has already lost your money and many other loans taken from RBI, LIC, GIC, banks, UTI etc. There is no way, the Government can repay your loan.
Also see some other figures -
Total tax and non tax revenue of the Central Government - for the year 95-96 is budgeted at Rs.1,10,191 crores. Out of this, Rs.52,000 crores are spent on paying interest. Government's other expenditure on revenue account itself is far more than Rs.1,10,191 crores. So it has to borrow even for paying salaries. The interest is paid by borrowing more. And loan installments are paid by borrowing more.
Government is already in an Internal Debt Trap. Best definition of Debt Trap is - when a person or Government has to borrow more and more to the extent that it can not run its operations without borrowing - and no one is prepared to give him loan.
You may be aware of a series of Indian Government bond issues which flopped in the years 1995 and 1996.
Conclusion - A loan to Central Government of India is the riskiest investment. Rethink your investment strategies.
One may be tempted by tax reliefs. If you invest in P.P.F., you get 20% of the amount as tax deduction. Well, you gain 20% today, but you may lose the principal - after 15 years.
[Next issue - bank fixed deposits and life insurance]
Sources of Information :
1. Central Government's assets and liabilities - Annual Budget Document - published in 28th February, 1996. Full budget document presented to the Parliament. "Receipts Budget" - Pages 42 and 43.
2. External Debt figure for the year 1995 is reported in the Economic Survey on page S-105.