Is the Next Debt Crisis Coming Soon?

At present, the whole world is facing an economic crisis. In such a situation, there is a cloud of debt looming all over the world, similar to that of a time bomb of debt, which can burst anytime soon. So what is this time bomb of debt? We always spend keeping our income in mind. But, if we want to spend more than what our income is, then we either borrow or take a loan. Just like we do it for us, the same goes for the whole country. The income of the country comes from many sources, but the most important source is taxes. So if the countryʹs income is less than what the country has to spend or if the country’s income is less compared to what the country has to spend, then the gap between it is called the fiscal deficit.

Now to repay this deduction, the government of the country either takes a loan from the open market or asks for a loan from the Reserve Bank of India. According to the accounting principle, the money given by RBI to the government to cover this fiscal deficit is termed to be the loan taken by the country. Thus, if the countryʹs fiscal deficit keeps getting wider every year, the countryʹs debt will continue to increase.

Now the World Bank has released some data about the countryʹs gross domestic product (GDP) and debt. But first letʹs understand what is meant by the GDP of the country? If we calculate the total value of the entire production occurring in the whole country, then we get the figure of the GDP of the country. Now the World Bank has released some data on how much the debt should be compared to the GDP. This figure is very different for developing countries like India and developed countries like America.

The Debt to GDP ratio is 77% for developed countries like the US. If a country’s production is Rs. 100, then the debt of Rs. 77 is fine. If this loan amount exceeds Rs. 77, then the economic growth of the country may be hindered in the near future. Similarly, for a developing country like India, this Debt to GDP ratio is 64%. That means if the production of Rs. 100 is being recorded in the country, then a loan of Rs 64 is fine. If this debt is more than Rs. 64, there may be difficulty in economic development in the near future. 

Let us see how similar these figures were in the earlier days of Corona. Statistics of the Debt to GDP Ratio from countries such as the US had already crossed the 100 mark. The US figure for 2019 (before Corona) was 106% and for India, it was 69%. If only debt continued to grow and GDP did not increase that much, then the crisis could be much bigger in the coming years and a similar situation was already there before Corona. Now that there is a lockdown due to the corona pandemic, the GDP will fall further and this may increase the debt to GDP ratio furthermore. This will make the economic situation even worse.

To avoid this situation, we need to find ways to increase our income in the future and avoid taking loans unless absolutely necessary. After carrying-out the right financial planning and if you can afford to take the risks only then invest in the stock market. Also, while investing in the market may sure to invest as per the market valuation. If you are investing directly, then invest only in stocks that have a sustainable competitive advantage and strong financials. 

Until our next blog…

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Now the World Bank has released some data about the countryʹs gross domestic product (GDP) and debt. But first letʹs understand what is meant by the GDP of the country? If we calculate the total value of the entire production occurring in the whole country, then we get the figure of GDP of the country. Now the World Bank has released some data on how much the debt should be compared to the GDP. This figure is very different for developing countries like India and developed countries like America.