Gone with the wind

For an economy, heres how its debt can become unsustainable.

Say at time 0, Revenues are x, lower than expenditure y. Then bonds are issued and debt is built up to the extent of y-x. next year, time = 1, say with no change in level of revenue or expenditure, bonds are issued to the extent of (y-x) plus interest cost on outstanding debt: i*(y-x) in our case. The dynamic problem gives the solution that primary balance should be higher than the debt financing cost. More formally, (D/Y)(i-g)/(1+g) = primary balance.

Caught on an explosive debt path, economies should raise tax rates and cut expenditure. Some back of the envelope calculations show India’s primary balance fell below the sustainable level in FY10. In FY11 although, it has reversed.

India actual and sustainable primary balance as percent of GDP:

With a 7% increase in expenditure (ex interest payment) and 20% increase in receipts, the Govt. has been able to cut primary deficit to 1.9% of GDP in FY11 from 3.2% of GDP in FY10. Of the total non debt receipts, Rs 40k crores is budgeted from disinvestment and Rs 35k crores from 3G and BWA auction proceeds.

Is this fiscal prudence? fiscal discipline? What of next year when crude prices are high? or crisis worsens? And Govt has no more spectrum to auction? Even at the risk of getting sovereign debt downgraded, auction and disinvestment proceeds should not be used for emergency expenditure.