To borrow from the old adage—money makes the world go round—and debt is the fuel which powers this movement. Debt fuels growth and powers money circulation in economies and gains thereof, eventually trickle down to the most basic unit of the system: the citizen. While there are numerous factors which impact this ecosystem—the cost of debt available to a country dictates growth.
Comparing the Indian government’s 10-year G-sec yields with 10-year UK Gilts’, Jay Kotak, the son of eminent Uday Kotak, CEO of Kotak Bank, on Sunday declared that “colonialism is not dead”.
“India borrows at 7.5% vs the UK at 4% (10 yr Govt bond). India has similar GDP, higher GDP growth & Forex reserves, lower exchange rate depreciation, public debt and fiscal deficit to GDP! Not to mention a stable government and policy framework! Colonialism isn’t entirely dead!” the junior Kotak tweeted.
For the uninitiated, governments borrow money through sovereign bonds, G-secs in the case of India and Gilts in the case of the UK.
Kotak also did a delighting comparison of economic indicators vis GDP, GDP Growth, 1-year currency depreciation, FX reserves, public debt/GDP and fiscal deficit of the two nations.
The Financial Times defines the yield on a risk-free government bond as being roughly “equal the rate of growth in the economy, plus the rate of inflation.”
However, the relationship between GDP growth and bond yields is more complex, especially in developing countries like India. Factors like currency strength, share in global trade, government subsidy programmes, and the overall health of the country’s banking system, and last but most prominent investor sentment play a major role in dictating bond yields.
Kotak’s tweet comes in the backdrop of a bond crisis in the UK after the Bank of England launched an emergency intervention program to calm markets after a government tax-cut plan sent borrowing costs surging. The debacle even led to a downgrade in UK credit rating from S&P’s while Moody’s has threatened to do so too. S&P on Friday assigned a “negative outlook” to the country’s credit rating, maintaining AA investment grade.
Kotak studied history at Columbia University and then did an MBA from Harvard University.
