Through his tweet that “Would you believe if anyone gave you interest free loan, for repayment in not 10-20 years, but 50 years” Narendra Modi is trying to project that India has got a sweet deal in form of interest free loans. Prima facie, it looks very fascinating to us Indians, who are used to getting loan at high interest rates (my education loan is at 13% interest rate), and we think of saying “Waah! Modiji, Waah!”. But, anyone who has read basic MacroEconomics can easily call his bluff of this. Unfortunately for India, not many of us have that kind of economic training, so let me explain it in simple terms -
In 2010, a friend of mine from US agreed to give me a soft loan of 1000$, free of interest to be repaid after 5 years. I thought, wow! What a great deal, and accepted it. In 2010, the average exchange rate for USD to INR was around 46. So, I got approximately 46,000 rupees from him. Now, in 2015, when it came the turn to pay him back, rather than paying 46,000 rupees, I ended up paying him nearly 63,000 rupees, because by now, the exchange rate had become approximately 63. So, what was supposed to be an interest free loan, was not actually interest free. [Similarly, You can pick any long period based on historical data, (>3 years, to average out any short term fluctuations)].
Do you see, what happened here? While the Dollar value of my amount remained same during the last 5 years, due to depreciation of Indian Rupee, I had to end up paying more to my friend. This is precisely what is happening with Japan here. The inflation rates in countries like US and Japan are very low, as compared to India. Since India is a growing economy, our currency will definitely depreciate at a faster rate than USD or Japanese Yen (Explanation of the Economics behind this - https://www.economicshelp.org/blog/1605/economics/higher-inflation-and-exchange-rates/). Leaving aside minor ups and downs, due to recession, demonetisation or Tsunami, on average, over the last 10 years, the rupees’ value has depreciated considerably as compared to USD/Japanese Yen. While 1000$ was worth 40,000 rupees in 2007, it is around 65,000 rupees in 2017, and will only increase by 2027, as India is still growing at a faster rate than US. Similarly, while 1000 JPY was worth 350 rupees in 2007, it is now worth 580 rupees in 2017. (Source)
For a long time now, Japan’s inflation is stagnant around 0% rate. In fact, the Bank of Japan, is giving a negative interest rate, yes, you read it right, a rate of -0.1% on loans, to increase money circulation. In such circumstances, taking such a huge loan worth 1 Lakh Crore from Japan is only an economic blunder, for which we will keep repaying in years.
On a side note, the same Narendra Modi gave interest-free loan to Ratan Tata for Tata Nano plant when he was the Chief Minister of Gujarat, where Tata Motors got a soft-loan of 10,000 Crores at 0.1% interest payable over 20 years. This was clearly a personal favour by Modi to Tata Group, and now it is also a common knowledge, how much money Tata Trust has donated to BJP in the last few years. So, NO Modiji!, such a deal is not unheard of! If only, you had saved the money which you gave away to Ratan Tata for free, we would not have needed a loan from Japan at all.
PS: This article is based on my understanding of Economics, which is very basic as of now. But I found the same evidence in another report that backs my assumptions - https://thewire.in/177815/mumbai-ahmedabad-bullet-train-many-things-not-free/ . If any advanced economist feels I am wrong, I am willing to learn for the better :)
