Mounting fiscal deficit

— Demand for consumer goods is fast moving up and sections of Corporate sector are hoping that an economic recovery is round the corner. It is true that the Centre in response to ongoing economic slowdown needs to pump in more purchasing power in the economy even though it has already done much through a number of fiscal stimulus and repeated monetary steps including accelerated public spending in national rural employment guarantee scheme, Bharat Nirman Yojana and its flagship programmes, Rs 71,000 crore of farmers’ loan waiver, job-creating infrastructure projects, large subsidies and salary hikes, besides several revisions of RBI key rate cuts. What is, however perturbing is the growing quantum of fiscal deficit which presently has come to account for a whopping Rs 5,00,000 crore for both the Centre and the States taken together. At the top of this, what is inviting severe criticism is that the Centre has decided to sell a staggering amount of Rs 2.4 trillion worth of bonds which is equivalent to $ 47.4 million in the first half of current fiscal, the total for the year being Rs. 3.6 trillion, i.e. Rs. 360,000 crore. This will be added to the existing liability because the decision of the government is to rule out direct bond buying by the Reserve Bank of India that will result in ten-year yields surging above 7 per cent of payable interest. This will make the government go for even larger borrowings at the back of already accumulated huge debt burden.

The revised estimate for 2008-09 as shown in the interim Union Budget puts fiscal deficit to be climbing to 6 per cent of GDP as against the target of only 2.5 per cent. The impressive gain in fiscal management in recent years due to Fiscal Responsibility and Budget Management Act of 2003 had to be sacrificed to meet the borrowing needs of 2008-09 as the FRBM provisions have been made unoperational until the economy revives. The huge government borrowings of the previous fiscal have already put pressure on interest rate structure even after RBI’s several rate-cuts. It is not still unlikely that the apex bank might even go for further downward revision of its short-term interest rates if the banks do not come to terms with the necessity of lower interest rate structure, particularly since the too low inflation rate has made the real interest rate too high now. At this juncture, the central drive to widen the fiscal deficit by additional borrowings of Rs 360,000 crore in 2009-10 through sale of bonds will suck out the corresponding quantum of liquidity from the system which will severely counter the objective of RBI’s anti-recessionary monetary steps. Hence the financing of deficit should better be made through printing of new money than through direct borrowing from market. Though this method is normally avoided due to the fear of inflationary pressure, it will certainly be less harmful at current situation since economic revival is not possible in the absence of cutting down of interest rates of commercial banking system and also since inflation rate has gone down to only 0.5 per cent. ASSAM TRIBUNE