With the Union Budget just three weeks away, Reserve Bank Governor Urjit Patel on Wednesday asked the Central and State governments to bring down the high borrowings while keeping the inflation low and stable for long-lasting higher growth.
“Our general government deficit (that is borrowing by the Centre and states combined) is, according to IMF data, amongst the highest in the group of G-20 countries. In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade,” Patel said while speaking on the second day of Vibrant Gujarat Global Summit.
“We have to take cognisance of these comparisons and facts as we go forward to make progress. Specifically, this will help us to better manage risks for ourselves, and thereby mitigate financial volatility,” he said. “Borrowing even more and pre-empting resources from future generations by governments cannot be a short cut to long-lasting higher growth. Instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the growth front,” Patel said.
He said low and stable inflation is an essential prerequisite for having a meaningful interest rate structure whereby decisions by savers and investors help achieve maximal allocative efficiency in an economy whose investment rate has to increase for better growth outcomes. “We have to continue to press ahead for a more fluid, smooth transmission of monetary policy, as also enhance the formulaic linkage between changes in policy rates and other rates, including administered ones,” he said.
Stating that the RBI has already notified inflation target of 4 per cent, Patel said the effort should be to achieve the objective of keeping prices under check on a durable basis, given the progress already made.
“For us, in India, good policy housekeeping should be the cornerstone. It is easy and quick to fritter away gains regarding macroeconomic stability. But hard and slow to regain them,” he said.
Cautioning on credit guarantees, Patel said, “while some government guarantees and limited subventions can help, steep interest rate subventions and large credit guarantees also impede optimal allocation of financial resources and increases moral hazard. The mandates for these have to be narrow, and thus perforce be deployed judiciously, within a regulatory framework…”
He said guarantees increase government’s contingent liabilities, and add to risk premia for its own borrowing. “Guarantees per se at the end of the day have limited utility in solving important sector issues…,” he said.
Patel also made a case for continuous support towards recapitalisation of public sector banks arguing that “a well capitalised domestic banking system enhances the comfort of the various stakeholders to conduct business in the offshore IFSC as well”.
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