Internal debt trap

The Comptroller and Auditor General CAG has expressed alarm over the increasing share of interest payments in the budget and has warned that the country is heading towards an internal debt trap. There can scarcely be scope for disagreement on that score. Consider the rate of increase in interest payments 8212; they increased from Rs 441 crore in 1995-96 to Rs 500 crore in 1996-97, and further to Rs 657 crore in the revised estimates for 1997-98. The budgeted estimates project interest payments in the current fiscal at Rs 750 crore, which works out to 82.4 per cent of the fiscal deficit. Debt-servicing has increased since liberalisation, as a result of a conscious policy of paying market-based rates on government securities. This was an essential step in the development of the financial markets, but a by-product has been an increase in the government8217;s debt-servicing.

The increase in interest payments means that the element of discretion in the use of budgetary resources by the Centre is being progressivelyreduced. Consequently, the scope for government spending under all other heads is affected. In theory, there is no problem if the amounts borrowed by the government are utilised to generate a return higher than the cost of borrowing. Unfortunately, most of the amounts borrowed have been spent in non-plan expenditure. On the other hand, the draft ninth plan has pointed out that the slippage in public investment as a percentage of gross domestic product has been from the target of 9.9 per cent to 9.1 per cent. In its bid to keep the fiscal deficit under control the government has wielded the axe on public investment, and this has resulted in the weakening of infrastructure, which in turn takes its toll on productive capacity. It is imperative, therefore, to take immediate steps to reduce the stock of government debt. The ninth plan has called for the share of interest payments to be brought down by limiting the fiscal deficit as well as by retiring some of the public debt. However, given the size of the debt,retirement would achieve only a relatively small reduction in the overall burden. In the circumstances, new sources of funds have to be tapped to reduce debt. Apart from disinvestment, the government could also sell some of its land to retire the debt. In the long run, however, there is no escaping from the fact that the government must be able to utilise resources more efficiently. Unless we do that we will be bequeathing to our children not just a huge debt burden, but also a full-blown infrastructure crisis.