RBI’s concern over growing govt debt, worsening finances

The deterioration in government finances have stemmed from a major shortfall in revenue collection as against the budget estimates in the face of a modest growth in expenditure. The combined gross market borrowings of the centre and states in 1998-99 increased by 17.6 per cent to Rs 1,06,067 crore against the budgeted figure of Rs 90,224 crore and a 57.4 per cent rise over the gross borrowings in the fiscal 1997-98. “The outstanding combined liabilities of the government sector at Rs 10,19,773 crore at end-March 1999, recorded a rise of Rs 1,28,234 crore over the previous year. This pushed up the debt-GDP ratio to 58 per cent in 1998-99 from 57 per cent in 1997-98," it said.

According to the report, the combined revenue receipts in the revised estimates pegged at Rs 3,08,660 crore fell short by 5.1 per cent of the budget estimates of Rs 3,25,079 crore in 1998-99. "The shortfall was mainly on account of tax collection as reflected in a 7.6 per cent reduction in the revised estimates," it said.

The report says that the fiscal slippage resulted into an excessive growth in the borrowings of the government to meet its growing expenditure. “Non-plan capital expenditure exceeded budget estimates by 24.4 per cent in 1998-99 due to increased outgo of loans to the state governments and public sector understandings. The structural imbalance in the government finances stems from the limited resource base of the states in relation to the growing expenditure commitments,” the RBI warned.

The rising level of debt witnessed in the last two decades has generated considerable debt servicing burden on the fiscal front. As for downward inflexibility on the expenditure front, the report said that the increasing debt service obligations created further pressure on the fiscal operation of the government. “However, a clear appreciation of the issue of debt dynamics in theIndian context requires an understanding of the structural changes in the composition debt, the changing fiscal structure and the magnitude and dimension of the market borrowing programme," it added.

The RBI said said the major concerns towards achieving a sustainable debt-gross domestic products (GDP) level stem from the persistence of significant primary and revenue deficits of the government sector over the years which may lead to an unsustainable situation in future.

The persistence of debt-GDP ratio at higher levels of 54.8 per cent at end-March 1999 and estimated at 57 per cent at end-March 2000 demonstrated that there is a structural rigidity in the downward adjustment in the combined domestic debt of the government sector to GDP ratio. This has raised concerns like the sustainability of debt in the wake of declining public investment, crowding out of private savings for current consumption of the government and high real interest rates.

In this context, the report has called for strengthening the process of fiscal consolidation such as government expenditure management, tax reforms and restructuring of the public sector. The reduction in the combined government debt to a sustainable level in the medium time-frame gains immense relevance particularly in the context of opening up the economy further and integration of the money, forex and capital markets.

As the country is poised to further the institutional reforms for enhancing the prospects of higher growth rate with endring stability, the report said that action pertaining to collection of revenues and containment of expenditures particularly on the revenue account together with prudence in the creation of contingent liabilities were imperatives for achieving the stability condition as well as the long run sustainability.