With the Union Budget in the horizon,the Reserve Bank of India on Wednesday cautioned the government against excessive borrowing and called for a cap on total public debt as a proportion of GDP.
Like with the other two legs (price stability and financial stability) of the new trilemma,even in the case of sovereign debt,there is an inflexion point beyond which fiscal deficits militate against growth. Government borrowing is not bad per se,but excessive borrowing is, RBI Governor D Subbarao said.
The Thirteenth Finance Commission had recommended that the total debt of Centre and states as a percentage of GDP should be cut to 68 per cent in 2014-15 compared with 81.9 per cent in 2008-09.
What is equally important in respect of fiscal management is the quality of public expenditure. If the government borrows and squanders that money away on unproductive current expenditure,both fiscal sustainability and growth would be jeopardised. Governments need to spend on merit goods and public goods,in particular on improving human and social capital and on physical infrastructure, he said at the International Research Conference of the RBI in Mumbai.
This is the second time in the last two weeks the RBI voiced concern against fiscal slippages. In the absence of credible fiscal consolidation,the Reserve Bank will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending, Subbarao said after announcing the policy review last week.
The fiscal deficit in 2011-12 is expected to exceed the budget estimate of 4.6 per cent of the GDP on account of subdued receipts and overshooting of the subsidy bill by at least Rs 1 lakh crore. To bridge the receipt-expenditure gap,the government plans to exceed its borrowing target for the current fiscal by Rs 92,000 crore over budget estimate of Rs 4.20 lakh crore.