RBI warns of rising deficits of Centre, states

RBI warns of rising deficits of Centre, states
ENS ECONOMIC BUREAU

MUMBAI, AUG 28: The Reserve Bank of India (RBI) has sounded a note of caution on the rising deficit levels of both the Central and states governments and called for a well-designed strategy for correction of the fiscal position of government finances in the medium term.

The combined gross fiscal deficit of Centre and States have increased to 9.9 per cent of GDP (Rs 1,93,471 crore) in 1999-2000 as against the budget estimate of 7.4 per cent of GDP (Rs 1,56,928 crore) in 1998-99. The combined revenue deficit rose sharply to a peak of 6.7 per cent of GDP in 1999-2000, accounting for 67 per cent of GFD. The gross fiscal deficit of the government sector deteriorated from 3.7 per cent of GDP in 1999-99 to 4.2 per cent of GDP in 1999-2000.

The RBI said the fiscal position of states was characterised by expenditure overruns due to committed expenses like wages and salaries, pensions and growing debt service obligations. The apex bank, in its annual report, has pointed out that state level public sector units (PSUs) like state electricity boards (SEBs) and state road transport corporations (SRTCs) had been reporting losses and absorbing scarce funds through budgetary support.

An area of concern in this context was the growth in the implicit or contingent liabilities in the form of guarantees for accessing finances to meet the needs of PSUs, especially those in the area of infrastructure, besides the explicit liabilities.

RBI cautioned that these off-balance sheet exposures were often costly and could pose risks of default if the state level institutions supported by funds did not improve their performance. It said this debt position led to higher risk premium thereby resulting in volatility in the financial markets and constraining downward movement in long-term interest rates.

With the central and state governments meeting their repayment obligations through fresh borrowings, the bunching of payments had brought pressure on the market by increasing gross borrowings with adverse implications for interest rate evolution. The RBI stated that with fiscal deficits persisting, the debt to GDP ratio of the combined government sector had risen from 59.6 per cent as at end-March 1991 to 60.7 per cent as at end-march 2000.

The relatively high interest rates on borrowings owing to persistance of fiscal deficits had led to growth in interest burden of the combined government sectors to 32.2 per cent in 1999-2000 (23.6 per cent in 1990-91). However, interest burden had risen more sharply for the central government from 39.1 per cent to 50.9 per cent of revenue receipts during the same period.

The apex bank said the adverse effect of a high debt ratio had been the reduced allocation of funds for social and other productive expenditures of the government in order to accommodate the ballooning interest commitments.In this regard it was imperative to limit public debt creation together with contingent liabilities over the medium term and thereby to lend credibility to the fiscal stance.

In the context of fiscal adjustment in the medium term a strong institutional mechanism embodied in the form of fiscal responsibility legislation (FRL), as announced in the last budget, would be necessary at the level of the central government.

RBI has suggested that the legislation should explicitly focus on the elimination of dissavings of the public sector, placing statutory limits on borrowings and stabilisation of the debt to GDP ratio at a sustainable level. It said state governments too should be encouraged to balance their revenue accounts by introducing FRL on the lines envisaged in respect of the central government.