The Hindu : Govt. borrowing should be put to good use

Online edition of India's National Newspaper
Thursday, Feb 20, 2003

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Govt. borrowing should be put to good use — Chamber

By Our Special Correspondent

NEW DELHI FEB. 19. The Associated Chambers of Commerce and Industry of India (Assocham) has asked the Government to arrest the trend of borrowings being used for unproductive purposes and called for channelising capital to finance sectors such as housing and construction.

Such expenditures, the chamber has emphasised, will not only help prop up the economy but also insulate it from domestic demand shocks such as drought and global economic slowdown.

The chamber has expressed concern over the sharp rise in government borrowings, financing consumption expenditure, from 40 per cent in 1990-91 to 72 per cent in 2001-02 and inability of the Government to stem the declining capital expenditure.

An analysis of fiscal data through the 1990s by the chamber reveals the inability of the Government to rein in its deficits. The total liabilities of the Central Government have shot up from 55.3 per cent of GDP in 1990-91 to 59 per cent in 2001-02. The increase has come primarily from rising internal debt as external debt/GDP fell from 5.5 per cent in 1990-91 to about 2.5 per cent in 2001-02.

This situation has arisen as the proportion of government borrowings financing consumption expenditure rose to 72 per cent in 2001-02 from 40 per cent in 1990-91. The use of borrowings for consumption that does not generate any returns that could be used for servicing the debt over extended periods will lead to a situation where the servicing of debt will become a major issue.

The Assocham has pointed out that the quality of government expenditure has significantly deteriorated during the decade of 1990s. The fact that interest on debt today absorbs over 4.5 per cent of GDP together with the rising share of committed expenditure of the Government has considerably reduced its leverage to use its borrowings for productive purpose. Falling capital expenditure is an example of this.

Thus, the type of fiscal adjustment India has witnessed in 1990s has the potential of jeopardising its future prosperity. Worse, the rising debt/GDP ratios could ultimately lead to a situation where government will default on its debt obligations.

Thanks to the low and continuously softening interest rate regime, the interest payments as a proportion of GDP appear to have stabilised. The falling marginal cost of debt is reducing the average cost of debt each passing year. The average cost of debt is projected to fall from 8.7 per cent in 2001-02 to 7.9 per cent by 2007-08. The chamber has cautioned that the window of opportunity offered by the soft interest rate regime will hold only for a limited period. Once the average cost of debt stabilises, the profligate fiscal stance of the government will again lead to an increasing interest payments/GDP ratio. Further, if the demand picks up and the government continues with its profligate fiscal stance, the interest rates are bound to firm up.

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