Column

It may come as a surprise to many that, out of every Rs 100 raised by the Centre by way of market borrowings during 2006-07, it received only Rs 62 in net terms, the balance being the repayment obligation of past loans. In the current year, the net receipt will be even lower at Rs 59.

To put it more directly, repayment accounted for 38% of the market loans last year and is slated to claim as much as 41% in the current fiscal.

Over the years, this dubious practice has been firmly entrenched in our system of public finance - the Centre (as well as states, though this discussion is limited to the Union government) makes no explicit provision in the budget for payback of past debt.

Instead, it works out its borrowing needs in net terms and then adds to it the repayment of previous loans that fall due in that year to fix the gross amount to be mobilised from the market.

The upshot of this is that there is a persistent underestimation of expenditure and the figure of gross fiscal deficit that is usually indicated in the budget documents tends to be on the lower side.

This is clear from the pattern of financing the gross fiscal deficit envisaged for 2007-08. The gross fiscal deficit for the year is pegged at Rs 1,50,948 crore and it will be met via market borrowings to the tune of Rs 1,10,827 crore or 73%.

But the Centre will be tapping the market for a much higher amount of Rs 1,87,769 crore; the borrowing in excess of the sum set apart for bridging a part of the gross fiscal deficit will be utilised to liquidate earlier loans that became due for repayment.

As the repayment burden becomes onerous, the government will labour under a painful necessity to contract fresh borrowings on an ever-increasing scale so that net borrowings are commensurate with the financing needs of the gross fiscal deficit.

This is not a sane course and sooner an alternative approach is devised, the better. By contracting fresh loans - presumably at an even dearer interest cost - to repay cheaper loans of the past - the pace of debt accretion and of interest payments will get a new impetus at a time when the stock of debt and interest burden are unconscionably high.

What is the remedy? The sane course would be for the budget to make provision for amortisation of loans, even if it leads to a larger revenue deficit. Fiscal probity demands such transparency.

There are other solutions too, though in essence they veer round to what is advocated above. The Tenth Finance
Commission had mooted the setting up of a Consolidated Sinking Fund to take care of the debt problem.

The Reserve Bank of India, in some of its annual reports issued in the nineties had also suggested the creation of such a fund while in its credit policy pronouncement during this decade -in 2000-01 for example - pointed out how the massive borrowing programme of the government might be beyond the absorbtive capacity of the market.

It also warned against the crowding-out effect of this recourse to reckless borrowed finance and the pressure on interest rates that might result.

The second report of the Tarapore Committee on fuller convertibility stressed the need to achieve a revenue surplus to provide the wherewithal to repay loan liabilities. It went on to suggest that this revenue surplus should reach 10% of the GDP by 2010-11 to this end.

The government’s stance at present glosses over the debt repayment issue. Its adoption of a variant of “pay-as-you-go” approach is flawed, unwise and unsustainable. And the sooner it is jettisoned, the better.