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Mumbai, Feb. 1: Reserve Bank of India (RBI) governor Duvvuri Subbarao today urged the Centre to impose a cap on public debt, nudging the government once again to set its fiscal house in order.
Subbarao said excessive borrowing was bad and said there was a need to put a ceiling on overall public debt.
This is the second time since the third quarter review of monetary policy on January 24 when the central bank is voicing its view on the worrying fiscal situation.
In its monetary policy review, the RBI had categorically said strong signs of fiscal consolidation were critical to create room for lowering the policy rate (repo rate). In the absence of fiscal consolidation, the RBI had said it would be constrained from bringing down the policy rate.
Its observations come at a time the Centre’s fiscal deficit is widely expected to surpass the budgeted 4.6 per cent of GDP and go up to around 5.6 per cent. While the government had budgeted to borrow Rs 4,17,000 crore, it announced an increase in borrowings via dated securities of around Rs 53,000 crore last September and further by Rs 40,000 crore in December 2011.
Speaking at the second International Research Conference of the RBI here today, Subbarao said in the case of sovereign debt, there was an “inflexion point” beyond which fiscal deficits militated against growth.
“Government borrowing is not bad per se, but excessive borrowing is. There is therefore a need to cap total public debt as a proportion of GDP,” he said.
The RBI governor said when it came to fiscal management, the quality of public expenditure was important.
“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.
According to Subbarao, while large sovereign borrowing can make the government’s fiscal stance unsustainable, it leaves the central banks with little choice.
If the central bank does not conduct open market operations (OMOs) to bring systemic liquidity within reasonable limits, they risk losing control over financial stability. On the other hand, if they conduct OMOs, they risk losing control over price stability.
Subbarao said at times the pursuit of price stability, financial stability and sovereign debt sustainability might run counter the policies required to promote growth.
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