FM says no to monetising deficit, promises reforms

Finance Minister Pranab Mukherjee today sought to soothe industry’s and stock market’s nerves by saying that the government would not monetise the fiscal deficit. Spending a good part of his reply in the Lok Sabha on allaying fears over the seeming lack of reforms in his July 6 Budget, Mukherjee promised a roadmap for disinvestment in public sector undertakings and the financial sector.

Mukherjee justified the government’s huge borrowing programme — a little more than Rs 4 lakh crore this financial year — as essential for bringing the country back on a high-growth path. “During the first half of 2009-10, the government’s market borrowing of Rs 2,41,000 crore of dated securities is being supported by RBI (the Reserve Bank of India) through open market operations (OMO). It has to be understood that OMO of RBI should not be confused with monetisation of government borrowings and that the government has no intention of monetising its debt.”

OMO involves RBI purchasing government securities in the secondary market, as distinct from monetisation, in which RBI lends directly to the government.

Mukherjee maintained that despite the increased borrowings in the current year, the cost had been low so far and the government would not crowd out private investment.

Mukherjee said his ministry had initiated discussions with other ministries and departments for identifying public sector undertakings in which a portion of government equity could be sold, and those that could issue fresh equity to meet their requirements.

Talking of the volatile nature of certain private capital flows, especially those involving foreign institutional investors, the finance minister said: “Though such flows provide critical risk capital with long-term benefits to the economy, the volatile nature of these flows has a negative impact on investments decisions. We have to create the necessary policy environment that helps in addressing such concerns.”

He said the government would look into all issues, legislative or otherwise, necessary to carry forward the reforms to their logical end.

He said the country would return to the path of fiscal prudence without compromising the growth momentum. Expressing confidence that the fiscal deficit will narrow down to 4 per cent in two years – its is projected at 6.8 per cent this year – Mukherjee said the Sixth Pay Commission arrears would have been paid out this financial year.

The increase in plan spending as part of the implementation of the fiscal stimulus had been in the nature of frontloading of the plan expenditure approved for the Eleventh Five Year Plan. “With some effort we should be able to align it with our future requirements,” he said, hinting that the remaining period of the Plan may not see high expenditure.

On the revenue side, the finance minister said much of the decline in business and corporate tax collections was cyclical and could be reversed with the anticipated increase in growth from the second half of the current financial year. With the introduction of the goods and service tax in 2010-11, there could be a sustained rise in tax revenues.