Govt borrowing could 'crowd out' capital: Rangarajan

Former Reserve Bank Governor C. Rangarajan has said the massive borrowing programme of the government would have implications for the corporate world in the next fiscal and might lead to "crowding out" of capital from the market.

The government has proposed to borrow Rs 4 lakh crore during the current fiscal.

Rangarajan, who was delivering a lecture on "International financial crisis and its impact on India' to Members of Parliament here yesterday, also said that interest rates would go up by the end of the year.

"Interest rates will harden by the end of the year," he said. Rangarajan, now a member of the Rajya Sabha, said "as long as the private demand is not picking up, the government will be able to borrow at the same rate."

He said the economy was likely to show signs of definite improvement in the second half of current fiscal which might lead to a pick-up in demand for credit by the industry. 

He expressed confidence that the country would clock an economic growth of 6.5 to 6.7 per cent in 2009-10 which could go up to 7-8 per cent during 2010-11. "We would not be able to go back to 9 per cent GDP growth rate, unless the world economy recovers."

 Rangarajan said the government's fiscal deficit at 6.8 per cent of the GDP, proposed in the current budget, was not sustainable and efforts would have to be made to bring it down to 3 per cent in the next three years.

Total deficit of the centre, states and off-budget items were likely to be as high as 12 per cent of the GDP, he added.     

Rangarajan said the government should step up expenditure to fight the impact of the global economic crisis on exports and capital flows.     

However, "it is not the level of government expenditure, but the composition that is important," he said, adding that additional domestic demand would have to be created to help the sectors hit hard by the slowdown.       

Rangarajan said the government must ensure the extra spending was on sectors capable of replacing the declining global demand for Indian goods.      

He said the priority was to stimulate sectors such as textiles and auto components that would improve local demand.