Letters: The debt trap

The acceleration in public debt, due to the growth in fiscal deficit, should be a matter of great concern to every citizen. Woodrow Wilson called it ‘financial joy-riding’. After the publication of the article “The Burden of Domestic Public Debt in India” in the Reserve Bank of India Occasional Papers (June 1987), there was a heated discussion in Parliament and across the media on the prospect of an internal debt Ttrap. We have already been in that trap for several years with more and more borrowing required just to service the existing debt. The danger of an inordinately large public debt is the tendency of governments, with a few exceptions. This is what we learn from the episodes of hyperinflation in other countries.

There is a general complaint that the Budget offers no road map for how it plans to get back the fiscal targets which have been laid down in the Fiscal Responsibility and Budget Management Act. Even the 6.8 per cent fiscal deficit figure for 2009-10 is an underestimate due to off-budget liabilities.

The official explanation is that the Finance Commission will make recommendations on the matter. The fiscal deficit is one area where there is no dearth of literature and expertise, here or abroad. One does not know what new light the Commission is going to throw on the subject. The fact of the matter is the government is in a bind and it has no way to wriggle out of the problem. Having revenue surpluses to pay off debt is a distant dream. The other solution is the massive disinvestment of assets in the public sector — this is equivalent to selling away family jewels to pay off debt. The current exclusion of off-budget liabilities from the fiscal deficit is facilitated by the fact that the government is yet to shift to accrual-accounting from the cash system

A Seshan, Mumbai

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