A Consolidated Sinking Fund
The RBI in its annual reports has been advocating the setting up of a CSF since 1992-93. In the annual report of 1995-96, the RBI argued that it was erroneous to claim that a CSF would be meaningful only when there is no revenue deficit. While a CSF does impose a burden on the fisc, in the immediate period, it does provide a viable modus operandi for ensuring the repayment of the public debt. The RBI further asserted that the present practice of enlarging gross borrowings to repay the debt is unsustainable and that early concrete action should be taken in 1996-97 to set up a CSF.
The setting up of the Eleventh Finance Commission is long overdue. The government must give an assurance that the recommendations of the Eleventh Finance Commission on the CSF will not be treated like an obiter dicta. The specific recommendations of the commission on this subject must be carried out in toto as is the tradition with regard to Centre-state allocation of resources.
By not instituting a CSF, the revenue deficit is quite clearly understated. A CSF admittedly creates an immediate burden on the revenue budget and since a CSF has to be built up for a number of years, the relief of a self-sustaining CSF would be felt possibly after a decade. Prior to 1980-81, the maximum interest rate on 30-year central government paper was only 7 per cent. It was recognised that large government borrowing at low rates of interest was a tax on the banking system and while this warranted successive increases in the statutory liquidity ratio, this was not enough and over and above this a large monetisation of the budget deficit required an increase in the cash reserve ratio which was an even heavier tax on the banking system. Quite obviously, all this had a cost in terms of an inefficient and weak banking system and the bill kept coming back to the government in terms of a recapitalisation of public sector banks.
While the maximum interest rate on government securities was raised from 7.0 per cent in 1979-80 to 14.0 per cent in 1995-96, it was not possible to put through the borrowing programme of the government without telescoping of the maximum maturity from 30 years to 10 years. Even after the maximum maturity was made 10 years, a large amount was being raised at even shorter maturities. As such, there has been a progressive ballooning of the repayment schedule. Patch-work solutions are no longer possible and it is necessary to reiterate that the much-dreaded internal debt trap has finally arrived in 1998-99. The choice now before the nation is to recognise the intensity of the problem and go through painful surgery or merely turn a blind eye and be hit by chaos.
The government must close the intellectual debate on why a CSF is not possible and draft its energies on implementing a CSF forthwith. Allocating budgeting resources to a CSF would widen the revenue deficit and the gross fiscal deficit, but it would be a responsible and statesman-like act to be transparent about the condition of the fisc. For a self-sustaining CSF, it would take about 10 years before any relief is felt, and in many walks of life the future is discounted as in the long-run we are all dead. Had a CSF been implemented in, say, 1980-81, this would not have been our plight today. The problem of a CSF should be dealt with in a non-partisan manner and all concerned should work in concert to deal with this crisis.
The corpus of the Centres CSF should be built up very rapidly by a number of measures which are set out below:
n An amount equivalent to 1 per cent of the fresh gross borrowing should be earmarked for the CSF.
n Any increase in profit transfer by the RBI (excluding the FCNRA loss) should be earmarked for the CSF.
n The entire proceeds of disinvestment should be earmarked to the CSF. It is highly improper to sell the family silver built up so assiduously over the years and to use it to finance the greed of today.
n There should be a special dedicated surcharge on all direct and indirect taxes to make a sizeable contribution to the CSF.
n The net borrowings should be frozen at the 1997-98 level for the next five years and under no circumstances should the government be persuaded to raise this amount.
n There should be an immediate increase in 1998-99 in the maximum maturity from 10 years to 15 years and a further gradual elongation in subsequent years. The government should be prepared to pay the higher rate of interest. While earlier there was a trade-off between a shorter maturity and lower interest rate, the new policy should be of a trade-off between a longer maturity and higher interest rate.
n With the instituting of the CSF in 1998-99, the running of the CSF should be entrusted to a highly-skilled team of CSF commissioners who should be given freedom to maximise the yield on the corpus of the CSF. The commissioners should be made accountable and there should be total transparency of operations with exacting standards of performance. There should be a Board of Trustees who would set out the investment guidelines and also evaluate the performance of the commissioners.
All this calls for hard decisions and it is quite easy to work with soft options and to pretend that the problem will just resolve by itself. Today, we take for granted what our forefathers built up. We can be callous and argue that what has posterity done for us that we should do for posterity. If we take such a stance, generations to come will justifiably condemn us. If the present government wishes to be remembered for caring for the future, it must immediately direct the mandarins to institute a CSF.