Slap Ceiling On Cfi Borrowings, Says Study

The central government should fix limits in terms of both flow and stock of its liabilities taking into account only borrowings secured under Consolidated Fund of India (CFI). This should then be placed before the Parliament along with supplementary information on other liabilities including guarantees and the overall public sector deficit.

The medium-term objective should be to bring about a suitable constitutional amendment for imposing a ceiling on public debt.

This has been suggested by a study entitled Placing a Statutory Limit on Public Debt prepared by K Kanagasabapathy, Dr R K Pattnaik and Ms K A Jayanthi, all of whom are Reserve Bank of India officials.

At present, under Article 292 of Constitution, the Parliament is empowered to fix a limit on borrowings upon the security of the CFI. And under Article 293 of the Constitution, the state governments enjoy similar power.

The study has raised the issue whether the central government debt secured under the Consolidated Fund of India should include only domestic market borrowings and the external borrowings or it should also include the substantial portion of other liabilities that is raised arising in governments account in its capacity as a banker.

At present, such borrowings are shown as a part of public account. The study raised that issue of whether its should be include only borrowings secured under Consolidated Fund of India or it should encompass all interest bearing obligations including the other liabilities of the government.

Yet another issue raised by the study is whether only one level of the government such as the central government should be covered or government sector as a whole, including the state governments and public undertakings also be covered.

The study shows that central government liabilities increased significantly both in absolute terms and as percentage of total expenditure and GDP. The volume of debt has also shown significant increase in terms of stock and flow.

Study has said that there are three broad implications of increasing debt flow and larger size of accumulated debt stock of the government. First, interest payment as percentage of total expenditure grow to unsustainable levels, secondly, the marginal cost of borrowings increases, impacting upon the real rate of interest in the economy and lastly, the substantial net additional borrowings results in ballooning of gross borrowing requirements and bunching of repayments.

However, the study points out the advantage of statutory limit is that it enhances the credibility of the anti-inflationary policy stances of the government and makes domestic economy more efficient in terms of resources used. It also enforces the political will of the government through legislative means.