Borrowing crowds out interest rate gains

ECONOMIC SURVEY 2003-04/ STATE OF THE FISC

The Economic Survey yesterday said the growth in outstanding debt had lessened the impact of low interest rates on the interest burden of the government.

"While reduction in interest rate has helped at the margin, its effect in terms of the reduction in the average cost of government debt is yet to be felt. The effect of lower interest rates on the total interest burden of the Central Government is not distinctly visible because of the growth in outstanding debt," the Survey noted.

Outstanding liabilities of the government, after declining from 55.3 per cent of the GDP in 1990-91 to 51.2 per cent in 1998-99 started rising to reach 63.1 per cent of the GDP in 2002-03 and was budgeted to increase further to 64.6 per cent of the GDP in 2003-04.

The Survey also said that the increasing trend in government debt has been a matter of serious concern because of the associated preemption of resources from the private sector.

Increase in government debt by drawing up on private savings deprives the private sector of the required resources.

"Any increase in debt puts pressure on interest payments which in turn necessitates a further build up of debt," the Survey said adding that the indirect cost of debt is the incremental growth foregone by the economy as a result of the diversion of resources from the private to the government sector.

Though the government has taken a number of initiatives, these need to be stepped up, the Survey noted. "While reforms can be designed better when the economy is doing well and there is no crisis, mobilising popular support for such reforms is a challenge in the absence of an impending crisis," it added.

The deterioration in the fiscal situation since 1997-98 has not resulted in any fiscal crisis so far because of the relative stability of the revenues, an increase in the average maturity period of central government loans, a low proportion of external debt to total debt, high credibility of the government's fiscal consolidation plans and subdued demand for non-food credit in recent years.