Govt Weighs Cap On Public Debt

The strategy also requires that once the debt stocks have been identified, efforts should be made to retire the more expensive debt and thereby reduce the growing interest burden.

The proposal put together by the internal debt cell of the Reserve Bank of India entails limits on both the annual increase in public debt -- market loans, treasury bills and external debt -- as well as the outstandings at the end of the year. That is, it addresses both the flow and stock problem of government debt. It has been suggested that a limit on the increase in the public debt as a ratio of total expenditure be placed at 15 per cent. To bring down the fiscal deficit to below 4 per cent of gross domestic product, it has been suggested that this limit be brought down further to 10 per cent over a five-year period.

 

To tackle the stock problem, a 35-per cent limit has been mooted on year-end outstanding public debt as a ratio of gross domestic product of the preceding year.

In recent years, the increase in public debt as a ratio of total expenditure has dropped from 36 per cent in 1993-94 to 21 per cent in 1994-95. Over the same period, the proportion of total public debt as a percentage of gross domestic product declined from 42 per cent to 38 per cent.

The finance ministry is perturbed by the growing interest burden, which is now pre-empting a substantive portion of the revenue receipts of the Centre.

Ministry officials admitted that they were working on the proposal. "It has got legal ramifications as the existing articles of the Constitution do not permit us to place ceilings on some components like small savings which also constitute internal debt. We are looking at it," the officials said.

The officials said that Article 292 of the Constitution -- which empowers Parliament to fix statutory ceilings on borrowings -- does not cover constituents of internal debt like small savings, provident funds and reserve funds. As a result, this would lie outside the purview of the statutory limits, unless the Constitution is amended, officials added.

It is therefore argued that the effort should be to fix a statutory limit on total liabilities, which will also take into account items like small savings and provident fund accruals.

However, there is another point of view within the ministry which argues that these items should be kept out as they are a perennial source. It is argued that there can be a net outflow from provident funds only if the rate of employment turns negative.

Ministry officials are, however, not buying this argument and maintain that with the biggest employer -- the government -- slowing down its absorption and large staff retirements due in the next five years, there could be pressure on the provident fund corpus.