COMMENTARY
INTERVIEW
SPECIALS
CHAT
ARCHIVES

Govt's debt higher than revealed, warns RBI

The Union government's debt is higher than calculated because the present system of measurement does not reveal the true extent of its liabilities, warns the Reserve Bank of India. The country's external liabilities are estimated in a narrow sense and accounted for at a historical exchange rate, which may not show the full extent of its liabilities, said the central bank.

Moreover, contingent liabilities on guarantees extended by the Union government are also not taken into account while calculating the public debt, said the apex bank in its Occasional Papers' special issue to commemorate the 50 years of Independence.

If these two factors are taken into consideration, the government's aggregate liabilities as a percentage to gross domestic product at the end of March 1996 would have been higher at around 73.3 per cent as against 55.2 per cent which was conventionally estimated, pointed out the Reserve Bank.

If the government liabilities are matched by equivalent assets, it would be possible to afford higher level of borrowings and debt without an adverse impact on fiscal sustainability, it added.

The RBI admitted that difficulties in encompassing the valuation of the government's real and tangible assets, valuation of guarantees extended by the government, and the present value of the unfunded liabilities exist. Yet, a narrow measure of the net worth of the federal government shows a considerable deterioration over the period, the central bank added. The measure was discerned from statements of assets and liabilities in budget documents.

The excess of liabilities over capital outlay and loans and advances of the Centre, on the book value basis as a ratio to GDP increased from 14.5 per cent in 1991 to 18.7 per cent in 1997, and is placed at 18.2 per cent in 1998.

These developments, said the RBI, highlight the need for qualitative fiscal adjustment. This in turnwill promote the public sector undertakings' assets base and generate adequate returns to meet future debt servicing requirements.

Until these conditions are satisfied, fiscal adjustment merely reduce the quantitative dimensions of the public deficit, and the debt would not be sufficient to place the fiscal policy on a long term sustainable path, the RBI added.

To achieve growth with fiscal sustainability, it is necessary that the nominal interest rate on government securities should decline to such an extent that real interest rates are well below the real output growth.

The problem of interest rate needs to be addressed by reducing government's demand for resources from the market which, in turn, will also contribute to the credibility of the monetary policy actions, said the RBI.

Besides, it was necessary to reduce the hidden debt burden of the fiscal system arising out of quasi-fiscal operations, the RBI observed.

In this context, the RBI said the government would be heading for an acute financial stress if it continues to allow inefficiency in the operations of the public sector undertakings at a socially high cost proportion.

EARLIER REPORT:
Inefficient PSUs pushing Centre into financial disaster, warns RBI