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Cap on govt borrowing is a ham-handed solution, says Sinha

Finance Minister Yashwant Sinha today ruled out putting a constitutional cap on government borrowings as demanded by various experts.

''Unless a proper groundwork is prepared, constitutional limit on government's borrowings will be a ham-handed solution,'' Sinha said, while delivering the inaugural address at a seminar on 'Managing the Fiscal Deficit', organised by the Associated Chambers of Commerce and Industry of India.

He said implementation of Article 292 is unworkable in the present fiscal context.

Article 292 gives the Union government power to borrow upon the security of the consolidated fund within such limits, if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such limits, if any, as may be so fixed.

Many experts, including former finance minister P Chidambaram, had also favoured putting a constitutional limit on government borrowings.

Sinha said his prime concern is that government should not borrow to meet its current needs.

In fact, if the current revenue deficit is eliminated in the medium-term (four years), fiscal deficit will come down to two per cent, a big achievement. The projected target was four per cent in the Union Budget for 1999-2000. At present, revenue deficit accounts for half of the fiscal deficit, he said.

While increasing market borrowings by the government is a cause for concern, Sinha said, it need not necessarily crowd out private borrowings. It is particularly true in the present context when banks are flush with funds.

In reining in revenue deficit, government should keep changing its borrowings and reshuffle its portfolios. Maturity profile of earlier borrowings should be looked into to reduce interest burden on the government.

On expenditure side, he said downsizing of the government cannot be implemented unless its functions are curtailed. The proposed Expenditure Reforms Commission would suggest to the government how to prioritise its outlays.

Sinha said it is quite easy to say that government revenue should be increased and expenditure decreased to rein in fiscal deficit. However, suggestions on this count should be sustainable in medium to long term.

Hard steps taken by some state governments, following demand from their employees to raise their salary to be on par with Central government salaries, resulted in strikes and agitations.

While Latin American countries have brought down their fiscal deficits to sustainable limit within five to eight years, only a few countries in the world, including Bhutan and Congo, have as high fiscal deficit as India.

The total internal liablity of the government increased from Rs 2.83 trillion in 1991-92 to Rs 8.10 trillion during 1998-99.

The efforts at increasing revenue should not be always looked at increasing tax bases. A whole lot of issues need to be debated before agriculture is brought in the tax ambit.

However, the government is taking pro-active measures to increase the tax base. He lamented that tax-GDP ratio has come to nine per cent at present from the earlier level of 11.5 per cent.

In this context, user charges come into picture. When the government supplies irrigation facilities, there is resistance to pay, but when farmers form their cooperatives for the purpose, they are willing to pay, he said. Many a time, privatisation of such areas facilitates user charges, he said.

Sinha defended revision of methodology to calculate GDP. There is a school of thought that GDP figures be further reviewed since unorganised sector which contributes a major chunk to the kitty, is inadequately represented in the current methodology.

The efforts to keep small savings in public accounts are being criticised in many quarters. If the small savings should be encouraged, why should it add to fiscal deficit, he said.

Small savings are expected to increase this fiscal, but would not add to fiscal deficit, he said.

Besides, assets are being created and then ignored. No maintenance fund is created to keep them up to date. This is true of many irrigation and housing schemes. Is such type of expenditure a waste, Sinha asked.

Similarly, expenditure on internal security should not be curtailed as just law and order contributes to creating conducive environment for investment. Should such type of expenditure be put in revenue account and be curtailed for that reason alone, he wondered.

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