THE REPORT advocates a steady liberalization of constraints on external commercial borrowings and the withdrawal of hard-to-monitor stipulations about their end-use. It suggests more freedom for small firms to use this channel, especially in export-oriented sectors since they are more likely to find interest rate ceilings (or ceilings on spreads) on foreign borrowings a constraint. It points out that inconsistency obtains between capital account liberalisation (CAL) and tight management of the exchange rate. 

 

On fiscal deficit, the Report hits the nail on the head when it says, “A high fiscal deficit also creates pressures to hide it by burying it in public sector firms (for example, the enormous oil subsidy). (We see it happening right under our nose). Rather than disguising more of the deficit, the government should achieve more of its public objectives by explicitly paying for them rather than by imposing an implicit tax. For instance, it should attempt to achieve priority sector objectives and universal service objectives through explicit and targeted fiscal transfers rather than routing these objectives implicitly through the banking system and hindering its efficiency (incidentally this is what Palaniappan Chidambaram did recently, through the latest Union Budget - he waived farm loans to the extent of Rs 70,000 crores!). 

 

The Report also says that there are a number of disguised or off-budget obligations of the government that could swell the deficit and public debt if properly recognized as fiscal obligations of the government. Indeed, by some counts there has been little improvement in the central government deficit when these obligations are added back. In fact this is what we have been saying through these columns (vide, Budget 2008-09: Populism at its Best, dated Feb 29, 2008; Et tu, Chidambaram?datedJan 2, 2008 and Chidambaram or Modi, a common thread runs through politicians! dated 29December2007).  

 

As the Report rightly points out, issuance of public debt crowds out financing for private investment. If banks are seen as a continued source of cheap debt financing through the statutory liquidity ratio, it can also have long-term economic costs by holding back efficient financial intermediation. The Report suggests therefore the elimination of such elements of financial repression in the interest of fiscal health. The time is opportune to change the structure of public debt management, to minimise financial repression and generate a vibrant government bond market.

 

Thus, as to fiscal policy, the Report suggests reduction in levels of consolidated government deficit and public debt (ratios to GDP). It also suggests reduction in statutory liquidity ratio to a level consistent with prudential needs (in other words, government should switch to direct bond financing of new deficits). Provision of sops to exporters in response to currency appreciation must cease. Other suggestions include permitting onshore currency derivatives markets with no restrictions on participation.