Seeking to mollify the fears of banks that high government borrowing would not allow interest rates to come down, the Planning Commission today said the fiscal deficit will be high but not in “double digits”.
“Bankers are always concerned about the size of the government's borrowing. Because it is very large, many of them think that the interest rate on government debt will rise and they would rather retain liquidity now in order to invest in high-yielding government bonds,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said.
He, however, advised bankers to wait, as nobody knows what the government borrowing would be till the Budget and added that “I feel it will be possible to accommodate a reasonable fiscal deficit”.
As regards the likely fiscal deficit in the current year, Ahluwalia said, “I don't want to speculate on any of the Budget numbers, but I have no doubt that the central government's fiscal deficit will not be in double digits”.
People, he stressed, “should not look for a return this year to the normal fiscal deficit, which used to be 3 per cent. It should be significantly higher.”
Fiscal deficit, which is roughly the difference between total expenditure and total receipts, is an indicator of government borrowing.
More From This Section
The fiscal deficit during 2008-09 shot up to over 6 per cent of gross domestic product (GDP) as against the original estimate of 2.5 per cent.
“There were below-the-line items, what you might call the hidden items amounting to about 1.8 per cent of the GDP. So, on an inclusive basis the fiscal deficit was 7.8 per cent,” Ahluwalia said.
Pointing out that all over the world countries are running high fiscal deficits, he said, “In the US and the UK, it is 10-11 per cent of GDP. So we should not worry that we are abandoning the old FRBM target of 3 per cent for the present.”
As regards the impact of the high fiscal deficit on interest rates, Ahluwalia said, “It has been possible to absorb the large fiscal deficit because private investment has obviously been less than (it) would have been otherwise”.
“If we feel that private investment is going to be below normal this year also, the demand for funds by private investment will be lower and that creates space for more fiscal deficit without too much damage to the interest rates,” he added.
Admitting that the monetary policy stance does have a bearing on interest rates, he said, “I am sure the finance ministry and the Reserve Bank of India are in close contact on this issue”.