India staring at silent fiscal crisis, says PM's advisor Rathin Roy

The PM-EAC member also says that India faces a silent fiscal crisis owing to a shortfall in tax revenues

The government should not issue foreign sovereign debt without getting into larger public consultations, and the many arguments it has given in favour of issuing such securities do not hold, Rathin Roy, member of the Economic Advisory Council to the Prime Minister, said on Monday. 

Roy, who is also the director of National Institute of Public Finance and Policy, said India was staring at a silent fiscal crisis, and that the government should release a white paper on its medium-term targets in the backdrop of a shortfall in tax revenue targets. 

“I would pay very careful attention to what several governors of the Reserve Bank are saying, that these are sovereign liabilities in perpetuity. I think there are serious issues regarding loss of sovereignty, which need to be addressed. I do not think that the argument that it is cheaper is a good one, I think it doesn’t even hold if you add hedging costs and I don’t buy the simple argument that if something is cheaper, it is good,” Roy said at an event by five thinktanks on the Union Budget. Roy added that there was a reason why the country hadn’t issued overseas debt 70 years “despite huge provocations to so”. 

“I would urge, very respectfully, a public consultation on the subject and a public discussion rather than imperial announcements of borrowing programmes being made without taking into account these factors,” he said. Roy also said no country that had issued sovereign bonds, be it in Latin America or Europe, had a pleasant experience with the liabilities that was created. 

Finance Minister Nirmala Sitharaman, in her maiden Budget speech on July 5, had announced: “India’s sovereign external debt to GDP is among the lowest globally at less than 5 per cent. The government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have beneficial impact on demand situation for the government securities in domestic market.”

The bonds will be issued in the second half of fiscal 2019-20. Government officials have clarified that at most, 10 per cent of the year’s total gross borrowing requirement will be raised overseas. That amounts to roughly $10 billion. 

Roy also assessed that India was facing a silent fiscal crisis owing to a shortfall in tax revenues. “At the heart of the crisis is a shortfall in provisional tax revenues for 2018-19. It is mainly due to a shortfall in GST revenues (but also personal income tax revenues), compared to the numbers presented in the revised estimates,” he said. 

Roy also questioned how the Centre achieved the 3.4 per cent fiscal deficit target for 2018-19. “How is this done given the stunning shortfall in the tax-GDP ratio,” he said. 

“Given this revenue shortfall, the expectation from the revenue department is the tax/GDP ratio will rise by more than one per cent of the GDP, I don't know how this is going to happen. My plea to the government is to immediately issue a white paper if you like that incorporates medium term fiscal framework for next 3-5 years,” he said. 

"In my professional judgment, you will not able to tax as much as has been forecast in 2019-20 Budget. Therefore, either you will have to borrow more or you will have to spend less. If you borrow more, it has implications for overall economy, or you spend less then it will also have implications," he said.