A former member of Prime Minister’s Economic Advisory Committee and National Institute for Public Finance & Policy director, Govinda Rao, said on Tuesday that the expected fiscal deficit of 6.8% for 2009-10 would dry down private investment, even as the economy is likely to grow between 6.5% and 7%. He also pitched for a 2% reduction in cash reserve ratio (CRR) to release more funds in the banking system to create demand.
The observations have come a day after finance minister Pranab Mukherjee presented the annual Budget for 2009-10, in which he estimated the fiscal deficit to increase to 6.8% of gross domestic product (GDP) from 6.2% in the previous year.
“The proposal to accelerate aggregate demand through fiscal stimulus funded by increased government borrowings may not help, as private investment would get crowded out,” Rao said on the sidelines of a conference organised to discuss the implications of the Budget on public sector enterprises.
Explaining his argument, he said the Central government borrowings and 3.5% average borrowing by state governments would eat up almost the whole of 11% financial sector savings of households. “Only 0.7% would be available for the corporate sector. That drives up the interest rates and they cannot borrow with the higher interest rate,” Rao added.
On growth, he said the economy might grow between 6.5% and 7% this year, as the major growth indicators are not positive. “The external environment has not yet improved. You had a negative growth rate of industrial production in April, power sector is not doing extremely well, infrastructure has come out, but then more time is needed. You need to be a little more realistic,” Rao said. “It is not very much likely to be last year’s growth. It could be less, marginally less; may be between 6.5% and 7%,” Rao said. GDP grew 6.7% in 2008-09.
In order to increase demand in the economy, the council mooted the idea of further reduction in CRR, the proportion of deposits commercial banks keep as reserve, saying there is no need for such a safety measure when banks are required to invest 24% of demand and time liabilities in government securities. “When you say that the government is borrowing money through SLR, do you really need further safety mechanism? It’s a sovereign guarantee,” Rao observed. With the inflation being in the negative territory, Reserve Bank of India may look at releasing more money into the banking system for lending, he said. “You can reduce CRR by another 2% to something like 3% at this stage. It won’t hurt. It will increase the liquidity. It releases that much of money for the banking system to lend,” he said.
Standing Conference of Public Enterprises’ chairman Arup Roy Choudhury expressed satisfaction on not fixing any target for disinvestment for the year.