Govts borrowing costs may shoot up on fiscal consolidation doubts

Written by fe Bureau | New Delhi | Updated: Mar 2 2012, 23:36pm hrs
The governments borrowings costs could shoot up sharply, as the bond market is increasingly sceptical about its commitment towards fiscal consolidation. Some economists believe the yields on government securities could permanently increase on bloated borrowings and market's lack of faith in the finance ministrys commitment to lower fiscal deficit.

Speaking at a seminar on Indian economys prospects on Tuesday, HDFC Bank chief economist Abheek Barua said the market is doubting the credibility of governments actions; as it intermittently raises its borrowings target breaching its earlier promises.

Total borrowings of the government are now pegged at R5.1 lakh crore for 2011-12, much higher than the R4.17 lakh crore budget estimate.

The bond markets are getting increasingly impatient about the government's attitude towards fiscal consolidation. This could lead to permanently elevated yields that the market will want in order to buy government bonds, Barua said at the seminar organised by National University of Singapore and Institute of South Asian Studies.

The fiscal deficit is expect to come close to 5.8% for the fiscal, up from the 4.6% budget estimate.

Yield might settle into a neighbourhood of 9% instead of 8% unless the government bring its finances in order. This may impose huge costs on the government and may derail fiscal consolidation, he said. Yield on ten-year government bond is currently around 8.23%.

Other economists said at the seminar that the UPA government needs to push economic reforms through executive actions like faster clearances to businesses even if it is unable to pursue legislative reforms.

Problems in obtaining forest and environment clearances, difficulties in land acquisition and bureaucracy

not taking decisions are the chief causes hampering the economic growth, said Bibek Debroy, Professor, Centre for Policy Research.

Without the contribution of net exports to the gross domestic product, India would be left with a GDP growth rate of merely 3%, he said, pointing out that the domestic economy has remained somewhat inactive in the past few years.

There has not been much progress made since 2004 on the economic front, Debroy said, adding that the current period mirrors the slow growth period between mid 1960s and mid-1970s, which many economists called the lost decade.

The country's needs to move towards evidence-based policy making, Shubhashis Gangopadhyay, Director, India Development Foundation, said. The national rural employment guarantee programme need to be made more simpler and sleeker in order to plug the rising leakages, he added.