Sovereign borrowings: Economists caution govt, remind Latin American economic crisis

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Published: July 13, 2019 12:38:45 AM

Former finance secretary Vijay Kelkar said the practice could open the floodgates as the Centre may find it difficult if states too approach it to borrow from abroad

The revenue-GDP ratio is 8.2%, a full percentage point lower than reported in the revised estimates but the Economic Survey pegs the fiscal deficit at 3.4%, the same as in the revised estimates. The revenue-GDP ratio is 8.2%, a full percentage point lower than reported in the revised estimates but the Economic Survey pegs the fiscal deficit at 3.4%, the same as in the revised estimates.

Former finance commission chairman and former finance secretary, Vijay Kelkar, has cautioned against the dangers of government borrowing from abroad. Foreign borrowings by states was the cause of the Latin American economic crisis, he pointed out.

Kelkar said the practice of sovereign borrowing could open the floodgates as the central government may find it difficult if states too approach it to borrow from abroad. Kelkar said the after the masala bonds issue by Kerala, the government would not be able to stop other state governments from going for similar borrowings. It has opened a Pandora’s box and could be dangerous for the Indian economy, Kelkar said.

Rathin Roy, director, National Institute of Public Finance and Policy, said the proposal regarding sovereign government of India borrowing overseas to finance its expenditure was worrying. “I have grave concerns about this proposal on grounds of economic sovereignty and about the macroeconomic consequences,” he said.

Roy urged for transparent reflection and consultation before taking this route. Roy was speaking at a panel discussion on the Union Budget 2019-20 organised by the Pune International Centre (PIC) in Pune on Friday.

Roy said the country was going through a silent fiscal crisis akin to a silent heart attack. The Budget numbers severely underestimate the magnitude of the unstated fiscal crisis that we went through in 2018-19, which cannot be conceivably be fully reversed in 2019-20, Roy said.

At the heart of the crisis is a shortfall in tax revenues. which as the Economic Survey makes it clear, is mainly due to a shortfall in GST revenues as well as personal income tax revenues, compared to the numbers presented in the RE. The revenue-GDP ratio is 8.2%, a full percentage point lower than reported in the revised estimates but the Economic Survey pegs the fiscal deficit at 3.4%, the same as in the revised estimates. “How is this done given the stunning shortfall in the tax-GDP ratio,” he wondered.

“For the 2019-20 BE to be credible, revenue receipts would need to rise by a whopping 1.1% of GDP. where the Budget allows for just 0.12% increase,” Roy said.

Shubhashis Gangopadhyay, research director, India Development Foundation, said the solution to the agriculture sector problems lie outside the agriculture sector. “If you want to double farmers income your have to halve the number of farmers and take people out of farming,” Gangopadhyay said. Nearly 70% of farmers get their income from non-cultivating income and only big farmers earn 80% to 90% of their income from

Kelkar suggested the one easy way to achieving growth in the Indian economy was to have a single-rate GST and this could give a fillip to the export and manufacturing sector in the country.

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