Fiscal Deficit: The Union government’s decision to issue sovereign bond in foreign currency has evoked strong views from both the supporters and opponents of the move. While two former RBI governors C. Rangarajan and Raghuram Rajan have opposed the move, Bimal Jalan has supported the move. Finance minister Nirmala Sitharaman’s budget announcement that the government would issue foreign currency bonds is significant departure from the policy of reducing the country’s external debt followed by successive governments over the last two decade. Financial Express Online’s Krishnanand Tripathi, spoke to noted economist and former chief economic advisor Dr Arvind Virmani. Edited Excerpts:

Q: How do you see the government’s move to issue sovereign bonds?

A: Fifteen years ago, I opposed the move on the file in a note written to both the finance secretary and finance minister. The funny thing is that all those you have written against it, don’t seem to realize the change that has happened over the last 15 years. The key to solvig this issue is FRBM. When I opposed it 15 years ago there was no FRBM. My concern was that issuing sovereign bonds could lead to expansion of the fiscal deficit. When you think of that then you think of FRBM which says that the government cannot do that.

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Q: But the successive governments have often amended the provisions of the FRBM Act.

A: It boils down to once judgement of the FRBM. If you say FRBM is of no use despite the fact that it is presented to Parliament and you believe that the government can just go over it then I can understand it. But if you believe that the FRBM is valid and it will be implemented in next 4-5-6 years then I don’t see any basis for these concerns. My view is that if we take FRBM as given then it will be a small measure to establish a benchmark. Sovereign borrowing is a good thing, not a bad thing.

Q: But successive governments have tinkered with the FRBM target?

A: People don’t seem to realize that the fiscal deficit target in FRBM Act is a glide path. The target under FRBM is about debt to GDP ratio. I think it is 60%, that the debt should not exceed 60% of the GDP that is to be met at a certain deadline. The target of reducing the fiscal deficit to a certain per cent of the GDP is a glide path and many people don’t realise this distinction.

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Q: But how would the government deal with the currency fluctuation?

A: The issue is whether the government accounts for the depreciation in its borrowing and that was precisely the reason I opposed this thing 15 years ago. The point is whenever there is a depreciation, it will be reflected in the budget that is required by law. And it will become more transparent. There is a hypothesis that if the government had borrowed in 1999 then it would have been better off today. It means the fiscal deficit would have been lower today, not higher. Now we will have to look at data, we just can’t keep talking about theory.

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