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Reordering the debt markets?

Reordering the debt markets?
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First Published: Fri, Feb 26 2010. 12 37 AM IST
Updated: Fri, Feb 26 2010. 12 37 AM IST
New Delhi: The fiscal reforms prescribed by the 13th Finance Commission (TFC) and accepted by the government will significantly reduce the country’s debt stock in the next five years and push down overall interest rates in the economy.
While market experts concur that change is on the anvil, they believe that the behaviour of the market in the immediate future will depend on the government’s fiscal projections in Budget 2010, which will be announced on Friday.
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The acceptance of TFC’s prescriptions makes it mandatory for the Union government to specify and commit to a medium-term fiscal reforms road map with three-year forward-looking estimates of revenue and expenditure, introducing for the first time a predictability in assessing the fiscal impact of the government’s major policy decisions.
Once implemented, this will impact the debt markets by pushing up bond prices and make the overall cost of credit cheaper, in turn affecting interest-rate sensitive sectors such as real estate, banks and automobiles.
The blueprint for action implies a redesigning of the existing fiscal responsibility legislation by making explicit the parameters underlying revenue and expenditure projections and specifying economic shocks that would necessitate relaxation of these targets within defined limits.
“This would ensure tighter integration of the MTFP (medium-term fiscal policy) into the Budget and make the MTFP more a statement of commitment rather than merely one of intent,” the Finance Commission report said.
TFC has laid down that the government reduce its outstanding debt (measured as a percentage of national income) to 44.8% of gross domestic product from the current level of 54.2% by 2014-15.
“While there are long?term implications for the market, much will depend upon its implementation,” said Indranil Pan, chief economist, Kotak Mahindra Bank Ltd. “As far as the immediate impact is concerned, it will depend upon the borrowing target the government will put out in its Budget tomorrow (Friday).”
anil.p@livemint.com
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First Published: Fri, Feb 26 2010. 12 37 AM IST