New Delhi: India may take more steps to make cheaper and adequate funds available to the private sector, while ensuring the government’s record-high borrowing plan proceeds smoothly, the finance minister said on Saturday.
Pranab Mukherjee said the country aims to return to the higher growth of past years, for which the government has outlined a spending plan of Rs10 trillion ($205 billion) for the year to March 2010, largely funded through debt.
Markets were spooked after the government on Monday announced a Rs4.51-trillion borrowing plan for 2009-10, 14% higher than a Reuters poll forecast and about a quarter higher than cited in an interim budget in February.
Analysts and industry groups are worried the government’s heavy borrowing would crowd out private firms and undermine the impact of the Reserve Bank of India’s (RBI) rate cuts since October.
“But we will manage it with the cooperation and support and competence of the RBI and there should not be any apprehension that the private sector would be crowded out,” Mukherjee said after meeting central bank board members.
“We will meet the requirements of the private sector from the market and government’s borrowing will also be managed in such a manner that there is no disruption in the market in favour of the government and starving of the private sector.”
High Borrowing Costs
High borrowing costs and then a global financial crisis have hit Asia’s third largest economy harder than expected with the growth rate moderating to 6.7% in 2008-09, from 9% or more in the previous three years.
The central bank has also aggressively cut its key lending rate by 425 basis points and injected liquidity in the financial markets between October and April, while the government slashed duties and stepped up spending to stimulate a slowing economy.
But government borrowing plans have partially offset the impact of rate cuts, keeping bond yields firm and preventing commercial banks from lowering lending rates in tandem with the RBI.
Mukherjee said there was “no inherent contradiction” between the monetary and fiscal policies.
Asked if there was room for more rate cuts, Mukherjee said: “As and when situation will require, appropriate action will be taken. But what appropriate action will be taken and at what time, is not predictable.”
Policy makers now say the economy could grow by 7% in 2009-10, with a revival in domestic demand and a global recovery by the end of this year.
“Obviously, I choose to come back to the path of a higher growth trajectory and that private investment cannot be expected to meet the full requirement in the immediate future,” Mukherjee said.
“That is why it was decided to step up the public expenditure and it had to be dependent heavily on a larger borrowing.”
The government plans reforms affecting subsidies, taxes and stake sales to cut its fiscal deficit in coming years.