Mumbai: There was a long-term cost to directly finance the budget deficit that needed to be considered despite the apparent short-term benefits of not tapping the market for funding, India’s central bank governor said on Monday.
Government borrowing in the 2009-10 fiscal that started on 1 April is already slated at a record Rs3.6 trillion ($72 billion), and there has been some speculation of direct selling debt to the central bank, a process known as monetization, to ease the pressure on the market and bond yields.
“There is no free lunch. I can print a lot of money. I can put up another printing press, lease another printing press and print money... They are not benign solutions,” Reserve Bank of India (RBI) governor D. Subbarao told a business conference.
Dealing with deficit: RBI’s Subbarao says government borrowing in 2009-10 will be significantly higher than that of the previous year. Santosh Hirlekar / PTI
“So, when people say monetize the deficit, these things are not about the next three months, but the next three years,” he said.
Last Tuesday, the Confederation of Indian Industry called for monetization of the deficit to aid private investment and boost the economy, despite risks of inflation and sovereign downgrades.
A sudden increase in funding to plug the deficit at the end of 2008-09 saw an agreement where the Reserve Bank would transfer Rs45,000 of funds held against Market Stabilization Scheme (MSS) debt to the government to ease pressure on the market.
But in the end, the government needed only Rs12,000 crore of the MSS funds.
Subbarao said government borrowing in 2009-10 would be significantly higher than the previous year. Borrowing for 2008-09 was estimated at Rs3.06 trillion, although that would fall to Rs2.73 trillion given the full amount of MSS funds was not tapped.
The government plans to sell Rs2.41 trillion worth of bonds, or two-thirds of the annual target, in the first half of this fiscal year.
India’s current account deficit rose to an 18-year high of $14.64 billion in the December quarter as the global crisis choked inflows.