It is patently unfashionable these days to question fiscal profligacy—though this has not prevented Mint from repeatedly asking whether an undisciplined spending spree will create a public finance mess rather than reinvigorate the economy.
The government’s ever- higher borrowing needs to fund a growing fiscal deficit have thrown the bond market into a tizzy. The new plan to sell an extra Rs46,000 crore of government bonds has pushed down bond prices and pushed up bond yields.
These are early signs that a growing fiscal deficit will lead to higher interest rates and come in the way of the Reserve Bank of India’s (RBI) attempts to lower borrowing costs in a slowing economy.
There is now a clamour for the Indian central bank to follow in the footsteps of the US Fed and directly buy bonds sold by the government —monetize the deficit, in other words. True, inflation is low right now but printing money to cover deficits will fan inflationary fires later. So it is good that RBI governor D. Subbarao has ruled out this possibility—at least for now.