New Delhi: The Union government has no intention of monetizing debt being issued to fund its widening fiscal deficit and aims to return to a path of fiscal prudence to ensure moderate interest rates, the finance minister Pranab Mukherjee said on Tuesday.
He told parliament the Reserve Bank of India (RBI) was buying bonds through open market operations to support the government’s heavy borrowing, but that was not equivalent to monetizing the deficit, where it would buy bonds directly from the government.
“The government has no intention of monetizing its debt, this point has to be understood very clearly,” he said.
Monetisation of debt, which is not allowed by India’s fiscal responsibility rules under normal circumstance, could pose the risk of a sovereign downgrade by raising concerns about fiscal discipline.
The Budget presented last week projected a wider fiscal deficit of 6.8% of gross domestic product (GDP) for 2009-10 (April/March), to be funded by a record market borrowing of Rs4.51 trillion ($92 billion), spooking markets.
The revised borrowing plan for 2009-10 was 14% higher than a Reuters poll forecast and about a quarter higher than cited in an interim budget in February.
Industry lobbies and analysts say the heavy borrowing would crowd out private borrowers from the market, and further delay expansion of firms.
On Saturday, Mukherjee said India may take more steps to make cheaper and adequate funds available to the private sector, while ensuring the government’s borrowing plan proceeds smoothly, which soothed a nervous bond market.
On Tuesday, he said the government had to borrow more in 2009-10 to meet spending needs that are projected at Rs10 trillion, and help the economy return to a higher growth path.
“But at the same time I do believe it is not possible to maintain this level of borrowing unless we have higher growth, higher income,” he said.
The government aims to return to a path of fiscal prudence at the earliest and cut the deficit to 5.5% of GDP by the end of 2010-11, and further to 4% in 2011-12, he said.
“Fiscal prudence is critical for maintaining a stable balance of payments, moderate interest rates and steady flow of external capital for corporate investment,” he said.