A file photo of Viral Acharya. (Reuters)
A file photo of Viral Acharya. (Reuters)

Viral Acharya’s crowd management lessons involve showing true fiscal deficit

  • In his last published speech, the outgoing deputy governor of RBI highlighted yet again the problem of crowding out by govt’s rising market borrowing
  • Implications of crowding out are more serious now because household savings, main source of funding for both public and private sectors, are shrinking

Crowds can be disciplined and they can be unruly too. In the context of the debt markets, private sector companies have been feeling very uncomfortable since the government has been crowding them out of funding through excess borrowing.

Viral Acharya’s straightforward speech makes this all too clear.

The outgoing deputy governor of the Reserve Bank of India in his speech highlighted yet again the problem of crowding out by government’s rising market borrowing.

At the heart of his message lies the fact that the headline fiscal deficit number is not the true picture.

“A more precise indicator of the financing gap of the domestic economy, i.e., Public Sector Borrowing Requirements (PSBR)... is estimated for India to be between 8% and 9% in 2017-18 and 2018-19," reads one of the footnotes in Acharya’s speech, citing research by JPMorgan India. PSBR would include borrowings by central, state and local governments and public sector undertakings.

This would mean that the 3.3% fiscal deficit target of FY20 is an eyewash unless off-balance sheet borrowings through public sector undertakings are materially brought down.

Economists such as Sajjid Chinoy of JPMorgan Chase and Co. have flagged this concern often.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

“A weak fiscal position is India’s main credit challenge, with general government debt of 67.5% of GDP in 2018, above the Baa median of 52%, and debt-interest costs of almost three times the peer median," Moody’s Investors Service wrote in a recent note.

The implications of crowding out are more serious now because household savings, the main source of funding for both public and private sectors, are shrinking. Household savings as a percentage of gross domestic product fell to 6.8% in FY18 from 7.7% in FY12.

Since resources are finite, borrowers would end up competing for share and the private sector has been losing out on this to the government.

But crowds can be managed and so can crowding out be lessened. “One possible solution is for the government to improve the share of capital expenditures which currently stands at a meagre 14% for India," said Acharya in his speech.

It should also reduce its market borrowings by divesting stake in some of the enterprises it owns. “There could be efficiency gains if there are more private investors playing an effective role in the governance of public sector enterprises," he added.

Lastly, Acharya recommends a council to advice and police the government on its borrowings through more standardized disclosures. This would push the government to come clean on the extent of fiscal deficit by including off-balance sheet items.

Acharya’s suggestions are critical now that the economic slowdown has coincided with a decline in household savings.

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