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STATUS PAPER ON GOVERNMENT DEBT (Why need to be controlled (Inflation as…
STATUS PAPER ON GOVERNMENT DEBT
Why need to be controlled
Inflation
as lot of money in market
Exchange rate risk
due to poor credit ratings and investments
Fiscal repression of commercial banks
NK Singh/FRBM Committee Recommendations
40% for center and 20% for states by 2023
Affects credit growth
Crowding out effect for private firms
Intergenerational parity
future generations will have to pay increased taxes to settle govt. debts
Affects investor confidence
as credit rating agency reduce sovereign bond ratings that effect FII/FDI inflow
Definition
Government liabilities have been broadly classified as Public debt (against Consolidated fund of India - 41%) and other liabilities (5.5%)
Public debt into internal and external and internal into marketable and non-marketable
Has fiscal consolidation worked
Moving towards market interest rates
to bring parity in private and public sector borrowing
Lowering interest rate volatility
~98% of the public debt in India is contracted at fixed interest rates
Borrowing more from market
borrowing from RBI is inflationary
Increasing debt sustainability:
(interest payments to revenue receipts) of Centre decreased from 52% in 2000 to 35% in 2017-18
Gross fiscal deficit
GFD decreased to 3.5% v/s 5.9% in 2011-12
Centre’s total debt as a percentage of GDP reduced
to 46.5% in 2017-18 from 47.5% as of March 31, 2014
Strategy of central government
Public Debt Management Agency (PDMA)
for managing public debt (internal by RBI and external currently done by Finance ministry)
Medium-Term Debt Management Strategy
Low cost of borrowing
Risk mitigation: Currency Risk (right mix of foreign and domestic currency), Roll-over risk (debt to management previous debt), Commodity price risks, Interest rate risk,
Market development
Debt situation of states
Outstanding liabilities of states have increased
(24% v/s 24.3 comapred to previous year
Increasing Expenditure (UDAY bond), populist schemes,
Increasing Debts (no incentivization for financially prudent states)
Reducing Receipts
Steps to improve the fiscal situation
Improve quality of states’ Public Expenditure
Re-include "Fiscal Discipline as tax devolution criteria
More stringent, apolitical and transparent criteria