Just weeks ahead of the union budget, Reserve Bank of India Governor Urjit Patel has a message for the Narendra Modi-led BJP government: ‘Cut down on borrowing and spend on public infrastructure to improve productivity.’
In a speech at Gandhinagar, Gujarat, the central bank governor cited International Monetary Fund data to show that the country’s deficit is one of the highest among G20 countries.
“In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade,” Mr. Patel said.
He said borrowing more and pre-empting resources from future generations by governments could not be a short cut to long-lasting higher growth.
“Instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the Indian growth front. Investment in public transport, specifically railways and urban MRTS, can lead to reduced costs and productivity gains as also help us to lower our oil import bill, and, as collateral benefit, improve air quality in our cities,” he said.
The government had maintained the fiscal roadmap in the last budget by proposing to keep fiscal deficit target at 3.5 per cent for 2016-17. The deficit target was to be lowered to 3 per cent by 2017-18.
He also cautioned against large credit guarantees by the government and steep interest rate subventions as those impeded optimal allocation of financial resources and increased moral hazards.
“Guarantees increase government’s contingent liabilities, and add to risk premia for its own borrowing. Guarantees per se, at the end of the day, have limited utility in solving important sector issues,” he said.
The governor also reiterated that low and stable inflation was an essential prerequisite to a meaningful interest rate regime in which decisions by savers and investors help achieve maximal allocative efficiency in an economy whose investment rate has to increase for better growth outcomes.
“Concomitantly, we have to continue to press ahead for a more fluid, smooth transmission of monetary policy, as also enhance the formulaic linkage between changes in policy rates and other rates, including administered ones,” he added.
Banks had been reluctant to cut interest rates despite policy rate reduction by RBI but from January 1 this year, they have implemented steep interest rate cuts, after the demonetisation exercise reduced their cost of the funds significantly.