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Govt liabilities caused sharp rise in debt-GDP ratio: RBI

CREDIT POLICY

The rise in total liabilities of the central government caused a sharp increase in the combined debt-GDP ratio in 2001-02 and thereby, put pressure on fiscal deficits, according to Reserve Bank of India.

''The continuing high level of public debt leads to increasing interest payments, which, in turn, necessitates higher market borrowings and puts pressure on fiscal deficits,'' RBI said in its report on Macroeconomic and Monetary Developments in 2001-02.

The combined debt of the Centre and states at 69.7 per cent of GDP at end-March 2002 is ''significantly'' higher than 56.5 per cent at end-March 1997, RBI said.

The sharp increase in the debt-GDP ratio in 2001-02 is mainly attributable to the rise in total liabilities of the central government, the central bank added.

For 2002-03, central government's gross and net market borrowings are budgeted to increase by 7.4 per cent and 4.8 per cent to Rs 1428.67 billion and Rs 958.59 billion, respectively.

RBI said it continued with the practice of combining government bond auctions with private placement to avoid undue strain on yields.

During 2001-02, RBI took devolvement and private placement to the tune of Rs 288.92 billion, which was more than offset by subsequent net open market sales amounting to Rs 303.35 billion. As a result, the net RBI credit to the central government declined by 0.3 per cent during the year.

RBI said there was a persistent decline in the interest rates on market borrowings across the maturity spectrum during 2001-02, reflecting comfortable liquidity conditions.

Interest rate on primary issue of 10-year government securities declined from 10.25 per cent on April 12, 2001 to 9.22 per cent on July 25, 2001.

In the secondary market, yields declined to 7.36 per cent by end-March 2002.

The central government's debt-GDP ratio recorded a significant consolidation over the first half of the 1990s and declined almost 6 percentage points to 49.4 per cent by end-March 1997.

In the subsequent period, it increased to 56.4 per cent by end-March 2001 and is estimated at 58.1 per cent at end-March 2002.

RBI said the high level of public debt is mirrored in interest payments/GDP ratio, which increased from 3.8 per cent during 1990-91 to 4.6 per cent by 2001-02.

The debt-GDP ratio of state governments also rose significantly since 1997 to 24.2 per cent at end-March 2001.

According to states' Budget estimates, the debt-GDP ratio is estimated at 23.9 per cent at end-march 2002.

Concomitantly, the interest payments-GDP ratio of states rose from 1.5 per cent during 1990-91 to a budgeted level of 2.6 per cent during 2001-02.

In a chapter on monetary and liquidity conditions, RBI said as monetary conditions eased, ample liquidity was available during the second half of 2001-02.

The apex bank said the year 2002-03 commenced with a significant easing of liquidity conditions. This was reflected in higher repo bids received at the liquidity adjustment facility auctions.

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