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Economist urges govt to keep fiscal deficit within stated limit, favours gradual Re depreciaton

It is imperative for the government to maintain its fiscal deficit within the limit pegged in the Budget 1999-2000 so that the economy could benefit from the recent spate of interest rate cuts by the Reserve Bank of India, a leading monetary economist, Dr B B Bhattacharya, professor of macro and monetary economics at the Institute of Economic Growth in New Delhi, said.

Bhattacharya said government should not indulge in major borrowings at the low interest rates. The idea is that private credit should increase substantially through interest rate cuts which will spur industrial growth.

Fiscal deficit is intended to be four per cent for 1999-2000 in the changed (new) GDP series which is higher (by about ten per cent) than the old GDP series. Under the new classification, small savings are shown as state borrowings and not central borrowings. However, as per the earlier classification of the Budget, the deficit would be 5.8 per cent for 1999-2000, experts say.

Prof Bhattacharya said the interest rate reduction was small in dimension and should have been carried out six months ago.

Prof Bhattacharya said the probable reason that interest rates were not lowered six months ago was that the government feared the possibility of the contagion effect spilling over to India.

RBI governor Bimal Jalan had waited till the Budget was presented to ensure that the government's borrowing programme was in order. Having satisfied himself, he has taken the decision to lower interest rates on various monetary instruments. It is important that the government keep its expenditure under control.

Another important issue relates to where the expenditure is incurred. In case it is used for capital formation, it will not be inflationary. However, in case it is on revenue account then the increase in money supply would not have the desired effect on production. Reduction in CRR would release money supply to the extent of Rs 35 billion.

The economist favoured a gradual market-based depreciation of the rupee and not a free fall on account of speculation.

In case there is free fall of the rupee then this will create a serious foreign exchange or balance of trade problem -- in such a case the RBI governor may have to retract some of his steps, Prof Bhattacharya said.

He said five to ten per cent depreciation of the rupee in six months was desirable. This will generally help exports.

However, the only exports that will get a boost include products such as software and diamonds. Others like tea and coffee would not benefit because there was a glut in the primary market. The prices of such commodities have been falling, he said.

Asked what will be the impact of Budget on the stock markets, Prof Bhattacharya said there is likely to be a shift from the debt to equity markets. The obvious reason was that it would become less attractive to put money in safe and secured instruments. ''Those who will take risks will go to stock markets,'' Prof Bhattacharya said.

Prof Bhattacharya did not think that interest rate reduction would not lower savings because the correlation between interest rates and savings rate was weak, he said.

The economist was in favour of invoking Article 272 to put a limit on government borrowings. This year's Economic Survey had mentioned the desirability of such a move.

Prof Bhattacharya, however, felt that such a step was difficult for governments to pursue as it will cap their borrowing requirements for an year. In an uncertain world, this could be problematic for governments, he said.

UNI

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