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Falling interest costs keep fiscal deficit low

Mamata Singh in New Delhi

The country's fiscal deficit would have been much higher but for the falling interest costs of the government, which have kept the growth in its non-Plan revenue expenditure under control over the last few years.

While this had reduced the pressure on the government to do anything concrete in terms of expenditure reduction or revenue growth, these issues could not be ignored, especially with regard to meeting the Tenth Plan targets, government officials pointed out.

"Over the four years between 1998-99 and 2001-02, the central government has been able to broadly stay in the same place without doing much with regard to the nature of its expenditure," says the money and finance bulletin brought out by the Investment Information and Credit Rating Agency.

Between 1992-93 and 1999-2000, half of the incremental debt servicing of the government was on account of increased cost of funds.

The average cost of funds to states, which was only 7 per cent in the late 1980s, rose to over 12 per cent by 1998-99. In 2001-02, the yield on the 10-year government security had fallen to 9 per cent.

The Centre has been rolling over its high-cost debt and financing debt at lower cost over the last four years.

However, the non-interest revenue expenditure had grown faster than the interest expenditure, indicating that the reduced interest cost had not been used to either lower fiscal deficit or to reorient expenditure towards more productive uses, government officials said.

Between 1998-99 and 2001-02, the government's revenue expenditure rose 11.9 per cent and non-interest revenue expenditure 12.4 per cent, said the Icra bulletin, indicating that the saving on account of the fall in interest rates had been more than made up by increased expenditure on other items.

Despite the fall in interest rates, the fiscal deficit has grown at 12.6 per cent over the period in question, much higher than growth in revenue (11.8 per cent) or expenditure (12.1 per cent).

"With interest rates on 10-year gilts at 7 per cent, there is little scope for further downward adjustment. The palliatives to avoid taking the tough decisions involved in fiscal consolidation appear exhausted," the report points out.

The price of procrastination is self-evident in the lack of improvement in physical infrastructure and the continuing deficits in social infrastructure, it states.

Moreover, officials in the Planning Commission say while the Tenth Plan projections take into account the fact that interest payments as a percentage of gross domestic product will fall, meeting the targets set for the Plan still requires non-interest non-Plan revenue expenditure to fall as a percentage of GDP and the tax-GDP ratio to rise 1 per cent.

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