India
| Pages | 66-78 |
Page 66
India operates under a fiscal regime , with the Constitution of India specifying the fiscal responsibilities for the central and the state governments through the three lists: the Union List, the State List, and the Concurrent List. According to current budgetary practice, there are three sets of liabilities of the government that constitute public debt: internal debt, external debt, and "other liabilities."1
Total outstanding liabilities of the central government as a proportion of GDP reached the peak level of 65.4 percent at the end of March 1992, after which it recorded a significant consolidation over the first half of the 1990s and declined to 56.4 percent by the end of March 1997 (see Table A.1 in the Appendix). In the next period, however, it showed an increasing trend, reaching 65.3 percent of GDP by the end of March 2002 and is projected to be around 67 percent by the end of March 2003.
As in the case of the central government, the debt- GDP ratio of state governments first recorded an improvement, falling from 19.4 percent at the end of March 1991 to 17.8 percent by the end of March 1997; later, the ratio increased significantly, reaching 24.1 percent by the end of March 2001 (see Table A.2 in the Appendix) in the revised estimates. According to the budget estimates of the state governments, the debt- GDP ratio was estimated to be 23.9 percent at the end of March 2002. Concomitantly, the interest payments-GDP ratio of the states increased from 1.5 percent in 1990-91 to a budgeted level of 2.6 percent in 2001-02.
The combined central and state governments liabilities had similar trends and stood at 72.9 percent of GDP at the end of March 2001 (see Table A.2 in the Appendix) and were estimated to be about 76 percent at the end of March 2002, significantly higher than 63.5 percent at the end of March 1997. The sharp increase in the debt-GDP ratio in 2001-02 is mainly attributable to the increase in the total liabilities of the central government. The continuing high level of public debt leads to increasing interest payments, which in turn necessitate higher market borrowings and put pressure on the fiscal deficit.
Until the early 1990s, India used a development strategy based on its predominant role in the public sector. Large statutory preempts and borrowing from the Reserve Bank of India (RBI), the central bank of the country, provided the government the ability to Page 67 finance the large fiscal deficits. Lower administered yields on government securities coupled with high cash and liquidity reserve requirements resulted in a repressed financial system with very little scope for active debt management.
Reorientation of the debt management strategy began under the overall process of financial sector reforms that were started in the early 1990s. The authorities preferred a gradual approach for this purpose, wherein sequencing the policy initiatives was given the utmost importance.
The first initiative in the reforms process was to allow market-determined rates in the primary issuance market for government securities through auctions (1992). To compensate to some extent for the escalation in the cost of borrowing, and in view of the market preference under the new regime as well as the expectation that interest rates would experience downward trends over the years, the maturity profile of the debt issuance was shortened. The tenor of new loans issued during the next few years after moving toward price discovery mechanism was restricted to 10 years. The move was also prompted by the recommendations of the Committee to Review the Working of the Monetary System. This was followed by a stoppage of automatic monetization of the fiscal deficit and gradual withdrawal of the central bank's support to finance the government budget at subsidized rates.
The role of net market borrowing in financing gross fiscal deficit gradually increased from 21 percent in 1991-92 to 66.2 percent at present. This has happened even while statutory preempts were being reduced. Reserve requirements were brought down. The statutory liquidity ratio (SLR), which requires banks to invest a certain percentage of their liabilities in government securities, was brought down from a peak of 38.5 percent in 1990 to 25 percent in 1997. (At present, the SLR continues to be at 25 percent, which is the statutory minimum.) The cash reserve ratio (CRR), which requires banks to keep a certain proportion of their liabilities in the form of cash with the RBI, was also brought down from a high of 25 percent in 1992 (including the CRR on incremental liabilities) to 5 percent in June 2002.
Debt management strategy began to focus, on the one hand, on the interest rate and refinancing risks inherent in managing public debt and, on the other hand, on monetary policy objectives so that the debt management policy would be consistent with the objectives of the monetary policy. This strategy, in turn, required the authorities to develop the institutional, infrastructure, legal, and regulatory framework for the government securities market.
The objective of the debt management policy has changed over the years. It first focused on minimizing the cost of borrowing, but now the objective is minimizing the cost of borrowing over the long run, taking into account the risk involved, and ensuring that debt management policy is consistent with monetary policy.
Under the current Indian budgetary classifications, three sets of liabilities constitute central government debt: internal debt, external debt, and "other liabilities."
Internal debt and external debt constitute the public debt of India and are secured under the Consolidated Fund of India, as reported under "Consolidated Fund of India-Capital Account " in the Annual Financial Statement of the Union Budget . Article 292 of the Indian Constitution provides for placing a limit on public debt secured under the Consolidated Fund of India but precludes "other liabilities" under the Public Account There is also a similar provision in Article 293 with respect to borrowings by the states, wherein the state legislature has the power to set limits on state borrowings upon the security of the Consolidated Fund of the state. However, a state's power to borrow is limited to internal debt, and a state is required to obtain prior consent of the government of India as long as the state has outstanding loans made by the government of India.
Internal debt includes market loans; special securities issued to the RBI; compensation and other bonds; treasury bills issued to the RBI, state govern- Page 68 ments, commercial banks, and other parties; as well as nonnegotiable and non-interest-bearing rupee securities issued to internal financial institutions. The internal debt is classified into market loans, other long- and medium-term borrowing, and short-term borrowing and is shown in the receipt budget of the union government. External debt represents loans received from foreign governments and bodies. The liabilities other than internal and external debts include other interest-bearing obligations of the government, such as post office savings deposits, deposits under small savings schemes, loans raised through post office cash certificates, provident funds, interest- bearing reserve funds of departments such as railways and telecommunications, and certain other deposits.
The "other liabilities" of the government arise in the government's accounts more in its capacity as a banker than as a borrower. Hence, such borrowings, not secured under the Consolidated Fund of India, are shown as part of the Public Account. Furthermore, some of the items of other liabilities, such as small savings, are more in the nature of autonomous flows, which to a large extent are determined by public preference and the relative attractiveness of these instruments. Nevertheless, it should be emphasized that all liabilities are obligations of the government.
Provisional Actual Budget data for the year 2001-02 show that the gross fiscal deficit of the central government at 6 percent of GDP was financed by domestic market borrowings to the extent of 69.4 percent and through other liabilities to the extent of 26.1 percent. External financing accounted for only 1.6 percent of the gross fiscal deficit. According to budget estimates for 2002-03, the gross fiscal deficit of the central government is targeted at 5.3 percent of GDP and is to be financed by domestic market borrowings to the extent of 70.7 percent and by other liabilities to the extent of 28.7 percent; external financing would contribute only 0.6 percent.
The RBI acts as the government's debt manager for marketable internal debt. Because the RBI is also responsible for monetary management, there is a need for coordination between the monetary and debt management policies, especially in view of the large market borrowing program to be completed at market-related rates. At the time the budget is prepared, there are consultations between the government of India...
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