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ACCOUNTING
High inflation makes centre's debt look reasonably good
Mon, 07 Mar 2011 23:07:37 GMT
NEW DELHI: High inflation may be a worry for policymakers, but it has made the Centre's debt situation look reasonably good. Because of the base revision and high inflation, India's nominal gross domestic product (at current prices in market prices) is projected to rise 20.3% in 2010-11.

The government's total debt, as a percentage of GDP, is budgeted to drop to 45.3% from 51.1% estimated in the budget last year, which was based on an assumption of 12.5% growth in nominal GDP.

"Unexpected spurt in nominal growth from GDP base revision and high inflation pared the Central government's debt ratio (debt/GDP) in 2010-11," said DK Joshi, chief economist with ratings agency Crisil .

A finance ministry paper on the country's debt position - Government debt - status and road ahead - pegs consolidated debt of all the states at 24.8% of GDP. The total debt of the country, therefore, comes at about 70% of GDP, well below that of most developing countries and much better than that of some big developed countries.

The statistical advantage has helped the Centre meet the targets laid down by the 13th Finance Commission well ahead of time. The commission had set a debt-GDP target of 53.9% at the end of March 2011.

A recast in the way public debt is calculated will also help, as the absolute debt will drop because of elimination of double counting for some items of borrowings.

"The government has restated debt as there were issues of double counting and amounts under MSS (market stabilisation scheme)," said M Govinda Rao, member of the Prime Minister's Economic Advisory Council.

Before the adjustment, the Centre's debt to GDP ratio at the end of 2009-10 was estimated at 57.8%, which dropped to 50.7% of GDP after adjusting for liabilities in the national small savings fund that were not used for funding the government deficit. This will fall to 45.3% of GDP based on the latest estimates of national income.

India's fiscal deficit, the excess of expenditures over revenues excluding borrowings, also improved this year due to healthy tax revenues and much higher returns from the telecom auctions. The government achieved a target of 5.7% set by the finance commission with ease, as the actual deficit came in at 5.1%.

However, experts caution against complacency because of the statistical gains. "The overall indebtedness needs to be reined in, as it is still quite high," said Shubhada Rao, chief economist at Yes Bank .

"The present crisis in Euro Zone has brought into focus that sustainability analysis in classical terms may not be the sole tool to gauge the fiscal health of the country," the finance ministry debt paper notes.

"It would not be prudent to further increase the share of expenditure on interest payments in the overall expenditure as this would result in lower resources availability for financing the developmental needs," it warns.

From the government's net tax revenue 42.71% goes into meeting the interest costs. "We have to be careful that the interest burden does not get out of hand. Going forward, we should have greater role of market pricing and subsidise judiciously," said Shubhada Rao.
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