The Hindu Business Line : States enter the act

Given the importance of State governments in the kind of infrastructure that is envisaged as part of the economic stimulus, it was only proper to get them involved.

The decision of the Union Cabinet to permit States to borrow an additional Rs 30,000 crore from the market makes eminent sense if one has just emerged from a seminar on Keynesian economics in the groves of academe. At a time when investment demand is slipping dangerously, governments must step in to generate that expansionary effect to revive the flagging spirits of both consumption and private investment. Given the importance of State governments in the kind of infrastruc ture that is envisaged as part of the economic stimulus it was only proper to get them involved.

The idea that State governments, already budgeted to borrow Rs 57,000 crore from the market, would top up their debt would not have been a matter of worry had the history of government expenditure provided proof of money well spent. So far that evidence is pretty thin on the ground as innumerable reports about the delayed highway projects and power plants spilling over from the 10th Plan attest, not to mention the severe leakages in rural employment programmes. Thus, it is entirely possible that the expansionary potential of government expenditure may not materialise in full in the absence of steps to ensure that projects are executed on time. Also, an immediate danger of the Centre’s generosity is the likelihood of interest rates remaining sticky and the credit markets tight. Just the other day, the RBI’s quarterly review warned that large market borrowings of the Government prevented interest rates from following the RBI’s cues. For banks rediscovering risk in private sector lending, State government paper is as attractive an alternative as Union government securities to park that additional liquidity the RBI had made available since September. So when the acting Finance Minister urged public sector bank chiefs on Monday to lend more “to boost domestic demand’, what could he have expected? North Block has been sending confusing signals; on the one hand, urging cuts in lending rates and on the other, making it unattractive to do so.

The problem before the policymaker is one of combining stimulus packages with an easy monetary policy in a country where government has limited resources. To fund the former, interest rates have to remain high so the Centre/States can raise funds from the domestic markets. For an easy money policy to work, banks have to drop interest rates so people borrow. North Block has to therefore prioritise; in any case, it must ensure that public money is spent well and private investments are inspired to follow. Only then will rigid rates be tolerated and government borrowings justified.

Related Stories:
Centre relaxes fiscal deficit targets, borrowing ceilings for States
States pitch for special grant of Rs 20,000 cr
Southern States want higher share in Central taxes

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