http://www.moneyspidery.com/2012/02/02/public-debt-gdp-ratio-must-be-capped-for-economic-stability-says-rbi-governor-duvvuri-subbarao/
MUMBAI:
The amount of public debt a country can accumulate needs to be capped
as a proportion of its gross domestic product for economic stability,
said RBI Governor Duvvuri Subbarao, whose monetary actions are being
nullified by imprudent fiscal policies.
“Even in the case of sovereign debt, there is an inflexion point
beyond which fiscal deficit militates against growth,” Subbarao said in
his address titled ‘Policy Challenges from the New Trilemma: Price
Stability, Financial Stability and Sovereign Debt’. “Government
borrowing is not bad per se, but excessive borrowing is. There is,
therefore, a need to cap total public debt as a proportion of GDP.” He
was not specific about the Indian government’s finances during the
speech.
Nations such as Greece, Portugal, Italy and Spain are on the brink of defaulting on their loan repayments as excessive borrowings are hurting as slowdown reduces revenues. Greece, the first country from the European Union that may default, has a debt of more than 100% of GDP, and so do many others. India’s public debt to GDP is estimated at 65%, the second highest among emerging markets, behind Hungary.
“In the context of the current economic scenario, particularly, fiscal excesses in the Euro zone, it’s important that there is fiscal consolidation to achieve price stability and financial stability,” said Shubhada Rao, chief economist at YES Bank. “Fiscal dominance of monetary policy over a long period can compromise macroeconomic stability.”
Fiscal expansion may be necessary to achieve financial stability in times of crisis like in 2008, but could wreck the system if debt is high. “There are circumstances under which fiscal expansion in support of financial stability can threaten sovereign debt sustainability,” said Subbarao.
“That will happen if the sovereign is already highly indebted, and the recovery is not quick enough. Governments will then see their revenues falling, will need to borrow to make up the fiscal gap, and can potentially get trapped in a self-reinforcing adverse fiscal feedback loop.”
MUMBAI:
The amount of public debt a country can accumulate needs to be capped
as a proportion of its gross domestic product for economic stability,
said RBI Governor Duvvuri Subbarao, whose monetary actions are being
nullified by imprudent fiscal policies.Nations such as Greece, Portugal, Italy and Spain are on the brink of defaulting on their loan repayments as excessive borrowings are hurting as slowdown reduces revenues. Greece, the first country from the European Union that may default, has a debt of more than 100% of GDP, and so do many others. India’s public debt to GDP is estimated at 65%, the second highest among emerging markets, behind Hungary.
“In the context of the current economic scenario, particularly, fiscal excesses in the Euro zone, it’s important that there is fiscal consolidation to achieve price stability and financial stability,” said Shubhada Rao, chief economist at YES Bank. “Fiscal dominance of monetary policy over a long period can compromise macroeconomic stability.”
Fiscal expansion may be necessary to achieve financial stability in times of crisis like in 2008, but could wreck the system if debt is high. “There are circumstances under which fiscal expansion in support of financial stability can threaten sovereign debt sustainability,” said Subbarao.
“That will happen if the sovereign is already highly indebted, and the recovery is not quick enough. Governments will then see their revenues falling, will need to borrow to make up the fiscal gap, and can potentially get trapped in a self-reinforcing adverse fiscal feedback loop.”
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