FM sees early signs of recovery, says deficit won’t be monetised

FM sees early signs of recovery, says deficit won’t be monetised
The Financial Express, July 15, 2009, Page 1

fe Bureau, New Delhi

The government will push through its disinvestment programme, cut the fiscal deficit to 5.5% by next year and create the necessary policy environment—including reforms—in the financial sector, finance minister Pranab Mukherjee said on Tuesday.

“We all know that the global financial crisis did not affect Indian banks or financial market directly. But it did expose a number of weaknesses in our financial system,” was the minister’s candid acknowledgement in Parliament.

The minister used his reply to the debate on the general Budget to outline the government’s reform agenda. He touched on all topics that domestic and foreign investors as well as stock markets had missed in his Budget speech on July 6, saying there were early signs of economic recovery.

“There is sometimes a perception among financial and other investors that in the recent past, government has been slow on policy reforms. I intend to look into all issues, legislative or otherwise, necessary to carry forward the reforms to their logical end,” Mukherjee said.

Elaborating on the UPA government’s disinvestment policy, he said, “The President’s address had clearly spelt out the policy of the government on disinvestments--the government would develop people-ownership of public undertakings while ensuring that government equity does not fall below 51% and the government retains management control of the company. I reiterated this in my Budget speech.”

The finance ministry has already begun discussions with other ministries and departments to identify PSUs where the government can divest a portion of its stake or issue fresh equity to meet their fund requirements. “The details are being worked out and would be announced in due course,” Mukherjee said, adding that this would “enable the PSUs to benefit from techno-managerial efficiencies and become more competitive”.

Stake sales in four PSUs are already on the cards, Mukherjee told the Rajya Sabha earlier in the day. The Centre would divest its holding in NHPC Ltd and Oil India Ltd through IPOs this fiscal, and has also approved disinvestment of two loss-making companies-- Tyre Corporation of India Ltd and Central Inland Water Transport Corporation Ltd--he told the Upper House.

Mukherjee did not say if disinvestment proceeds would be used to bridge the fiscal deficit. But he assured Parliament that the fiscal deficit would come down from 6.8% of GDP in 2009-10 to 5.5% in 2010-11 and further to 4% by 2011-12. “Much of our recent success in raising our growth trajectory has come about due to adherence to FRBM targets, both at the central and state levels. Fiscal prudence is critical for maintaining stable balance of payments, moderate interest rates and steady flow of external capital for corporate investment,” he said.

On financial sector reforms, Mukherjee said the UPA would “create the necessary policy” to address weaknesses. He said this was necessary to counter the volatile nature of FII equity and private capital that created a negative impact on investment decisions.

The minister also clarified the Centre’s borrowing programme for 2009-10, estimated at Rs 3,97,957 crore, saying it has no intention of monetising its debt because the borrowing was being supported by RBI through its open market operations. He also dispelled fears that higher government borrowings would crowd out the private sector and increase the cost of borrowings.