New Delhi: Former Reserve Bank Governor C Rangarajan has said the massive borrowing programme of the government would have implications for the corporate world in the next fiscal and might lead to "crowding out" of capital from the market.
The government has proposed to borrow Rs 4 lakh crore during the current fiscal.
Rangarajan, who was delivering a lecture on "International financial crisis and its impact on India' to Members of Parliament here yesterday, also said that interest rates would go up by the end of the year.
"Interest rates will harden by the end of the year," he said.
Rangarajan, now a member of the Rajya Sabha, said "as long as the private demand is not picking up, the government will be able to borrow at the same rate."
He said the economy was likely to show signs of definite improvement in the second half of current fiscal which might lead to a pick-up in demand for credit by the industry.
He expressed confidence that the country would clock an economic growth of 6.5 to 6.7 percent in 2009-10 which could go up to 7-8 percent during 2010-11. "We would not be able to go back to 9 percent GDP growth rate, unless the world economy recovers."
Rangarajan said the government's fiscal deficit at 6.8 percent of the GDP, proposed in the current budget, was not sustainable and efforts would have to be made to bring it down to 3 percent in the next three years.
Total deficit of the centre, states and off-budget items were likely to be as high as 12 percent of the GDP, he added.
Rangarajan said the government should step up expenditure to fight the impact of the global economic crisis on exports and capital flows.
However, "it is not the level of government expenditure, but the composition that is important," he said, adding that additional domestic demand would have to be created to help the sectors hit hard by the slowdown.
Rangarajan said the government must ensure the extra spending was on sectors capable of replacing the declining global demand for Indian goods.
He said the priority was to stimulate sectors such as textiles and auto components that would improve local demand.
Bureau Report
First Published: Friday, August 07, 2009, 16:42