March 19, 2006	Sunday	Safar 18, 1427

MUMBAI, March 18: India’s central bank on Saturday cautioned federal and state governments not to resort to accounts jugglery to meet targets set under a law on fiscal responsibility.

Under its Fiscal Responsibility and Budget Management (FRBM) act, India needs to lower its federal fiscal deficit by 0.3 percentage points every year and wipe out its revenue deficit by 2009. Eighteen out of 29 Indian states have also adopted their own fiscal responsibility laws.

In the context of undertaking fiscal consolidation within the FRBM framework, it is imperative that the governments do not take recourse to ‘creative accounting’ in order to fulfil the targets set under the fiscal rules, the central bank said in its Currency and Finance Report for 2004-05.

The communist-backed coalition government said a year ago it was not going to attempt to lower its federal fiscal deficit for the current financial year which ends on March 31. It expects the deficit to end the year at 4.1 per cent of gross domestic product.

But the 2006/07 budget presented last month aims to narrow the shortfall to 3.8 per cent in the year beginning April 1 as the government seeks to take advantage of a buoyant economy which would net it more revenues.

India’s combined state and federal fiscal deficit of about 7.7 per cent is among the highest in the world and a key impediment, analysts say, to double-digit growth needed to help 260 million poor Indians to a better standard of living.

Under the fiscal responsibility law, India’s central bank will stop underwriting federal government issues in the primary market from next month, a move which analysts say could lead to higher borrowing costs.

While the withdrawal of the Reserve Bank will impart greater functional autonomy to monetary policy, the Reserve Bank will have to keep a vigil on interest rate uncertainties and create alternate financing mechanism for ensuring successful completion of the government’s market borrowing programme, the report said.

The federal government finances more than 70 per cent of its fiscal deficit through market borrowings and is due to raise a gross 1.53 trillion rupees ($34.3 billion) in 2006/07, 10 per cent more than what was budgeted this year.

Rising interest rates have already led to higher borrowing costs for the government and analysts say in a growing economy, projected to expand at 8.1 per cent in the year to March 31, banks are likely to lend increasingly to corporates.

As a result analysts see government bond yields rising further as investors seek lower prices to park their funds in government debt.

The central bank said the weighted average yield of dated securities issued up to Feb. 28 during 2005/06 rose to 7.30 per cent from 6.11 per cent during the corresponding period of the previous year.—Reuters