MUMBAI: The Financial Stability Report (FSR) has warned that excessive government borrowing could result in crowding out of private investment. The government is expected to borrow more in order to stimulate the economy even as revenues fall short of projections.
The report has looked at business interruption insurance being extended to include pandemic risks, either directly or via reinsurance, where fiscal capacity acts as a limiting factor. If businesses are able to recover losses due to the lockdown from insurance, it will lower the need for the government to provide relief directly or through banks.
The FSR has said that sovereign debt is growing to levels that have “intensified concerns relating to sustainability with crowding out fears in respect of the private sector in terms of both volume of financing and costs thereof”.
What this means is that the oversized government borrowing would not only take away funds from corporates but would also push up overall interest rates in the system.
While the central bank normally does not ease rates when government borrowing rises sharply, this year it has made an exception because of the pandemic by keeping liquidity easy, enabling corporates to borrow more.
“While easier financial conditions do support growth prospects in the short run, the longer-term impact in terms of encouraging leverage and inflating asset prices may give rise to financial stability concerns,” said the report.