OPINION

by Madhu Nainan

BOMBAY, Jan 31 (AFP)

India�s ballooning fiscal deficit is threatening to ensnare the country in a vicious debt trap unless radical measures are taken, analysts here say.

�We are already in a crisis,� said analyst Subhra Subramaniam at foreign brokerage Warburg Dillon Read.

�The government should acknowledge it and take urgent steps, or else we will get into a debt trap,� Subramaniam said, adding that 42 percent of current state revenue was already going on interest payments for domestic debt.

�Close to 65 percent of the gross domestic product (GDP) is government debt. The situation is very worrying.�

Finance Minister Yashwant Sinha has already voiced serious concern over rising public debt and warned his budget � to be unveiled February 27 � will contain �no soft options.�

Subramaniam argued the current crisis had been brewing for years, and accused the government of failing to use funds raised from state sell-offs to retire its debt.

The government has already admitted it will not be able to contain the fiscal deficit at the targetted 5.6 percent of gross domestic product for the current fiscal year ending March.

�Government expenditure has to be slashed. The kind of subsidies we have are massive and at the same time ridiculous. They need to be cut, realigned and prioritised,� Subramaniam said.

Sinha announced heavy cuts last week in state subsidies on foodgrains and fertiliser, saying they would save 50 billion rupees (1.2 billion dollars).

But many anlaysts feel the government has to go much further.

�The government should privatise, and not just sell off part stakes in state-owned ventures,� Subramaniam said, warning of a looming recession if steps were not taken.

�There should be strategic sales and the government should get out of managing business.�

Venture capitalist Pradip Shah estimated India�s combined domestic and foreign public debt amounted to about 90 percent of the GDP.

�In the United States, domestic public debt is now 60 percent of the GDP and is worrying the Americans. India�s economy does not have the resilience of the US economy, so we are in a worse situation,� he said.

�We use capital very inefficiently. There are a lot of leakages which must be plugged. Provident fund interest rates should be brought down, so that the public interest burden can be shrunk.�

Shah said India could pull itself out of the situation if it changed strategies, using the existing public asset base more productively and selling off state assets.

Analyst Devesh Kumar, at foreign brokerage ABN AMRO Equities, said the rising public debt meant the government had less money for developmental expenditure.

The government borrowed 760 billion rupees from the market in the fiscal year to March 1998 and the figure is expected to rise to 890 billion rupees in the year to March 1999.

�Rising government borrowings also mean the private sector is crowded out of the market and rising interest rates,� he added.

Kumar said New Delhi should push for growth and also deepen the tax net to get in more money.

�Less than one million people out of 900 million people pay income tax, but consumer spending on colour television sets, cars, airconditioners, houses is rising,� he said.

Argentine �dollarization� fails to generate enthusiasm

by Marc Braibant

WASHINGTON, Jan 22 (AFP)

Argentina�s move to more closely link its economy to the United States through �dollarization� has generated mixed reviews in the US capital.

A US Treasury Department spokesman said no formal talks were taking place, though the Department was aware of Argentina�s interest.

Charles Dallara, director of the Washington-based Institute for International Finance (IIF), which includes some 300 banks and financial institutions, called the idea �intriguing.�

The Argentine peso has been pegged at parity to the dollar since 1991 and the notion of monetary union under discussion in Argentina was �an attempt to carry the currency board further,� he said.

It was �an interesting direction of thought,� he said that �reflects a great deal of frustration after the spill over effect� in Latin America of financial instability from Asia.

IIF vice chairman William Cline, openly sceptical on the matter, questioned �how much more Argentina would get by adopting the dollar� as its currency. The International Monetary Fund (IMF) has also reacted with caution.

�(It�s) an interesting idea that we are studying carefully,� an IMF official said Friday, declining to give any further details.

The idea was floated by Argentine President Carlos Menem last week, when he recommended that a feasibility study on the �dollarization� of the Argentine economy should be done.

He also raised the possibility that all of the Americas, but particularly Argentina�s Mercosur trading partners � Brazil, Paraguay and Uruguay � should adopt the US currency.

The IIF�s Cline, however, was unconvinced by the argument for a common currency throughout the Americas.

He said it was �difficult to envisage a monetary integration like the euro� in a region of such diverse economies.

The move to the greenback has also been discussed in Canada, which is even more closely tied to the US economy, although no concrete plans have been announced.

In Brazil, where the government floated its currency Friday to stop capital flight from the country, the real has lost some 30 percent of its value against the dollar in less than two weeks.

The Brazilian devaluation threatens to flood Argentine markets with cheap imports, increasing the pressure on the Argentine economy.

In adopting the dollar, Argentina would lose what limited room for maneuver it has in terms of monetary policy. Buenos Aires already conceded much of its autonomy when it pegged the Argentine peso to the dollar, backing the peso with dollar reserves.

But under the new proposal it would also lose control of interest rates, which would be set by the US Federal Reserve.

However the scheme is seen as one method of stabilizing interest rates, and forestalling a run on the currency which could exhaust the country�s dollar reserves.

Talks between the two countries on the issue are under way, said Argentine�s central bank governor Pedro Pou. A treaty �in which the dollar would be the chief currency� is being worked out and could take effect in �two or three years,� he said Thursday.

He said US Deputy Treasury Secretary Larry Summers had taken part in talks on the project along with the IMF and the Inter-American Development Bank (IDB).