New Delhi: Concerned over the rising public debt, a finance ministry paper has suggested that government could aim at a fiscal deficit of 4.3 percent of GDP during the next financial year beginning April 1, 2012.
"Unless this issue (rising public debt) is addressed, it may lead to hardening of yields and may also necessitate utilisation of future revenues more for interest payment," the Ministry's Status Paper on Government Debt released on Tuesday said.
The government has hiked the market borrowing target for the current fiscal to Rs 4.35 lakh crore, from the budgeted Rs 3.43 lakh crore.
Though increased borrowings of the Central Government during 2011-12 have been conducted without disrupting the market, this level of increase in volume of dated securities is a matter of concern, it added.
The Paper further said that with the existing Statutory Liquidity Ratio (SLR), the portion of deposits which the banks are required to park in government securities, at 24 percent, the government could comfortably keep fiscal deficit at 4.3 percent.
However, in case the Reserve Bank decides to hike the SLR to 27 percent, a 4.9 percent fiscal deficit could be feasible.
"...the central government would be able to raise debt of order of 4.9 percent of GDP in 2012-13 and in the range of 4.2 percent to 4 percent of GDP (in the next 10 years) through dated securities," the Paper added.
Referring to the steps taken by the government to mitigate the impact of global economic crisis on domestic economy, the Paper said that Centre should try to create fiscal space in good times as it would help in recapturing the gains lost during bad years.
India, it said, has positive attributes with regards to sovereign debt as compared to both developed and emerging market economies and "is less vulnerable to risky parameters seen either in developed and other EMEs."
Because of the high borrowings, experts estimate that the government's fiscal deficit during the current financial year may exceed the Budget estimate of 4.6 percent by about one percentage point.

The Paper further said the government should aim at a fiscal deficit of 4-4.2 percent during the 10 year period.     

It also underlined the need of further reducing the cost of borrowing for the government.
"The most critical factor impacting Central Government's market borrowing is the level of fiscal deficit from year to year. Lower fiscal deficit of both Centre and States would ease the pressure on market liquidity.
"However, if the combined fiscal deficit remains high, there would be need to consider other sources of deficit financing, so that the private sector credit needs do not get crowded out," it added.
Pointing out that the proportion of external debt is declining, the Paper said, "government would have the option of exploring other sources of external debt to maintain a reasonable mix of domestic and external debt in its portfolio."
The paper further said that in order to better manage public debt, the government will come out with a legislation to set up of a Debt Management Office (DMO) in the Finance Ministry in the forthcoming Budget session beginning March 12.
"One of the key public debt management reforms under implementation is the establishment of a Debt Management Office in the Ministry of Finance," it said.