In the 11th document for a five-year plan, it was projected that in order to meet the proposed investment needs by year 2008-09, around 50% debt receipts worth Rs. 63,207 crores would be mobilized as domestic banks’ credit. However, the figures of revised budget estimates for 2008-09 states that market loans (amounting Rs. 261,972 Crores) are more than 80% of total debt receipt by the GoI.
The increased flow of subsidized bank loans to GoI for financing fiscal deficit is creating problems for economic growth of the economy because banks find it difficult to increase the supply of cheaper credit to the private sector at a time when they need it to minimize their output cost and combat recession.
It is observed that due to a fall in international demand, the availability of equity finance or cheaper credit sources have affected the business confidence. The equity financial sources are drying up after a reversal of capital flows from stock markets due to the global meltdown. External Commercial Borrowings (ECBs) and Export Credits have also declined. This has all affected the growth rate for industries.
Besides evaluating a fall in the annual growth rate of Gross Domestic Product (GDP) from 9.0% in 2007-08 to 6.7% in 2008-09, it would also be important to analyze the growth trend for different industries during last year. The Manufacturing industry employing a majority of non-agricultural workers observed the deepest decline where its annual growth rate fell to 2.4% in 2008-09 compared to 8.2% in 2007-08. Similarly the annual growth rate of agriculture, forestry and fishing fell to 1.6% in 2008-09 against 4.9% a year ago.
However, the annual growth rate for Community, Social and personal services has remarkably increased to 13.1% in 2008-09 as compared to 6.8% in 2007-08 reflecting the impact of increased expenditures by the Government through financing schemes like NREGS. It is important to notice that such expenditures have not only increased the fiscal deficit beyond the estimated budget for 2009-10, but only 9% of the Indian workforce engaged in Community, Social, and Personal services expected to be benefited through it. Thus the excess flow of subsidized bank credits to GoI for financing the budget deficit is ultimately restraining the economic growth.