Third, the continuing large budget deficits, even if they do not spill over into macroeconomic instability in the short run, will require higher taxes in the long term, to cover the heavy burden of internal debt. High tax rates will place India at a significant disadvantage compared to other fast-growing countries. Expenditure reform in India is critical in view of the fact that India's government dis-saving and overall level of government spending remain high. There is probably little room to cut capital expenditures, in view of the fact that they have already been squeezed to a mere 2.4 per cent of GDP in 1999-2000. In the future, it should be the private sector rather than the government meeting most of the enormous infrastructure needs of a growing economy.
Governmental action is needed in reducing expenditure under four major heads of current spending.
With respect to internal public debt, there is one important mechanism that could substantially ameliorate the fiscal situation. Privatization of public enterprises could raise significant funds as a per cent of GDP, which could be used to buy down the public debt. Not only would the stock of debt itself be reduced, but also the interest costs of servicing the debt would surely decline as the debt stock itself is brought under control. The cash value of these enterprises vastly exceeds the present value of profit flows that the state now collects on these assets. For this reason, sales of the enterprises to private sector buyers, if used to buy down the public debt, would yield annual saving in interest costs that far exceed the government revenues claimed by virtue of state ownership of the assets.