The Hindu Business Line : Expert cautions on internal debt

Dr Narendra Jadhav (left), Principal Adviser, Dept of Economic Analysis & Policy, RBI, with Lord Meghnad Desai, Director, Centre for the Study of Global Governance, London School of Economics, at a press meet in Mumbai on Monday. -- Paul Noronha

Mumbai , Sept. 20

INDIA'S escalating foreign exchange reserves are leading to a huge internal debt problem, according to renowned economist Lord Meghnad Desai.

"The fact is that India's foreign exchange reserves are large and the people have forgotten that internal debt will pose a huge problem", said Lord Desai, Director of Centre for the Study of Global Governance, London School of Economics.

In an informal interaction with newspersons here today, he highlighted the need for accelerating foreign direct investment.

"If people dislike FDI, then they should have more complaints against the portfolio investment scheme, as the money in the latter is just flowing into equities. If anyone thinks that India can have accelerated investment without FDI, they have to show that the country can generate surplus savings as funds to finance development from within", he said.

Equity is always a better option to finance development as against borrowings as equity is not tied to repayment. Borrowings are a risky proposition as there are no assets being created against them, he observed.

On the issue of rural employment, he said, the only way to employ the rural poor is by having a rapid manufacturing growth in low-tech, export-oriented products.

According to Mr Desai, the Indian tax structure needs to be revisited for more emphasis on direct taxes as against indirect taxes. " At present, the situation is such that the middle class and the poor are taking on most of the tax burden by paying indirect taxes to support the privileged class", he said.

Highlighting a few points that need to be immediately addressed in the economy, Mr Desai said there was an urgent need to sell all public sector enterprises, remove all restrictions on FDI, drastically reduce the illiteracy rates by attracting foreign capital on education, if necessary.