The Reserve Bank of India Governor, Dr Y.V. Reddy, said on Monday that contractual savings need better tax treatment to give a boost to the development of corporate debt market in the country. He felt that the current tax regime was more equity investments friendly, going by the way dividends and capital gains were taxed.

Inaugurating a refresher course on public economics for university teachers in the South Asian region, organised by the National Institute of Public Finance and Policy, Dr Reddy also said that the country needed to look at development of pension and insurance funds for government debt and corporate debt market on the supply side.

On monetary management, Dr Reddy noted that high fiscal deficit (accounting for 50 per cent of the household savings), dominant Government ownership of the banking system (70 per cent is Government controlled) and administered interest rates were complicating monetary management. There are issues of conflict of interest arising from the dominant ownership of Government in public sector banks that may need to be addressed.

He also said that actual reduction on statutory liquidity ratio would depend on the fiscal situation even though there is no statutory minimum of 25 per cent now. The idea is how to go down, as we should, as we go along, he said. Dr Reddy also said that Cash Reserve Ratio reduction depended on liquidity conditions.

The RBI Governor also said that the Centres fiscal situation was improving, but noted that several underlying fiscal pressures were not fully evident in the numbers. At the State level too, the fiscal position has improved significantly, he said.

India is looking to bring down its fiscal deficit to 2.5 per cent of its gross domestic product in the current fiscal, from 3.1 per cent in the last fiscal.

On the market stabilisation scheme, Dr Reddy noted that it was not a settled debate yet as to who should bear the fiscal cost under the scheme. Currently, the Centre and not the central bank is bearing the fiscal cost.