"Over the years the revenue deficit has risen so much so that even current account deficit is financed by borrowings which itself is indebtedness," Khusro told PTI in an exclusive interview.

Stating that monetised, fiscal and other deficits were on the rise, he said these had "huge inflationary potential as well as potential for raising interest rates and depressing growth". The Commission would address the issue of growing debt of both the Centre and the states and make recommendations for slowing down and later eliminating the indebtedness, he said. The Commission, for the first time, has been asked to suggest ways for restructuring public finance for restoring budgetary balance and maintain macro economic stability, besides looking into indebtedness of the states.

He said external debt was too highand if present trends continued the situation could become `alarming'.

"External debt can have a negative impact on the external value of the rupee and balance of payments," Khusro said. Fiscal and monetised deficits were another indication of rising internal debt as some of these had to be financed by domestic borrowings, the chairman said.

The commission would suggest measures to tackle this problem through macro-economic policies and micro-economic management, he said.

Government borrowings were projected to increase by over30 per cent in 1998-99 to Rs. 55,931 crore while the outgo on interests alone would be a massive Rs 75,00 defence expenditure."

Advocating for a soft-money policy, he stressed on improving tax collection through better compliance mechanism.