Maintaining that the mixed fiscal deficit of the Centre and states may go up to 13% to 14% this fiscal, On Sunday former RBI Governor Duvvuri Subbarao introduce the economic stimulus announced by the Centre on March 26 on account of lockdown to include the spread of COVID-19, is “not sufficient”.
Speaking at a webinar titled “The Challenge of the Corona Crisis – Economic Dimensions”, organized by the city-based Manthan Foundation, Subbarao stated the Centre must cap its borrowing because as the open-ended borrowings will have adverse penalties comparable to pushing rates of interest excessive.
Subbarao said that “The government announced the fiscal support package of 0.8% of the GDP. Is that sufficient? No, it is not sufficient when it was announced on March 26. It seems even lesser now. The government wants to spend more. And spend extra on three things. The first item of expenditure is to enlarge and expand the livelihood support.”
He also said that “since March 24, when the lockdown was imposed countrywide, millions of households have become vulnerable and therefore livelihood support has to be extended to many more families as most of their savings have dried up. And the government needs to cover more households, give more per household, and give for much longer per household. That is the first challenge to government expenditure.”
The Finance Ministry unveiled a Rs 1.70 lakh crore financial package deal on March 26 involving free meals grain and cooking gasoline for the poor for the next 3 months.
Subbarao said that “it’s fairly clear that the federal government must spend extra as it’s an ethical and political crucial. In order to spend extra, the federal government must borrow extra.”
He stated that “he disagreed with the view that since that is a rare and weird disaster, subsequently the federal government should not tie itself by setting up borrowing limits.”
He opined that “The combined fiscal deficit of the centre and state governments for this fiscal year as budgeted is 6.5% of the GDP. Because of the loss of revenue on account of the lockdown, because of the decline in the nominal GDP on account of the lockdown, the fiscal deficit will go beyond 10% of the GDP. The additional borrowings will now take the fiscal deficit to the range of 13% to 14% of the GDP. That is exceedingly high and will have all the negative consequences of the high fiscal deficit.”
According to him, the home finance sector, which is beneath deep stress, will be beneath “deeper stress” by the time the COVID-19 crisis ends, although he sees some silver linings within the scenario such as plummeting crude costs and bumper agri-yield.
Stressing that the world has to live with corona-virus for a while, Subbarao mentioned both centre and states are working in tandem to contain the pandemic.
Subbarao said that “The dilemma (of lives and livelihood) is the sharpest for India, given our weak medical infrastructure and high population density. Any gaps in prevention can imply a loss of millions of lives. Another side, a stringent lockdown to control the pandemic can imply millions of livelihoods. This is a very tough balancing act. Particularly for India, as our economic system is in bad form.”