New Delhi:
Freebies are desirable but there has got to be restraint as they are an enormous fiscal burden, former Reserve Bank of India (RBI) governor Subba Rao Duvvuri told NDTV ahead of the first full Union Budget of the National Democratic Alliance’s (NDA) third consecutive term.
Subba Rao, who served as RBI chief for five years from 2008 to 2013, cautioned that freebies do not necessarily result in any political gain, and both the central and state governments are to blame for the freebies situation.
“One message they [government] can send with respect to fiscal responsibility is about freebies. We have seen freebies; we saw them during the Maharashtra elections. We have seen them today ahead of the Delhi elections. And I know it’s difficult to apportion blame,” Subba Rao said.
“I think the central government, state governments, and all political parties are to blame. I don’t believe that it [freebies] is paying any political dividends because if every party is offering freebies, no party gets. On the other hand, it’s an enormous fiscal burden,” the former RBI chief said.
He said in a poor country like India, transfer payments are essential and even desirable in difficult circumstances.
“But there has got to be restraint because these subsidies or freebies are being financed out of debt, and a debt has to repay itself. One message the central government can send to mean business is to say that we are going to initiate – what if the Finance Minister announces in the Budget – that I’m going to initiate a dialogue with all political parties, all governments adopting a code of conduct on freebies,” said Subba Rao, who went in as RBI chief just a week before the global financial crisis began in September 2008.
“I believe it [dialogue] will be in the collective good of the economy,” he added.
On Economic Growth
Subba Rao said opinion is divided on why economic growth slowed down to 5.4 per cent. One view is that it is cyclical, and government expenditure slowed because of elections, he said, adding now with elections behind, government expenditure and growth will pick up.
“As against that, there is another view which is that the slowdown is structural, that the rapid growth we saw over the last three-four years is because of a rebound from the COVID dip,” he said.
Can Taxes Be Reduced?
Subba Rao said cutting taxes is not appropriate for the situation India is at the moment, despite urban consumption slowing and goods and services tax (GST) collections rising.
“My short answer is no,” the former RBI chief said to a question on whether Finance Minister Nirmala Sitharaman can reduce taxes.
“But here’s a considerate reply. If you can afford it, that’s a way of doing it. Because what you’re asking or what you’re saying is standard supply side economics. Cut taxes, that’ll spur production, that’ll spur consumption, and we’ll get on to our growth cycle.
“But that is not appropriate for our situation now because it’ll at best be a temporary palliative. It cannot improve consumption on a long term basis. What we need to do is give people long term income, not just short term palliatives. Besides, I don’t think the government can afford to cut taxes, given the fiscal constraints,” Mr Subba Rao said.
After leaving RBI, Subba Rao was a Distinguished Visiting Fellow at the National University of Singapore (2014-18) and at the University of Pennsylvania (2019-20). Most recently, he was a Senior Fellow at Yale Jackson School of Global Affairs (2023).