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Former RBI Governors take opposite stands on ways to revive economy; spend or not to spend?

Samrat Sharma
former RBI governor D Subbarao, D Subbarao on economy, modi govt, RBI, finance ministry, RBI reserves, fiscal stimulus, slowdown

While the Indian economy is in the grips of slowdown and even a slew of measures taken by the government do not seem to be of much help, two former RBI governors have suggested two contrasting approaches for economic recovery. C Rangarajan has suggested that the government increase the expenditure to steer the Indian economy out of the ongoing slowdown. On the other hand, Duvvuri Subbarao has proposed restricting the fiscal stimulus packages as the government does not have the fiscal space. Addressing Finance Minister Nirmala Sitharaman in an open letter published in The Indian Express, Subbarao said that everyone, including the FM, knows that the actual fiscal deficit is higher than what is shown in the budget and it is completely irrational to not admit the true fiscal deficit.

The government should not succumb to the temptation that a lot of people are suggesting about pouring money into the economy, Subbarao said, adding that instead, the centre must refrain from launching a fiscal stimulus. Despite the revenue shortfall, the government resorted to massive window-dressing of expenditures, including withholding payments to public enterprises, to show that the fiscal deficit target has been met, he added. He highlighted that the tax receipts during the past two years have been short of budget estimates.

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By contrast, Rangarajan earlier this week suggested that the Central government asked states to spend more. The centre must bring state governments onboard to raise capital expenditure relative to their respective gross state domestic product, he said. 

Stating the sharp weakening of demand in different sectors such as automobiles and housing, and the significant fall in the savings and investment rate, Rangarajan suggested the centre to bring onboard state governments for increasing their capital expenditure relative to their respective gross state domestic products, while Subbarao said that the government should worry about the growing revenue deficit as that has gone off the radar which is not a good thing.

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Subbarao mentioned it unsustainable to borrow to meet current expenditures and underlined that any further fiscal stimulus will increase the damage far more than that in the current scenario. He added that the RBI surplus will fill the fiscal hole to some extent this year but the next year, it will be a big problem again. Meanwhile, the government has launched many packages such as recapitalisation of banks with Rs 70,000 crores, additional liquidity support of Rs 30,000 crores to the housing finance companies, etc, to stimulate the demand and investment in the economy.