Raghuram Rajan endorses NYAY but sceptical of funding, says no space for Rs 7 lakh crore subsidy

India does not have the fiscal leeway to handle Rs 7 lakh crore of subsidy burden next fiscal, former RBI Governor Raghuram Rajan told India Today TV. The former RBI Governor is in Delhi to launch his new book 'The Third Pillar'.

Congress President Rahul Gandhi's surprise announcement of the 'NYAY' scheme providing Rs 72,000 as direct benefit transfer to each of India's poorest 5 crore households will amount to an additional annual expenditure of Rs 3.6 lakh crore, provided the Congress comes to power and implements the promise.

A day after Gandhi's announcement, Congress spokesperson Randeep Surjewala clarified that NYAY does not intend to subsume any of the existing schemes. Instead, it will be a benefit Congress Party will provide over and above the existing schemes in operation today. This has come as a huge surprise as most economists expected the NYAY scheme to absorb some of the existing subsidies to make it viable.

Given that Budget 2019-20 had already planned a subsidy outlay of Rs 3.34 lakh crore for existing schemes, NYAY's potential outlay of Rs 3.6 lakh crore will balloon subsidy burden to Rs 6.94 lakh crore.

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"At this point if you ask me, given the way we are, can we add Rs 7 lakh crore, the answer is no. That is really what any sensible government, post election, will have to think about. How do I... make whatever (parties) promised, happen, but within the context of what space is available, and how do I actually improve delivery," Rajan told Rajdeep Sardesai and Rajeev Dubey of India Today TV.

Rajan said India's Budget for 2019-20 cannot support a subsidy burden of approximately Rs 7 lakh crore. The NYAY scheme, for instance, alone would amount to nearly 13 per cent of India's Budget expenditure of Rs 27.84 lakh crore. It would also be 1.92 per cent of India's GDP.

Rajan, however, recommended subsuming existing schemes to make the NYAY fiscally affordable - an idea Congress has already discounted. "What will have to be looked at by whichever government comes into power is what the fiscal space looks like and, of course, as of now, the fiscal space is tight. So, in some sense, you cannot add scheme or each side's schemes on top of each other's and then, of course, there is overlap. Because some of the poor farmers who are helped by the NDA schemes are those very who are being targeted by UPA scheme," Rajan said.

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Meanwhile, the NYAY scheme has also drawn criticism from Niti Aayog vice chairman Rajiv Kumar, who described the proposal as "irresponsible" for fiscal discipline, saying "I hope its time never comes".

While making the announcement Gandhi had claimed the Congress Party had consulted some of the world's leading economists before making the announcement. Former finance minister P Chidambaram also tweeted: "We have consulted economists, this is doable, and we will adhere to fiscal discipline. Under NYAY, the poorest 20 per cent of families will get a uniform amount of Rs 72,000 a year."

Congress Party, however, has neither announced the full outlay of the scheme nor clarified where it will find the resources to fund such a huge scheme.

Congress Spokesperson Salman Soz, however, told India Today TV that NYAY scheme will cost 1.5 per cent of the GDP. Interestingly, even India's current subsidy outlay for 2019-20 of Rs 3.34 lakh crore is higher at 1.57 per cent of GDP. NYAY is already nearly Rs 26,000 crore bigger in outlay.

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Rajan quotes former New York Governor Mario Cuomo's famous quote that reflects on the ideal model of governance in a pluralistic society, "You campaign in poetry, you govern in prose. Post-election whatever government comes in will have to figure out what it actually does, given the space...". The 'poetry' referring to lofty promises; 'prose' implying compromises in implementing the promises.