Use this 'act of God' to push fiscal reforms: ex-RBI chief D Subbarao advises FM Sitharaman

Duvvuri Subbarao, former governor of the Reserve Bank of India (RBI), has advised Union Finance Minister Nirmala Sitharaman to use the pandemic as an opportunity to execute fiscal reforms, and not just "waste this crisis".

In an opinion article published on the Mint, Subbarao highlighted potential challenges for the Indian economy, saying that the hurdles faced by Sitharaman are unique, something that her predecessors had not encountered during their tenure.Subbarao mentioned that previously, finance ministers were advised to cut spending. However, in Sitharaman's case, the advice has always been to "spend more", still leading to an ironic result of a slumped economy.

The former RBI governor mentions two options to consider for the current Finance Minister - she could either boost consumption, or support the production processes. Subbarao, though, believes that her "bias should be towards the latter".

Job Creation

While praising the FM, Subbarao mentioned her role in expanding the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) scheme.

"Among the smart things you've done this year is to expand the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) scheme; that was wise, as MNREGA is self-selective and reaches the neediest. Do continue to support MNREGA," wrote Subbarao.

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"To weather this hardship, the poor have run through their savings. If you give them money now, they will use it to rebuild their savings rather than spend it, defeating the purpose of a stimulus," Subbarao added, stressing on the imperativeness to support the poor by job creation, rather than handing them money.

Consumption-base advantage

India's potentially huge consumption base has been highlighted by the former finance secretary as an advantage.

To elevate consumption, he suggested spurring production so as to offer regular jobs and incomes to the poorer population of the country.

"You assure the poor a regular income, and they'll spend, which will spur production, which, in turn, will lead to more jobs and more consumption, and we can get on to a virtuous cycle," Subbarao suggested.

Aggressive disinvestmentSubbarao also advised Nirmala Sitharaman regarding the practice of aggressive disinvestment in order to raise revenue.

"Sadly, every budget promises massive disinvestment and every budget disappoints. In selling public assets, you owe it to the country to be prudent, but too much prudence can lock you into indecision," he said.

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"You will need to borrow more. One option for raising debt is issuing COVID bonds directly in the market. That has several merits. Appropriately designed, it will provide an attractive option to savers who are being short-changed by low interest rates in the face of above-range inflation," Subbarao added, saying that this tactic is necessary, albeit insufficient.

Biggest challenge

According to Subbarao, the biggest challenge faced by Sitharaman is to convince interlocutors that the "borrow and spend '' programme is fiscally sustainable. In addition, Sitharaman should make an effort to resurrect revenue deficit, which he opines to have "gone off the radar".

"You should resurrect it, if only for the purpose of virtue signalling, and commit to eliminating it over a five-year period. I am suggesting this rather than reducing the fiscal deficit because this is a more robust path to fiscal sustainability," he said.

Speaking about the need to increase tax intake and cut recurring expenditure, in order to get zero revenue deficit, he added that "it won't be wise to get into the nitty-gritty of expenditure compression. Just do the arithmetic and ask every department of the central government to cut recurring expenditure by a formula-determined percentage every year for the next five years."

As a blanket statement to get the said measures into action and expedite the recovery process, Subbarao advised Sitharaman to not waste this crisis, rather use the "act of God" as an opportunity to execute otherwise politically-difficult fiscal reforms.

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