Fiscal Deficit May Rise To 14%- Former RBI Governor: Centre’s Financial Stimulus Is Insufficient

Former RBI governor D Subbarao said in a web discussion on Sunday that the overall fiscal deficit of the Centre and states may rise up to 13-14 percent in the current financial year. In an interview, Kaushik Basu, former chief economist of the World Bank, said that India needs an economic stimulus on a large scale, as the country is facing a severe economic slowdown due to the coronavirus epidemic. To save the country’s economy from the Coronavirus crisis, a large relief package is constantly being demanded. 

Fiscal deficit expected to rise 13-14%:

Duvvuri Subbarao said that the combined fiscal deficit of the Centre and states could reach 14 percent of GDP in the current financial year. Subbarao said the financial incentives announced by the central government on March 26 for the lockdown implemented to prevent the spread of coronavirus are ‘insufficient’ and it looks even lesser now. As the central government has announced a financial package equivalent to 0.8 percent of gross domestic product (GDP).

The interest rate may increase due to more borrowing by the government:

Speaking at a webinar titled “The Challenge of the Corona Crisis – Economic Dimensions”, organized by the city-based Manthan Foundation, Subbarao said the Centre needs to cap its borrowings as the open-ended borrowings will have negative consequences such as pushing interest rates high. The interest rates can rise, as the government has increased the target of loans for the current financial year from 7.8 lakh crores to 12 lakh crores. 

The government may have to print notes to reduce losses:

Kaushik Basu said that the government may have to ask the Reserve Bank to print new notes to meet its deficit. Basu said that inequality of income in India is much higher than it was before and now the coronavirus epidemic will increase it further. He said that every economy in the world is going through a crisis and the coronavirus has left no part of the world and economy untouched. We need financial incentives on a large scale. India has an FRBM law for fiscal management. Its purpose is to ensure that the government does not spend excessively.

Need to increase spending on people’s livelihood:

On improving the economic condition, Subbarao said that the government needs to increase its spending on three fronts. First of all, there is a need to increase spending on people’s livelihood. He said that after the lockdown was implemented, the situation of many families had deteriorated significantly. In such a situation, these families need help, because their savings have been exhausted. He said that the first challenge for the government’s expenditure is to reach out to maximum families. More support should be given to these families.

The government will have to increase its expenditures in any case to improve the economic condition:

Subbarao said that if the government has to spend more, and for spending more it will also have to take more loans. He disagreed with the idea that this is an extraordinary crisis, so the government cannot bind itself to the debt limit. The combined fiscal deficit of the central and state governments is estimated to be 6.5 percent in the current financial year. Subbarao said the loss in revenue due to lockdown and thereafter loss in market value based GDP would lead to a fiscal deficit of 10 percent of GDP.

The world must learn to live with coronavirus:

He said that the domestic financial sector is already under pressure. Financial pressure will increase further until the COVID-19 crisis ends. However, the fall in crude oil prices and bumper agricultural yield will provide some relief. Subbarao said that the world needs to learn to live with the coronavirus for some time. Both the Centre and the state are trying to overcome this epidemic. He said that due to weak medical infrastructure and the high density of the population the situation in India is much serious and dangerous. 

Centre should allow states to spend more:

Basu said that the Centre should allow states to spend more while respecting the federal structure of the country. He also said that all this should be done for a short period because inflation will rise due to the crisis for a long time. The rating agency Moody’s Investor Service on Friday said that India’s growth rate could come down to ‘zero’ in FY 2020-21. Moody’s have also indicated on the increasing fiscal deficit, high government debt, weak social and physical infrastructure, and a critical condition of the financial sector.

Economy and society should be managed at a micro-level:

Currently, Basu, an economics professor at Cornell University, said that in times of crisis, governments should manage the economy and society at a micro level. We need professionals from outside the government with talented bureaucrats to establish a synergy between the epidemic and the economic crisis. Basu said a more monitored economy could have its consequences.

A long lockdown can cause many years of financial troubles:

Basu said that it will not be so easy for India to get out of lockdown, He said that if we look at the death rate due to coronavirus infection, then this figures in India is less than in European countries. Germany is one of the better-managed countries in the world but the deaths due to the coronavirus epidemic are 80 times more than India. We should not make the mistake of keeping ourselves locked in fear because this can led to an economic depression  and the country would not be able to recover this for many years.