Fiscal profligacy can lead to critical situation: Former RBI Guv Subbarao

Former Reserve Bank Governor D Subbarao on Tuesday asked the government to ensure fiscal deficit is within the targeted number and warned that "fiscal profligacy" can lead to crisis situations.

The comments weeks after official data indicated that the government has exhausted 107 per cent of the budgeted deficit gap of 3.4 per cent with five months to go for the fiscal end.

"We got to be careful about managing our fiscal deficit and keep it within the fiscal deficit targets," Subbarao said.

Speaking over a video link at the Times Network's India Economic Conclave here, he said a higher fiscal deficit fuels inflation, crowds out private investment and impairs Balance of Payments (BoP) by resulting in current account deficit-related issues.

Subbarao said BoP-related issues, including the 1991 financial crisis and also the taper tantrums of 2013 during his governorship of the RBI can be traced back to "fiscal profligacy".

"Both the quantum of fiscal deficit and quality of fiscal deficit are a cause for concern," Subbarao, under whose watch RBI used to regularly warn the government on fiscal deficit, said.

He also said the "true picture" of the fiscal deficit may not be visible to all of us because of aspects like off-balance sheet borrowings by quasi-sovereign entities and also due to payment deferrals.

Subbarao pointed out that the nominal GDP growth has fallen to as low as 6.1 per cent, and explained that it would have a direct impact on the revenue collections both at the Centre as well as the state level, which can impact the fiscal deficit situation.

The bureaucrat-turned-central banker also said that adequate attention needs to be given to the quality of the fiscal deficit, maintaining that it is not bad for the governments to borrow to invest in capital expenditure.