Former Reserve Bank of India (RBI) Governor D Subbarao has 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 showed that the government has exhausted 107 percent of the budgeted deficit gap of 3.4 percent with five months to go for the fiscal end.
Subbarao has pointed out that a higher fiscal deficit fuels inflation, crowds out private investment and impairs Balance of Payments (BoP) by resulting in current account deficit-related issues. He also stated that 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. He added that both the quantum of fiscal deficit and quality of fiscal deficit are a cause for concern.
Former RBI Governor further 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.” He also pointed out that the nominal GDP growth has fallen to as low as 6.1 percent, 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.
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