Subbarao Urges Code of Conduct on Freebies

Mumbai, Feb 21 (PTI) Former Reserve Bank Governor D Subbarao on Friday urged Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman to take the lead and collaborate with states to arrive at a code of conduct on freebies.

Accusing every political party, state government and also the Centre to be guilty of indulging in "competitive populism", the career bureaucrat-turned-central banker said that governments have to resort to borrowings to deliver the freebies and made it clear that the same cannot continue.

He also pointed out that three years ago, Modi spoke against freebies or 'revdis', but just two weeks after the speech, his BJP was the "leader" in Uttar Pradesh offering freebies.

"I think the FM, the PM must say that we are going to have a dialogue with state governments and we need a code of conduct, just as we have had centre-state collaboration on GST (Goods and Services Tax), FRBM (Fiscal Responsibility and Budget Management Act) to have code of conduct on freebies," Subbarao said, speaking at an NSE event here.

Acknowledging that 900 million people are vulnerable because of poverty and another 300 million live at subsistence levels, Subbarao said there is an "obligation" on the governments to provide support, but was quick to add that there ought to be "limits" on it.

Governments resort to borrowings to finance the freebies, which are nothing but expenditure on consumption, he said, drawing distinction between this borrowing and that for an educational loan.

He said the future earnings of the student once he starts his professional career will pay for the educational loan, whereas in the case of governments, the money has been used just for consumption sans creating any asset.

Replying to those who claim that debt levels are sustainable in India and point to the debt-to-GDP ratio of about 80 per cent which is low compared to other countries, Subbarao said we are not "safe" and people making such claims are "wrong".

"As long as we have a primary deficit, our debt is heavy. Interest payments are the single largest component of expenditure of the centre and all the state governments in the country. They're also the fastest-growing component.

"This is a consequence of too much debt. So, anybody who says that our debt is within safe limits, I think is wrong. Debt is a big problem for us, we need to bring the debt down and we need to do expenditure restructuring," Subbarao advised.

He spoke in support of the inflation targeting framework, but seemed to call out for a tweak in headline inflation computation to keep up with the times.