 "Duvvuri Subbarao")
In the memoir he wrote recently, Just a Mercenary? Notes from My Life and Career, former Reserve Bank of India (RBI) governor and finance secretary Duvvuri Subbarao was candid that the answer to “Was I a mercenary or was I more?” will perhaps elude him forever. Equally candid was the former Indian Administrative Service (IAS) officer as he interacted with Business Standard journalists. No answers remained elusive as he put forth his views on fiscal concerns, freebies, farm loan waivers, 2G scam and inflation targeting. Edited excerpts:
Your book mentions that Finance Minister Nirmala Sitharaman adopted fiscal expansionary policies in the Budget for 2021-22. You argue that these kinds of policies might work during a downturn in the advanced world, but not in emerging-market economies like India. Why do you say so?
I have said this in the context of the euro zone sovereign debt crisis, which came shortly after the global financial crisis. The initial IMF (International Monetary Fund) orthodoxy was fiscal austerity. What it imposed in East Asia it said in Europe too, and it found that negative impact on the economy was much greater than positive. It found that fiscal multipliers were actually much higher than expected. The IMF then, very uncharacteristically, conceded that it made a mistake. So, austerity might not have been advisable, as Nobel laureate Joseph Stiglitz had been saying for long. Our finance minister of the time took it that fiscal contraction was inadvisable. As far as the current finance minister is concerned, she went for a relaxed fiscal consolidation and provided a longer timeframe – fiscal deficit at 4.5 per cent in 2025-26. But to her credit, she has been delivering on that.
But does the high level of sovereign debt worry you?
Yes, it does. I think the current level of debt of the central and state governments together is high. It went up to as high as 90 per cent during Covid. It has come down a little now. But the Fiscal Responsibility and Budgetary Management (FRBM) committee said an acceptable and affordable debt-to-gross domestic product (GDP) ratio for India is 60 per cent – 40 per cent for the Centre and 20 per cent for states. Some people argue that we should not be fixated on 60 per cent. I agree with that. What is important is revenue. Also, interest payments are the fastest-growing expenditure item in Budgets. A study by former IMF chief economist Olivier Blanchard showed that sovereign debt was sustainable if economic growth rate was above the interest rate and the government concerned was running a primary surplus. In India’s case, our growth rate has been above interest rate on debt, but we do not have primary surplus.
You said emerging-market economies like India should not be nonchalant about grades given by rating agencies. However, the finance ministry recently came out with a report which found faults with these agencies’ methodology in rating emerging-market economies.
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You can always challenge credit rating agencies. You can ask them to review their assessment based on objective data. But, ultimately, you cannot pressure them beyond a point. They give a rating. And that rating matters. There is no country in the world, even the US or China, which can say it is indifferent to the ratings by these agencies. Ratings matter, especially for emerging-market economies. US economist Paul Krugman said Australia had the same infirmities in the late 1990s, same pressures as those faced by East Asian countries. But the markets allowed Australia to make a smooth adjustment because it was a rich country. Markets did not allow emerging-market economies like Thailand and Malaysia to make a smooth adjustment, so those economies had a crisis. We depend on markets, and on foreign investments. So, ratings by credit rating agencies matter to us, more than what we tend to acknowledge.
Coming to the present times, do you think the RBI is being overly cautious in proposing five per cent provisioning for infrastructure project financing, a suggestion which has not gone down well with the markets?
I am slightly uncomfortable commenting on this because we, sitting outside the central bank, do not have as much information matrix as the RBI. The advantage that regulators have is that they have knowledge across institutions, and a broad understanding, which individual institutions and individual interest groups do not have. It is quite possible that individual institutions would agitate because they are looking for profitability and their balance sheets, but the RBI is looking at the larger economy. The RBI may be looking at the larger picture and concluding it to be a cost worth paying to avert future problems. The non-performing asset (NPA) problems that we saw for a decade were also a consequence of some inappropriate standards.
One of the key factors that contributed to the rise of the National Democratic Alliance (NDA) government was the movement against corruption. In your book you cite an instance of you explaining the rationale of 2G licensing policies. Given that, do you think senior bureaucrats in key ministries are really wary of taking decisions, fearing they might lead to revenue loss and they might be prosecuted later by the Central Bureau of Investigation (CBI) or the Enforcement Directorate (ED)?
I cannot really comment on the concerns and anxieties of the present bureaucracy. But I can relate to them. I was in the IAS for 35 years. Increasingly, civil servants feel if they take a decision which they believe to be in the best public interest, it might come for them after they have moved on. On the other hand, there is no penalty for not taking decisions. So, why not play safe, which is a basic human tendency. But that is not in the best interests of the country.
There were two issues in the 2G scam. One was the procedure for licensing and the second was the price at which it must be given. Unfortunately, these two issues got conflated. And, in the context of the policy paralysis during the United Progressive Alliance (UPA) rule, it became a much bigger scandal than it should have been. I was not involved in the licensing issue, which is the subject matter of the criminal case against the then telecom minister A Raja and others. But I was involved in determining the price. When the issue of pricing came to the finance ministry, the suggestion of the department of telecommunications in 2007-08 was that we would sell spectrum at the price discovered through an auction in 2001. I took the view that it would be inappropriate because in the intervening period there had been a realisation around the world, including in India, that spectrum was a scarce commodity. So, part of the scarcity premium must go to the government.
You have written about presumptive loss that the Comptroller and Auditor General (CAG) calculated on 2G spectrum. Do you think the political history would have been very different, had the CAG not stuck to the presumptive loss?
Counterfactuals are always difficult in real life. First the Commonwealth issue came up, then the coal scam and then the Supreme Court stopped mining in Goa. So, I would conjecture that probably the political developments would have been different.
You mentioned freebies and Prime Minister Narendra Modi's remark about “revdi culture”. There is a thin line between freebies and social welfare measures. How will you place, say, the Centre’s free foodgrain scheme and the Delhi government’s Mohalla Clinics, or measures to improve government schools, in either of the two categories?
I thought the Prime Minister’s comment on revdi culture was very welcome. But I am disappointed that the Prime Minister did not follow up on that. And all political parties, including his Bharatiya Janata Party (BJP), have been guilty of this – some more than the others. The BJP went for a farm loan waiver in Uttar Pradesh in 2017. Modi’s guarantees and the Congress’s “nyay” path are now competing with each other in national politics, while both the ruling and Opposition parties are competing with each other promising freebies in my home state of Andhra Pradesh. Nobody is asking where the money for this will come from. So, I am uncomfortable with this. There is very little public awareness whether this is sustainable. Many say that in a country like ours, where millions struggle for livelihood every day, some safety nets by the government are necessary. But there must be some restraint on the quality of expenditure financed by borrowing. We should put a restraint on how much a government can spend on freebies and let political parties then compete on what is the best way of spending that money.
You spoke about demerits of farm loans in your book. But you also quoted a Nabard study saying that only four of the 21 political parties which announced farm loan waivers since 1987, when the Devi Lal government in Haryana announced it, lost elections. In that context, why will any political party refrain from announcing a loan waiver?
You must have read the Logic of Collective Action: Public Goods and the Theory of Groups by Mancur Olson. We always think that farm loan waivers are a problem between the government and the farmers and does not affect us. But it does affect us. Even if I am living down south in Andhra Pradesh or in Kerala, or in the Northeast in Manipur, it does affect me even though developments around farm loan waivers are taking place in North India. Farmers as an interest group can get together. But the larger public, which is affected, cannot be organised. Organising larger public is a big task; it never happens.
What are your thoughts on the RBI’s inflation targeting? Does it make communication easier and take away pressure from the government itself?
I had reservations about inflation targeting. But those reservations have slowly dissolved for a number of reasons. My biggest reservation was that our inflation is triggered by supply shocks. In that situation, monetary policy is not the most effective instrument. So, even if you have an inflation target, the central bank might not bring down inflation through the best of its monetary policy. It will affect the credibility of the central bank. But over time, we figured that inflation is becoming more supply shock-resistant, so monetary policy will increasingly be a more effective instrument.
How difficult is it to conduct monetary policy when the government does not stick to fiscal consolidation targets?
It is difficult because credibility is very important for any public policy, particularly for the central bank in the task of inflation management. Inflation is a function of inflation expectations. And if fiscal profligacy is stoking inflation, that is a problem for monetary policy.
The RBI gives its own projections for economic growth and inflation rates. But it does not give projections for the policy rate. Why is it so?
We don't have a dot plot like the US Federal Reserve. But since the time I was in the Reserve Bank, we have progressed quite a lot. There is a monetary policy committee (MPC), there are MPC minutes, there is forward guidance, and the media also reads between the lines of the MPC statements. So, we will, hopefully, give dot plots sometime.
FDI clearances are being held up at different department levels. Do you think we were better off with the Foreign Investment Promotion Board (FIPB)? Should we go back to a system like that?
From just the administrative point of view, the FIPB is good, as all ministers come together, and you take a decision in the present time. Otherwise, you have to write to different ministries, and it takes time. This is not to say that ministries deliberately delay the proposals.
