Government gets warning on populist programmes

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New Delhi, March 8: The Reserve Bank of India gave enough indications that the nation cannot afford any more populist schemes.

RBI Governor Duvvuri Subbarao said today that "we must recognize that the government does not have the fiscal capacity to continue entitlements and welfare programmes at this level." Subbarao was speaking at meeting of the bankers in New Delhi on Friday.

Subbarao's warning should be seen in the background of increasing subsidy bill that is telling on the budget deficit. In fact, Finance Minister P Chidambaram today presented supplementary demands and sought Parliament's approval to spend an additional Rs 49,715.54 crore mainly to meet the outgo on fuel, fertiliser and food subsidies in the current financial year.

The concern of the RBI can be seen in the series of action since early this week. It has taken serious note of the CAG report on agricultural debt waiver and debt relief scheme of 2008, and local area banks and has asked for complete details on farm loans from all scheduled commercial banks.

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Prime Minister Manmohan Singh's government had announced a debt waiver for farmers worth around Rs.52,000 crore across the country in 2008, a move analysts say helped the United Progressive Alliance (UPA) government win the 2009 general elections.

But the Comptroller and Auditor General (CAG), in its report tabled in parliament on Tuesday on the "Implementation of Agricultural Debt Waiver and Debt Relief Scheme, 2008", said there were irregularities in at least one in five cases.

India is on track to trim its fiscal deficit to 5.2 percent of GDP in the current fiscal year, a narrowing that several months ago seemed unlikely, and hopes to cut that further to 4.8 percent of GDP in the fiscal year that starts in April.

But the subsidies on various schemes are keeping the deficit at an unhealthy level and fuelling inflation.

Subbarao said today that many of the supply-driven causes of inflation can be corrected by appropriate policies.
"Accepting a new normal for inflation not only has no theoretical or empirical support, but entails the moral hazard of policy inaction in dealing with supply constraints," Subbarao said.

However, the RBI seems to have accepted the political compulsion and may go along with the government.

"The 'new normal' argument ... is that it will be politically difficult to reverse these entitlement programmes, they are here to stay, and that India should accept wage-price pressures as a structural feature and adjust its inflation goal accordingly," Subbarao said.

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