Budget must focus on structural reforms to promote job creation: Former RBI Governor Subbarao
This is the first full Budget of the NDA-III government and it must use its enormous political capital to implement politically difficult structural reforms, says the former RBI Governor
New Delhi: The NDA 3.0 government must use its enormous political capital to implement ‘politically difficult’ structural reforms in the upcoming Budget to promote growth and job creation, former RBI Governor D Subbarao said on Thursday.
The Union Budget for 2025-26, to be presented by Finance Minister Nirmala Sitharaman on February 1, comes amid global economic uncertainties and moderating domestic growth.
“This is the first full Budget of the NDA-III government and it must use its enormous political capital to implement politically difficult structural reforms,” Subbarao told PTI in an interview.
Further, he said that the primary objective of the Budget is to put the economy on a sustainable high-growth trajectory. “But mere growth will not do. We need to ensure that the benefits of growth are widely shared which is to say that we need to focus on reducing inequality,” Subbarao added.
According to him, the huge consumption base of the bottom half of India’s population is its biggest growth driver. “The only sustainable way to raise consumption of the bottom half is through job creation,” Subbarao said, adding that if they earn more, they will spend more which will in turn spur more production, more jobs and higher growth.
The former RBI Governor noted that if the US-China trade war is accentuated, potential investors will be looking for alternate destinations, and “we must get our act together to make investing in India a happy experience for them.” He emphasised the need to focus on the MSME sector and labour-intensive exports to boost job creation.
Weak Rupee
Responding to a question on the weakening of the rupee, Subbarao said that he believes there is a strong case for the domestic currency to find its level consistent with economic fundamentals. “The rupee is overvalued today in real terms which is hurting our export competitiveness,” he said, adding that allowing the rupee to weaken will help exports and thereby help growth.
For sure, Subbarao said it may be inflationary but the coefficients suggest that the net effect on balance will be positive. “Moreover Trump’s threatened policies will likely keep the dollar strong over an extended period, and trying to hold up the rupee in such circumstances will be self-defeating,” he noted.
According to him, the RBI’s stated policy is that it does not target a specific exchange rate but intervenes in the market to check ‘excess’ volatility. “There is a strong case for the RBI to walk the talk,” Subbarao emphasised. The rupee touched an all-time closing low of 86.70 on January 13.
On Freebies
In response to a question about the resurgence of giveaways, also known as freebies, he said the culture of freebies is on the rise, as both the central and State governments, as well as all political parties, are equally culpable. “It is not clear if this competitive populism pays off in terms of votes since all political parties are in the game, but it casts a huge fiscal burden especially because these so-called freebies are being funded by borrowings,” Subbarao said.
“Some time ago, the prime minister decried the revdi culture but had not followed up on that,” Subbarao said, adding that given the pressure of vote bank politics, no single political party will voluntarily adopt restraint.
He said the Centre needs to take the initiative. “To bring some discipline into this, it will be great if the finance minister takes the initiative and announces in the budget that the government will initiate a dialogue with State governments and all political parties to agree on a code of conduct on freebies,” Subbarao suggested.
Excluding Food Inflation
On suggestions made in the Economic Survey 2023-24 for excluding food inflation while setting benchmark interest rates, he said he thinks that will be inappropriate for the Indian conditions.
“First, food is a large component of the Indian consumption basket. Food prices are what people experience in the market. It is food prices that shape inflation expectations. If the RBI’s Monetary Policy Committee ignores that and targets some esoteric variable like core inflation, the MPC and the RBI risk losing credulity,” he observed.
According to Subbarao, if inflation persists for a long enough time, no matter whether it is driven by demand pressures or supply shocks, it will unhinge inflation expectations and inflation will get generalised. “Our inflation management is likely to be wrongfooted if food inflation is knocked out of the inflation targeting framework,” he said.
Chief Economic Advisor V Anantha Nageswaran in the Economic Survey 2023-24 had pitched for excluding food inflation from the rate-setting calls, saying that the monetary policy has no bearing on the prices of food items, which are dictated by supply-side pressures.
