Speaking over a video link at the Times Network's India Economic Conclave here, he said a higher fiscal deficit fuels inflation, crowds out private investment and impairs Balance of Payments (BoP) by resulting in current account deficit-related issues.
Subbarao said 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".
"Both the quantum of fiscal deficit and quality of fiscal deficit are a cause for concern," Subbarao, under whose watch RBI used to regularly warn the government on fiscal deficit, said.
He also 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.
Subbarao pointed out that the nominal GDP growth has fallen to as low as 6.1 per cent, 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.
The bureaucrat-turned-central banker also said that adequate attention needs to be given to the quality of the fiscal deficit, maintaining that it is not bad for the governments to borrow to invest in capital expenditure.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.