Even as the Government bowed to populist demand and electoral pressures and hiked the subsidised lPG cylinder cap from nine to 12 bottles per family on Thursday, RBI Governor Raghuram Rajan described the increase in quota as “misdirected subsidies”, and said that the move will end up benefitting people who can afford to pay market rates.
“...What one should be careful about is expanding the misdirected subsidies in the system. We have to be very careful because we need to spend on very important things we are not spending on,” he told Karan Thapar on his programme Devil’s Advocate on CNN-IBN.
When asked whether hike in lPG quota was a “misdirected subsidy”, Rajan nodded in affirmation.
“I believe there is a certain amount of population that can benefit from subsidised lPG cylinders. But beyond certain point you are reaching people who can well afford to pay for it. Now whose pocket is it coming from. Its coming from the pockets of people who are getting subsidised,” he said.
The Union Cabinet on Thursday raised the quota of subsidised lPG to 12 cylinders from nine at present, and will cost Rs5,000 crore in additional subsidy annually.
“(In raising the quota) you are going from 87 per cent to 97 per cent (of lPG consumers)... If you are subsidising 97 per cent of the population, you are basically subsidising people who are paying for it themselves,” Rajan said.
Asked if the Government will be able to meet its fiscal deficit target of 4.8 per cent of the GDP, he said heavy expenditure cuts and other initiatives will help the Government reach very near the target.
As regards growth, he said it would be slightly below 5 per cent in the current fiscal but would improve in the coming years as steps taken by the Government will come into play.
“For the year as a whole, it will be between 4.5 and 5 per cent,” Rajan said. The economic growth rate slipped to decade’s low of 5 per cent in 2012-13. It has recorded a growth of 4.6 per cent in the first half of the current fiscal.
RBI Governor also said it is “wishful thinking” and the notion that the central bank is standing in the way of economic expansion is “nonsense”.
“Somehow there is a sense among some bureaucrats and industrialists that you cut the interest rate and magically get growth. I think at this point it is a wishful thinking.... The notion that RBI is standing in the way of growth is nonsense,” he said.
Rajan, who in the third quarter monetary policy on last Tuesday raised the key interest rate by 0.25 per cent to 8 per cent to check inflation, said the best way to promote growth is keeping inflation low.
“Once inflation comes down, then in circumstances when growth is very weak you will have room to cut the interest rate sharply so as to create a condition for growth without worrying about inflation,” Rajan said.