Mumbai, Jan. 11: Reserve Bank of India governor Urjit Patel today cautioned the Modi government against imprudent announcements of steep interest rate subventions and credit guarantees, which is being read as an advisory from the central bank ahead of the Union budget on February 1 amid speculation that finance minister Arun Jaitley could use the opportunity to farm out sops to select voter groups ahead of the elections in states such as Uttar Pradesh and Punjab next month.

In his December 30 speech, after the closure of the 50-day window for the deposit of demonetised notes, Modi had announced a slew of interest rate subventions on housing loans to the rural poor and the urban middle class, a 60-day moratorium on crop loans, and a guaranteed interest payout of 8 per cent on deposits by senior citizens, drawing flak from his political opponents for what was termed a 'mini-budget'.

"Steep interest rate subventions and large credit guarantees also impede optimal allocation of financial resources and increase moral hazard," Patel said while addressing the Vibrant Gujarat Global Summit at Gandhinagar.

Moral hazard is a concept in economics that describes a situation where a person or an entity has an incentive to take greater risks because someone else will bear the cost if things turn out badly.

Modi had announced his intention to double the credit guarantee given to micro, small and medium enterprises to Rs 2 crore. Banks provide the credit and the government guarantees its return. The guarantee scheme was also extended to loans given by non-banking finance companies (NBFCs).

"Guarantees increase government's contingent liabilities, and add to risk premia for its own borrowing," Patel said even as he stressed the need for the Centre to stick to the path of fiscal consolidation.

The outstanding debt liabilities of the Centre and the states hovered at 68.1 per cent of GDP in 2014-15.

Jaitley has promised to cap fiscal deficit this year at 3.5 per cent of GDP and gradually pare it to 3 per cent. But in his budget speech last year, Jaitley signalled the need for a debate on the rigid targets set under the Fiscal Responsibility and Budget Management Act.

"There is now a school of thought which believes that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the government to deal with dynamic situations," the finance minister had said.

"Our government deficit (that is borrowing by the Centre and states combined) is, according to IMF data, among the highest in the group of G-20 countries. In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade. We have to take cognisance of these comparisons and facts as we go forward to make progress. Specifically, this will help us to better manage risks for ourselves, and thereby mitigate financial volatility," the RBI governor said.

"Borrowing even more and pre-empting resources from future generations by governments cannot be a short cut to long-lasting higher growth. Instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the Indian growth front. Investment in public transport, specifically railways and Urban MRTS can lead to reduced costs and productivity gains as also help us to lower our oil import bill," Patel said.

Patel said while India had achieved macro-stability along several key areas over the last few years, there are two key transitions underway in the two largest economies.

In the US, there has been a realignment of fiscal, monetary and trade policies, which has already led to considerable financial volatility in the global economy. China has been rebalancing its growth drivers from investment and exports to domestic consumption of goods and services.

"One of these transitions is welcome, the other not so. For us, in India, good policy housekeeping should be the cornerstone. It is easy and quick to fritter away gains regarding macroeconomic stability," he added.

Patel also said that the notified target of 4 per cent inflation set for the central bank has to be "secured on a durable basis given the progress already made''.

He added that low and stable inflation was an essential prerequisite for a meaningful interest rate structure or regime whereby decisions by savers and investors help to achieve maximal allocative efficiency in an economy whose investment rate has to increase for better growth outcome.

"Concomitantly, we have to continue to press ahead for a more fluid, smooth transmission of monetary policy, as also enhance the formulaic linkage between changes in policy rates and other rates, including administered ones," he emphasised.