Former RBI governor Raghuram Rajan | PTI
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New Delhi: India should desist from cutting personal income tax rates for the middle-class for now and should use its scarce fiscal resources to support the rural poor through schemes such as the MGNREGA, former Reserve Bank of India governor Raghuram Rajan said.

In a detailed commentary on the Indian economy published in the latest issue of India Today, Rajan said there are signs of deep malaise in the Indian economy with significant slowdown in growth and little fiscal space to the government to spend more.

The repeated government allusions to a $5-trillion-economy by 2024, which would necessitate steady real growth of at least 8-9 per cent per year starting now, seem increasingly unrealistic, Rajan added.

“Given the scarce resources, India should not jump immediately to a permanent tax cut for the urban middle-class to boost consumer demand. Instead, while growth-boosting reforms are being put in place, scarce fiscal resources are perhaps best targeted toward supporting the rural poor — for instance, by bolstering the NREGA programme and by funding rural road construction,” he said.

India’s economic growth slowed to a 6-year low of 4.5 per cent in the July-September quarter. With inflation rising, fears of stagflation — a fall in aggregate demand accompanied by rising inflation — have resurfaced.

Rajan said the starting point to address the economic slowdown will be for the Modi government to acknowledge the problem.

“The starting point has to be to recognise the magnitude of the problem, to not brand every internal or external critic as politically-motivated, and to stop believing that the problem is temporary and that suppressing bad news and inconvenient surveys will make it go away,” said Rajan.

“Furthermore, even if some of the problems are legacies, the government, after five-and-a-half years in power, needs to resolve them. A massive new reform thrust is needed, accompanied by a change in how the administration governs.”


Also read: Is RBI right in not cutting interest rate even as it downgrades growth forecast to 5%?


‘Decentralisation must for economic growth’

The former RBI governor pointed out that decentralisation is critical for economic growth. He said that the Modi government should empower its own ministers and regain the trust of states by amending the terms of reference of the 15th finance commission that seems to push for a lower devolution to the states.

Many Indian states have opposed the terms of reference of the commission, pointing out that the central government is looking to bring down the share of state governments in central taxes from the existing 42%.

The Modi government’s decision to expand the commission’s terms of reference to find resources for defence spending has also left the states worried. They feel that this will bring down the total divisible pool of taxes.

Rajan said the Modi government has shown “surprising timidity” when it comes to unfinished reforms on the business environment, land acquisition, labour and the role of the public sector.

“Initially, it appeared to entertain the idea of reforms in these areas. However, these reforms were largely put on the backburner as soon as the Opposition alleged the government was in the pockets of business,” he said.

He termed the NDA government under Prime Minister Atal Behari Vajpayee as the last steady reformer. He pointed out how the first term of the UPA government did not have the internal consensus to pass growth-enhancing reforms and the second term was paralysed by scams and opposition non-cooperation.

What Rajan suggests

The former chief economic adviser in the union finance ministry also favoured a more transparent accounting of the government’s liabilities.

“The government cannot endlessly take on contingent liabilities without recognising they will have to be paid for — recent proposals to boost bank deposit insurance to Rs 5 lakh per individual, while popular, will mean an enormous liability. The costs will be seen when weak cooperative banks, that will gain more deposits as insurance limits are boosted, fail,” he said.

“Instead, deposit insurance should be raised only in parallel with improvements in the governance and regulation of the cooperative sector. The broader point is that India needs a full accounting of its contingent liabilities, including on entitlements like food security and Ayushman Bharat, if it is to give a convincing picture of its fiscal health.”

Rajan stressed the need for cleaning up sectors, including non-banking finance companies and big distressed developers. Reviving stalled infrastructure projects, addressing the power sector woes and preserving the competitiveness of the telecom sector should be the priorities of the government.

He also stressed the need for land, labour and agricultural reforms and a predictable tax and regulatory regime.

“India has a powerful government today, with a charismatic popular prime minister. It can hope that growth will revive in due course and it almost surely will. But it will be far less growth than what India owes its youth. Hopefully, the government will read the writing on the economic wall.”


Also read: Global economy’s in a better place after US Fed rate cuts, trade deal hope: Raghuram Rajan


 

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16 Comments Share Your Views

16 COMMENTS

  1. Reading the comments , the political slant seems to be unmistakeable and thus missing on rajans’s last exhortation that every suggestion is not politically motivated . I agree with rajan whole heartedly in the sense that in all kinds of tragedies it is the poor and downtrodden who bear the brunt of the damage .While cutting middle class income to boost income is not a bad move , but when you consider that it is choice between selecting either of the two , rural income should be boosted . Which most governments are doing any way by loan waivers and other measures .But some immediate income support needs to be provided to the distressed .

  2. If and when 3% of the population. pays tax in India, there is no scope for its growth. The poor do not/can not pay and taxing the rich inhiibits the rich and growth. Guess who else is left???? Inconvenient truth for the so called middle class.

  3. When the Govt can afford Corporate tax cuts, income tax concessions hardly matters for fiscal prudence given the size of collections. The salaried class is the most compliant tax payer who is always penalised for his obedience.
    There are still scores of so called unregulated small traders who are thriving fleecing the customers with high prices as well as the exchequer with tax evasion. The GST regime has not solved this issue and the govt does not have machinery to tap them for boosting revenues.
    Income tax cut can not only spur spending and boost economy but also boost sentiment and confidence.

  4. ONLY LEFT OUT ALTERNATIVE IS , VOLUNTARY DISCLOSURE SCHEME OF THE BLACK MONEY. IMMUNITY CAN BE GIVEN TO THOSE WHO INVEST ON INDUSTRIAL SECTORS IN THE MARKED BACKWARD AREA OF INDIA WITH A MINIMUM EMPLOYMENT OPPORTUNITY OF 1000 WORK FORCES. GOVERNMENT WILL NOT QUESTION SOURCES AND MONEY SHALL BE DEPOSITED IN SPECIAL INDUSTRIAL INVESTMENT FUND, WITH A PROJECT BEING ADOPTED BY INVESTMENT ON AN EXISTING INDUSTRY, PPP OR NEW START UPS. MINIMUM ONE CRORES TO 1000 CRORES. LAND PROCURMENT SHALL BE DONE BY GOVERNMENT AND REASSIGNED WITH GOOD COMPESATION. ROAD AND COMMUNICATION SHALL BE ASSURED

  5. Our whole economy is based or depends on middle class and giving no attention to them is the main reason of slow down because it is service or business class they are the link person between products and its distribution.

  6. I am Rajan Raghuram Rajan, i do what I do,spell diaster and derail the economy, further,cutting income tax for middle class is the right move in the right direction,so govt should go ahead and not listen to any Tom Dick and rajan

  7. He is good at giving Gyan from outside..he was at the helm of affairs and fled fornreasons known to him..I wonder how can one be so gyani but doing nothing when given the levers

  8. When the government spends tax dollars to invest in projects with the hope that those projects would generate income and profits, it should compensate taxpayers. One way to accomplish that objective is to register a company with stocks and give a certain number of stocks to the taxpayers in proportion to the taxes paid by them. This first step makes taxpayers into stock owners. As stockholders, they get the right to vote for the directors of the business and gain indirect control over such businesses. If the price of the stock increases, they gain. If they need cash, they can sell the stock at the prevailing price for their stocks on the stock market. It is also possible that since they have stock in a for-profit business, they may decide to save less in other savings means (stocks, mutual funds, real property, gold, and cash). They may then spend cash, which can boost the current growth of the economy. Such a method makes government less of a business owner (with taxpayer funds) and converts people (taxpayers) into stockholders.

  9. Dear Raghu,
    I am your big fan , but your idea of not giving tax cut to middle class did not go down well with me. Its the middle class who take all the brunt of all economic policies, then why should they be rewarded for their sacrifices.
    Regards
    Milan Banerjer

  10. This gentleman lives in the U.S.A. Who is he to comment on Indian personal Income
    Tax ? As if he is the modern day Oracle. Come on media, grow up.

  11. Only stupid economist would suggest supporting rural poor through schemes such as the MGNREGA. This guy’s stupidity is unbounded. He can be understood from the very fact that he had been a total failure when he had the opportunity to serve poor. He either indirectly supported or closed his eyes for Congress lead corruption. He allowed tax payers money to be looted by corrupt Industrialists and the NPAs so created are still hurting the Indian economy. This shameless guy continue to lecture India even though nobody in Indian government pay any attention to the noise created by him.

  12. The issue is simple: whether India takes a Keynesian approach to managing its economy or unleashes large scale deregulation, it needs to be consistent. If former, the Centre should also work in a collaborative manner with states on plugging the leakage and bringing down corruption. If latter, there needs to be a much greater emphasis on corporate governance. However, before that happens, there must be a competent and empowered team worthy of handling the finance portfolio. The government, if it is truly committed to ‘achche din’ should also bring transparency when sharing data with the public.

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