Change Comes To India's Financial Management

Change Comes To India’s Financial Management

The announced departure of Dr. Raghuram Rajan, in about 75 days, as governor of the RBI, has not disturbed the bourses, or the value of the rupee, as was feared in some quarters.

But, having got the impact of  Rajan’s departure wrong, these naysayers have retreated to predicting ‘medium term’ consequences, so as to  save face from their dire predictions not coming to pass immediately.  

Rajan’s sudden announcement during the weekend past, that he would not seek a second term as governor, did put the spotlight on his legacy in a manner slightly different, from the way he pitched it himself. 

It has, in fact, raised some uncomfortable questions. Rajan, who has been in the finance ministry, in senior advisory capacities, since 2007, before commencing his three-year stint as governor of the central bank, apparently made no suggestions to prevent the build-up of the humungous bad debts  during the UPA government. At least nothing that is out in the public domain.

But, if there is an abiding feature of his tenure as governor of the RBI, it is his highlighting of bad debt, discovering the extent of the NPA in PSU bank books, and the promotion of moves to ‘clean it up’, meaning write-offs, or spin-offs to ‘bad banks’, set up for the purpose.

These moves would, obviously, get various UPA era borrowers off the hook, scott-free, while the public exchequer would absorb lakhs of crores of rupees in losses! For a crusading and highly vocal fiscal conservative like Dr. Rajan, this appears to be a curious caper. But, no matter, the attention has now shifted to speculation on his probable successor.

The market, opening this week, is not only unperturbed by Rajan’s departure, it is buoyant , with the fears of Brexit vote on the 23^rd receding, as I write this; and the prospect of  a good monsoon upon us, after a couple of consecutive years of drought.

But since a concern or two, referred to as the ‘wall of worry’ in bull  markets, always lurks in the shadows, the next speculation is, will the US raise interest rates in July?

Perhaps it will, though the US Federal Reserve is being very cautious, but India can reliably look forward to interest rate cuts, and other spurs to growth, once the new central bank governor gets settled in.

The good monsoon should see an economic revival in rural India, and an easing of food inflation, that has, at present begun to creep up.

The monsoon parliamentary session should also see the passage of the much delayed GST Bill, on which a near consensus has emerged. Though the Congress and AIADMK are not yet on board, they might come around too by the time parliament is convened.

All this has come not a moment too soon, because if the BJP voter feels let down by this government, it is in the one area of economic benefit, that, like Godot, has simply failed to appear. Where is the more money, more jobs, more options, an air of can-do optimism?

The GDP has risen, but without touching the lives of people, echoing the Vajpayee era’s disastrous slogan of ‘India Shining’. The NDA thought it was enough that the economy was growing at 9% then, without however making any tangible difference to anybody.

It so enthused the BJP internally, that elections were actually preponed, resulting in the government being thrown out in 2004. It is as if this government, in its multiple preoccupations, and many commendable initiatives, is repeating the mistakes of the first, and only, NDA government before this one.

Still, it is not too late to fix this. The prime minister enjoys enormous respect and goodwill, the public has been patient, and the economy has already been brought back from the brink. Nevertheless, something drastic has to be done immediately to produce visible results for ordinary people who elected Modi with high hopes.

The GDP will, at the present pace, touch 8% soon, notwithstanding some scepticism on how it is calculated. It has grown, principally based on the government’s infrastructure spending, and on a much smaller oil import bill.  The FDI inflow too is, in absolute terms, the highest ever in the history of independent India.  As are the healthy foreign exchange reserves, again at all-time highs, at around $ 370 billion, edging towards $400 billion. We will not have any problems retiring $ 25 billion worth of foreign currency bonds in December 2016.

But, for the rest, industry and business, jobs and promotions, are all in the doldrums. Fresh investment in private, or for that matter, in the public sector, for expansion, is still minimal, to non-existent.

The rupee is reasonably stable, albeit with a weakening bias against the US dollar, but our exports statistics are depressed nevertheless, as buyer markets in  the EU and America are going through a recession, or showing very weak growth.

The presidential elections in the US will throw up a winner by November and quell quite a bit of the global uncertainty too.

Domestically, the performance of the finance ministry, its smugness and disconnect with the public, leaves a lot to be desired. It has not managed to revive business, industry or agriculture, for that matter. It has burdened the salaried middle class with more lazy taxes. Its revenue collections are inadequate. The country’s fiscal deficit has been controlled, but mainly because there is very little happening.

Is there a case for urgent change at the finance ministry too? And is it finally time to resolve the problem of a narrow direct tax base for individuals that preys on less than 1% of the population?

The problem of so-called black money, a uniquely Indian concept, alongside capital flight, hawala transactions, secret money in hard currencies, stashed in bank accounts abroad, the steady acquisition of foreign property, even overseas business acquisitions, and the trend towards becoming NRIs to avoid Indian taxation, can all be solved.

Rajya Sabha MP and Harvard trained economist ,Subramanian Swamy, recently renewed his periodic call to abolish income tax; substituting it, with a near universal expenditure/bank transaction tax instead.

If this is done, it will remove the distinction between ‘white money’ and the tax-evaded ‘black money’ growing ever larger, and distorting the workings of the Indian economy. Punitive measures being enforced are unlikely to work when even elections are fought and won with black money.

Rajan’s exit from RBI, removed the brakes that were being applied to monetary policy and bank regulation. So what about energising the finance ministry, in a manner designed to promote rapid growth and prosperity for all?

For: The Pioneer

(1,099 words)

June 20^th, 2015

Gautam Mukherjee