Rajan Calls for a Transparent Tax Regime

RBI guv wants an environment that would enable `Make in India' to succeed

Reserve Bank of India (RBI) Governor Raghuram Rajan called for a “transparent and predictable“ tax regime as part of an “enabling environment“ for business, setting the broader economic context needed for Prime Minister Narendra Modi's `Make in India' initiative to succeed.

“Let's create the framework, let's make business easier.Let's make taxation more transparent, more predictable. Let's do all the things necessary to allow our businesses to create what is needed,“ Rajan said on the sidelines of a conference in Mumbai on Monday. “I say Make in India, but do not restrict making in India to just a few industries,“ the governor said.

He also expanded on his criticism of loose-money policies practised by the majority of the world's central banks without regard for what they are doing to the global economy. Global multilateral agencies such as the International Monetary Fund (IMF), where Rajan used to be chief economist, should be more watchful on this front, he suggested.

As the Chinese economy sputters, the Modi government has been looking to turn the country into a manufacturing hub through the Make in India programme to generate more jobs, raise incomes and speed up growth. But without improving supply to prepare for the higher demand that accompanies any such expansion, prices will head back up, Rajan said.

“Can we go to much higher levels of growth without inflation? The answer is no,“ Rajan said. “We have to create underlying supply conditions that would allow us to have much higher demand. In some sense, I see 9% growth as a situation where we are investing a tremendous amount and thus creating the supply which wil then help the demand.“

Increasing supply is a “steady process“ rather than an over night one, he said.

Last month, Rajan slashed the RBI's key policy rate by a steeper than-expected 50 basis points, or 0.5 percentage point, to a four and-a-half-year low of 6.75% to help shore up growth as consum er price inflation dropped be cause of lower food prices and a statistical base effect.

Since taking over as RBI governor in September 2013, Rajan has maintained that inflation needs to be kept in check for India's growth rate to be sustainable. The central bank is targeting to get retail inflation below 5% by March 2017. Rajan said the government would do well not to micromanage initiatives such as Make in India because this hasn't always worked out well.

“Micromanagement is going to be more and more difficult. We chose to support small industries to create jobs but those were decimated by global competition. It would have been better if we had supported large industries because it would support a large amount of jobs,“ he said.

Raising skills is also critical to aster growth, Rajan said.

“If we look around in the coun ry, one of the biggest sources of worry that business people have s they don't find the people for the kind of jobs that they have,“ he said. “We need to improve the quality of our human capital.“

Rajan also cautioned the political class against making prom ses that can't be met. “Populist policies are being driven by need or growth but the political real ty is that it's a burden to acknowledge it,“ he said.

The governor said India has to stay “within limits“ because “promising too much may come back to haunt you“. He urged moderation through sustainable growth. He said the IMF needed to be more critical about the effects of accommodative policies that central banks are following.

“I want to argue that we are in a world that nothing prevents these kinds of policies. There is nobody looking at them. The IMF is supposed to look at these in a global sense, but the IMF has been sitting on the sidelines applauding these kinds of policies ever since they were initiated and hasn't really questioned the value of these kinds of policies,“ he said. “Yes, it does spillover studies. But the spillover studies invariably say this is good for that country and therefore good for the world. So we need to examine these issues.“

The Economic Times, New Delhi, 20th Oct. 2015

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