Headline : RBI has done its bit, now over to the government Editorial 9th Aug’19 HindustanTimes
Rate cut by RBI:
- Inflation is within control.
- The economy is slowing down. RBI has lowered its growth projections for the first half of the year sharply.
- The RBI’s projections indicate that it expects growth to improve in the second half of the year, and will be 6.9 for the year.
- In light of this, the Reserve Bank of India (RBI) cut the repo rate by 35 basis points, a little more than what it usually does (usually, it’s 25 basis points).
This itself is not enough to induce higher growth rate:
- There is only so much that a monetary policy can achieve.
- This is because of other issues in the financial system, like a weak rate cut transmission mechanism, a stressed banking sector, and difficulties in the non-bank financial (NBFC) sector.
- This means that other policy changes will be needed to achieve higher growth in the second half of the year.
Need to revive Private investment:
- Private investment is a critical engine of growth for the economy.
- The government neither has the capacity, nor the fiscal space, to lift investment and growth without the participation of entrepreneurs across the country.
- The only way investment in India can pick up is if entrepreneurs are upbeat about the opportunities that the economy has to offer them to make a decent living from doing business.
Government tried some measures to achieve this:
- Between 2014 and 2019, India took some measures to help private sector, including:
- Enacting Insolvency and Bankruptcy Code
- Enacting Goods and Services Tax (GST)
- Improving ease of doing business
- Pushing both public investment and micro, small and medium enterprises credit
But private investment has not picked up:
- The policy initiatives already undertaken have not helped pick up the private investment.
India’s tax regime hurts businesses:
- The most important department that perhaps affects the economy is the tax department or the department of revenue.
- Its job is to increase the share of gross domestic product (GDP) that it collects as taxes.
- To do so, it often proposes new taxes or increases in tax rates.
- Increasing tax rate easier than increasing tax base:
- Often, given the narrow tax base that India has, increasing revenues is easier done by increasing the tax rate or the tax burden of those already paying taxes, than by increasing compliance.
- Lead to evasion:
- In recent years, marginal tax rates have been increasing. This has made trying to evade taxes more attractive.
- Tax department increases harassment in the name of compliance:
- To counter the subsequent loss of revenue through evasion, the tax department has been given greater powers to go after those who they feel are evading taxes.
Tax department not worried about its impact on business sentiment and investment:
- The tax department is not expected to assess the impact of its greater powers on businesses, and the sentiment of businessmen.
- India today has a number of taxes, like the surcharge on income and corporate tax, the Securities Transaction Tax (STT) and, now, the tax on the super-rich, where no analysis is done about the impact of the tax on the economy.
- It is not expected to focus on the impact its proposals on new taxes and tax rates have on GDP or investment.
- For example, what is the impact of the tax on the super-rich? What is the effect of the tax on foreign portfolio investors and stock markets? How is it going to impact investment? The department is not worried about that
Increasing the tax rates indiscriminately is counter-productive:
- Economic theory and the Laffer curve suggest that, beyond a point, increasing the tax rate is counterproductive, even in terms of collecting more revenue.
- Beyond a point, high tax rates can also have negative effects on incentives for investment in the country, for encouraging growth and job creation.
What other steps the government can take to achieve higher growth rates?
Assess potential impact of any new proposals:
- Seeing the business environment today, there is a need for a thorough analysis of the economy-wide impact of policies before new proposals are accepted.
- This needs to be an integral part of policymaking.
- The finance minister has to turn down many proposals that may appear attractive in the short run, and keep tax administration under a tight leash.
Restore the role of DEA in reform and productivity growth in the economy:
- The department of economic affairs (DEA) in the ministry of finance traditionally had the task of pushing for reform and productivity growth in the economy by looking beyond short term and sectoral issues.
- This helped the finance ministry in the past push for lowering taxes, import tariffs, push for greater foreign investment since 1991, and liberalisation and better regulation of the financial sector.
- While sector-specific ministries (such as aviation, railways, steel etc.) focus on their areas or sectors, they may, at times, lobby for what is good for their sector, but not for the economy as a whole.
- The DEA’s traditional role could be restored so that it studies the investment and growth impact of policy proposals before they are accepted.
- The general sense of gloom in business needs to change before we can expect that growth will be higher in the second half of the year.
- RBI has done its bit, now the government needs to do its share.
GS Paper III: Economy