Is India headed for a disastrous situation as far as its economy is concerned? Why does its markets get rattled when US raises tariffs against China? Why are the Western countries starting to question the promises made by India and shrug them away as sweet nothings? Is the point of no return approaching whereby if no drastic measures are put in place, India would go the Argentina way? No, this is not an exaggeration.
Dr. Subramanian Swamy, the indefatigable economist has suggested 5 steps that the Indian government should take to reverse course. Modi can take all the credit provided the steps are implemented in toto (and not a hashed-up disaster like the one done during the demonetisation saga). So what are the 5 steps? Here is my interpretation of each of these.
Five steps torescue economy: 1. Abolish personal income tax 2. Reduce prime lending rate to 9% 3. Raise bank term deposit rate to 9% 4. Make corporate R&D & employees children education expenditure tax deductible 5. Print notes liberally for infrastructure construction
— Subramanian Swamy (@Swamy39) August 2, 2019
- Abolish Personal Income Tax – The approximate revenue earned from Personal Income Tax is around Rs.5 lakh crores ($72 billion at today’s exchange rate). According to the 2018 budget numbers, India’s revenue was about Rs.25 lakh crores ($360 billion) and expenditure Rs.29 lakh crores ($440 billion). So the government needs to forego approximately 20% of its revenue. What does it gain in return? It can save on the salaries of about 80,000 officers employed in the Finance Ministry. At least half can be asked to go. This is not as bad as it sounds – Income Tax officers are among the most corrupt and the honest ones are usually weeded out.
- Reduce Prime Lending Rate to 9% – This may not be too difficult to achieve. It is currently at 9.45% and it will not make break the backs of banks.
- Raise Bank term deposits to 9% – The current fixed deposit rates vary from 6.8% (State Bank of India) to Bajaj Finserv (8.6%). This has to be done in lockstep with 1 and 2 above because it would encourage the consumers to save the dividend from 1 rather than spend it.
- Tax deductions for Corporate R & D and Employees children education expenditure – India does not excel at fundamental, ground-breaking research at least at this point of time. This exemption, if given for a period of 10 years would spur many companies to invest in this. India’s Diaspora can be tapped to pitch in with their time and expertise. 1 above will incentivize them to come work in India.
- Print notes for infrastructure construction – Think of it as India’s Quantitative Easing. When money is printed for infra, it will show itself in the form of new roads/ metro lines/ irrigation projects/ Smart City projects etc. And this will spur a lot of employment and in turn will lead to remonetizing the banks from savings. If there is one thing an average Indian does, it is to save. The savings rate needs to climb back to mid-30% of GDP.