This Banyan Is Just Too Heavy

This Banyan Is Just Too Heavy

If I had eight hours to chop down a tree, I’d spend six sharpening my axe- Abraham Lincoln

Governor Raghuram Rajan of the RBI cannot seem to resist efforts to enlarge his essentially regulatory role. He aspires to be nothing less than a policy-setter for the Modi Government.

Some of his prescriptions, however, are palatable enough. He calls for more tax sops for the middle class to boost the saving’s rate. He also points out that the tax concessions, given in the past, were not indexed for inflation, and have quickly proved to be inadequate. This is equally true of the tax rates, which are absolute, except for exemptions.

Rajan advises the Modi Government to remember that the ‘Make in India’ campaign cannot take off without infrastructure and taxation reliefs. Rajan is right; even if he chooses to state the obvious. He cautions the Government against adopting a China style export oriented campaign. But this is not the Prime Minister’s emphasis. Modi  hopes a proportion of what is made here, if it is state-of-the art, and not the sorry ‘import substitution’ effort alluded to by the RBI Governor, will surely be exported. This is by way of an additional benefit to the country, not a primary objective. Of course, with the West being in the doldrums currently, they may not prove be the actual export markets at all.

Modi’s purpose however  with the ‘Make in India’ call is to attract much needed foreign investment, boost the GDP share of the manufacturing sector, and to provide greater number of jobs to our youth.

For example, when the Russians start making their estimated $3 billion worth of joint venture factory to produce helicopters in India; the majority of the choppers will be absorbed by the Indian Armed, Para-military and Police Forces. Some will certainly go into the corporate ends of  ‘Civvy Street’. But a number, in addition, could well find buyers abroad; just as cars made in India by international marques have done.

Governor Rajan also suggested that to emphasise the manufacturing sector over other ones may result in imbalances. Again, he must understand that the Modi government expects to proceed on multiple fronts simultaneously. And to emphasise any one of them, is not intended to be at the expense of another.    

Given the faltering  statistics, despite a drastic fall in oil prices, a ramp-up in dwindling manufacturing activity is crucial. The latest IIP (Index of Industrial Production), number is at it worst in 3 years. Manufacturing has contracted by a whopping 4.2% in October.

Will Rajan cut rates now?  Curiously, it is not likely. He says that, by themselves,  rate cuts will not restart the investment cycle. But it will certainly help sentiment. Talk of it being too soon as inflation may spike again, strike many as a bogus argument. Particularly, since October 2014 data shows  the CPI (Consumer Price Index), has eased to 4.38%; well below Rajan’s earlier target of 6% for January 2016!

He may have a point on excessive taxation and poor infrastructure though.  And other commentators too, like Pratap Bhanu Mehta, are also complaining that the Government is not working to a plan. To others, the plan is to build massive infrastructure, Chinese-style, using foreign investment from a host of countries including Japan, Russia, the US, Australia, France, Israel and others. President Vladimir Putin’s other recent offer to build 12 new nuclear reactors, with their parts and componentry to be also manufactured in India, is illustrative of this.   

The larger, far more sinister problem is that India runs a very expensive administration. This could prove disastrous in the long run. It destroyed a financially top heavy and once mighty USSR. Our taxes, GST bill notwithstanding, are running away with us. The fundamental question remains: why does India need such a high direct and indirect tax structure?  

In reality, a major chunk, if not all of the Government’s raised taxes, goes to cover just a part of the salaries and expenses of the enormous sarkari set-up. Governments may come and Governments may go, but none seem to get any leaner or more frugal. 

This high tax regime may be  the single greatest disincentive to the ‘Make in India’ campaign.  

 And as for export driven growth, our moment may indeed have passed. But Asian giants like Japan and China used this very route, rising like the Phoenix from the ashes of war and colonial exploitation. They added enormous wealth to their economies; but not without an incredible amount of Government support. This came, by way of low or nil taxes, state-of-the-art infrastructure and processes. There were liberal bank credits, loans, technology. There were MFN (Most Favoured Nation) trade protocols.

The Modi Government’s ‘Make in India’ programme will have to adopt and adapt many of these proactive techniques with the greatest dynamism, in order to succeed.

(807 words)

December 13^th, 2014

Gautam Mukherjee