04 January 2013, 05:09 PM IST
This is the upshot of what Prime Minister's Economic Advisory Council chairman C Rangarajan told my colleague Deepshikha Sikarwar and me when we interviewed him for the Economic Times.
Cutting the cant on interest rates is more important than cutting the rates themselves. Boosting public investment in the short run in projects directly controlled by the government, such as Railway projects, is the key to boosting sagging private sector sentiment and reviving investment, which has fallen off a cliff after the crisis started in 2008. In public finance, the focus has to be changing the composition of government expenditure, shifting resources from consumption to investment. And if that sounds like clear but conventional wisdom from the chairman of the PM's economic advisory council, Dr C Rangarajan adds a radical thought: why not introduce yet another slab for income tax, for levying a higher rate of tax?
The private sector is making too much of interest rates, feels this former governor of the RBI. In the mid-nineties, when the rates were much higher, industry had invested far more aggressively. The question, really, is how economic agents expect the economy to behave. If expectations are buoyant, so would their investment activity. If the mood is blue, lower rates of interest would not really achieve anything much. Thus, the focus has to be on changing perceptions about growth. The government has to lead this vital change in perceptions. And the government has, indeed, taken some vital steps in this direction.
Open-ended subsidies over which the government has no control, such as on petroleum products and fertiliser, just cannot continue. They strain the fisc, add to inflation and to pushing the current account deficit to unsustainable levels. When subsidies become a source of macroeconomic instability that derails growth, they have to be pruned, Dr Rangarajan is clear.
A bird's eye view of the economy cannot but spot grain. Dr Rangarajan sees little sense in the government hoarding nearly one-third the country's grain output, taking it out of the market. Yet, foodgrains contribute little to food inflation. Rising prosperity at the bottom of the pyramid feeds sustained demand for superior foods. The production of milk, meat, poultry, fish, vegetables, fruits and lentils has been going up but not going up fast enough to meet the demand. Therefore, the real solution to entrenched inflation is to step up the output of these foods even more aggressively.
It was at a lecture to commemorate Raja Chelliah presided over by Dr Rangarajan that finance minister Chidambaram had said it's time we debated an inheritance tax. We asked the senior economist what he thought of the idea. Yes, we must debate unconventional ideas, he said. The fiscal deficit cannot be contained by curbing expenditure alone; we must raise revenue as well. We have to think of not just administering existing taxes better, but also of new ones. Echoing a clamour for taxing the rich in the developed countries, Dr Rangarajan said, why can't we think of having a rate of tax higher than the current peak 30% on substantially higher incomes? Why tax dividends effectively at a lower rate than the peak income tax rate? But these leaps of taxing innovation, he said, will have to wait till sentiment has revived and the economy has resumed its growth momentum.
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