Praise from RBI Governor Raghuram Rajan as Modi Government Completes a Year in Office

File Photo: RBI Governor Raghuram Rajan

“This government came in with tremendous expectations and I think the kind of expectations were probably unrealistic for any government,” Dr Rajan said responding to questions after his address to the Economic Club of New York yesterday.

He said in the minds of the people, Prime Minister Narendra Modi’s image was that of “Ronald Reagan on a white horse” coming to slay anti-market forces and such comparison was “probably not appropriate.” 

Dr Rajan, however, said the government has “taken steps to create the environment for investment, which I think is important.” 

The government is “sensitive” to the concerns of investors and is looking into addressing economic issues, he said.

Dr Rajan’s remarks come as the Modi-led government completes one year in office this month, having received a commanding majority from an electorate that wanted jobs, economic development and respite from rising prices and corruption.

The Reserve Bank of India Governor said a “big part” of the business environment is taxes and the government has said it will not bring retrospective taxation again.

“However once the tax authority levies a demand on you, there is a quasi-judicial nature of that proceeding and therefore it has to go through the courts before it is resolved. The government cannot intervene,” Dr Rajan said.

“Legacy issues are winding their way through the courts, including issues based on laws that existed before they were changed,” he said.

The corporate tax rate will also come down one per cent every year going forward, he added.

The former International Monetary Fund chief economist said “perhaps” India could have done a “better job” in handling these issues but “going forward the government says no more of this kind of stuff we will do.” 

Dr Rajan said there are several areas where the government has taken more “serious and significant” advances to improve investor confidence and propel growth.

On the issue of subsidies, he said petrol and diesel subsidies have gone.

“Going forward these subsidies will be transferred directly into bank accounts,” he said, adding that already the cooking gas subsidy is being transferred directly to bank accounts. 

Dr Rajan said there is a “broad consensus” for the Goods and Services Tax (GST) and while he had hoped for the GST Bill to have passed in the just concluded session of Parliament, he feels there is “enough momentum” that “it will be done well in time and roll out by March 31 or April 1 next year.” 

“In fact (the government) is going ahead with the apparatus to ensure that it is actually done,” Dr Rajan said.

Another key legislation that the government is focussing on is the Land Acquisition Bill, which is important from the perspective of certain public works, Dr Rajan said.

He said that since different states have their own land acquisition bills, some commentators have suggested the possibility that the states should decide for themselves as to how to implement their respective land acquisition provisions.

There are tremendous plans for investment, particularly in the Mumbai-Delhi industrial corridor and freight corridors, the RBI Governor said.

“My sense is that things are happening,” he said.

Dr Rajan also called the government’s spending cuts “significant,” and said “there has been some amount of fiscal consolidation over and above what the government is owning up to.” 

He said inflation “has come down tremendously in India” and rupee has basically stayed relatively flat since the beginning of the year.” 

“…if you look at rupee’s volatility relative to other currencies, you’d have to argue that the rupee has been one of the most stable currencies (against) the dollar,” Dr Rajan said.

“It’s been much stronger than other currencies,” he said.

With the Current Account Deficit also projected to come down from more than four per cent to 1.5 per cent this year, Dr Rajan said “the big deficit numbers have come down” and the focus is on growth.

He, however, said while investment intention and investment is picking up, the pace can be faster.

Dr Rajan noted that the problem to some extent lies in the week balance sheet of banks and there is no supply problem as banks are willing to lend.

The government is pushing the banks very hard to clean up the balance sheet and to improve the governance structure of the banks, including separate chairman and Managing Director positions. Banks are also being encouraged to elect new people as chairman, may be from outside the system, he said.