India needs mini bangs, not big-bang reforms: Raghuram Rajan

India needs mini bangs, not big-bang reforms: Raghuram Rajan: Instead of asking regulators to relax norms, the govt should provide direct subsidy to infrastructure, said the outgoing RBI governor...

Subsidies and taxes

Apropos “India needs mini bangs, not big-bang reforms: Rajan” (Business Standard, August 27), one feelssad that India will miss the sane and forthright advice loaded with common sense and backed by learning and research, which the country has been listening to almost on a day-to-day basis for the last three years. Who else will dare to
come out with a justification for transparent subsidy as Dr Rajan has argued for. He said:
“…While the RBI is a liberalizer, we have to be careful not to relax prudential regulations simply because an entity or activity is deemed of national importance. Dispensation on prudential regulation is the wrong instrument to favour such activities. A nationally important activity such as infrastructure may be very risky. To require lower provisions, or to allow higher leverage or ECBs against such activities, may increase systemic risk. In the long run, the activity may be damaged by the regulatory dispensation (too many infrastructure projects that do not have dollar earnings will be financed with dollar or yen loans and cannot repay) and stability may also be compromised. It is far better for the Government to directly subsidize such activities if it deems them important than for RBI to sacrifice systemic stability on the altar of national importance.”
This observation points to the need for GOI and state governments to revisit subsidies and taxes from a hitherto forgotten angle. As a country, we have succumbed to external pressures not to rationalise subsidies and taxes. In an ideal situation where real costs are recovered in full from consumers of products and services, prices and wages are paid by users of services including government/s on a real time basis, need to pay subsidy and collect taxes will come down drastically. A couple of examples:
(a) Government acquires land at market prices and transfers the land free of cost to X organisation which will start a project which will benefit the state/country. The cost incurred by government in this case should be treated as subsidy or deferred credit which X should plough back to government as the project breaks even and starts earning surplus revenue, preferably at the market price prevailing at the time of repayment.
(b)Government provides protection to Y organisation which has huge accumulated assets or products stored in a particular area. Or, differently put, a particular geographical area needs additional police protection due to a different social behaviour of people in that area. Y organisation or the people in the area in the latter case should be made liable to meet the costs.
M G Warrier, Mumbai



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