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BW Businessworld

Modi Is No 'Reagan On A White Horse': RBI Governor

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The expectations from the new government when it came to power last year were "probably unrealistic" but it has taken steps to create an environment for investment and is "sensitive" to concerns of investors, RBI Governor Raghuram Rajan said.
 
"This government came in with tremendous expectations and I think the kind of expectations were probably unrealistic for any government," Rajan said responding to questions after his address to the Economic Club of New York on Tuesday.
 
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."
 
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.
 
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," 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." 
 
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.
 
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," 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, 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.
 
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." 
 
With the current account deficit also projected to come down from more than four per cent to 1.5 per cent this year, 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.
 
Playing With Fire
The "spectre of deflation" is spurring the world's major central banks into a dangerous struggle for stronger domestic growth that imperils financial markets and ignores the needs of developing nations, the RBI chief said.
 
Rajan, making a familiar argument for better global coordination on monetary policy, said central bankers in developed economies should take more seriously their international responsibilities.
 
He called for better leadership from the IMF. The Fund, Rajan said, should examine each unconventional monetary policy that is proposed or in place around the world and decide whether it meets the greater good of the global economy.
 
"The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector," Rajan told an audience of economists and investors in New York.
 
"I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it," he added. "We are thereby also creating financial sector risks for when unconventional policies end."
 
The US Federal Reserve, the European Central Bank and the Bank of Japan have purchased more than $10 trillion in bonds to fight deflation and help kick-start growth in their respective economies following the global recession.
 
The mass monetary easing had sent a rush of funds into developing economies like India, sending currencies and stocks to records. More recently, the end of the Fed's bond-buying and the prospect of a US interest rate hike has had the opposite effect, stoking volatility in financial markets.
 
Rajan said that since "the spectre of deflation haunts central bankers," it is no wonder that developed countries do not want to settle for low growth "even if that is indeed their economy's potential."
 
Still they should not ignore their responsibilities to developing economies, he said, adding the IMF should be the arbiter of whether accommodative policies are "in- or out-of-bounds."
 
The "IMF is perfectly capable of doing these things. But it needs leadership. Because the central banks won't do it themselves, (the IMF) needs the political leadership," Rajan said.
 
"We have the organisation. It needs people to recognise that we are moving from crisis to crisis."
 
American, European and Japanese central bankers often acknowledge the volatile effects their policies have on the rest of the world. But they argue that even developing economies benefit from their stronger domestic economies.
 
IMF Managing Director Christine Lagarde has applauded the aggressive monetary easing by major central banks and has warned against a premature tightening in the United States.
 
(Agencies)