Raghuram Rajan is to exit the Reserve Bank of India. A number of leaders in the ruling establishment had reservations with his policy decisions, and the man who led this opposition, Rajya Sabha MP and senior BJP leader Subramanian Swamy spoke to Bloomberg TV India in this exclusive interview.
Now that Raghuram Rajan’s tenure gets over in September, what pivot do you want the RBI to make under the new leadership?
What we need to address are certain urgent problems. The first is that when you look at the national accounts data — whatever may be their rate of growth and index number and issues connected with the actual level of rate of growth — the fact is undeniable that both the agriculture sector and the industrial sector, particularly the SMEs that constitute a bulk of the industrial output and provide much semi-skilled employment, have been in the negative for some time now. That needs to be rectified first.
The second thing is that there has been a sharp drop in household savings and total investment ratio as a part of GDP. That is because the middle-classes are really feeling the pinch. This is due to inflation and reduction in the rate of term deposits. We have to make some special measures for them. I would like to put money in the pockets of the middle-class, so I would strongly advocate — I am not sure I will be in the driver’s seat to do this so I am just suggesting it to the PM — that the PM should abolish income-tax for all sections. There is anyway no I-T for agri income, and rich people have CAs to ensure their I-T is minimal. It is really the middle-class and professionals that face the harassment of income-tax. Removing this would enthuse the country in a big way.
In addition to that, we need to find a way to ensure that the prime lending rate is no higher than 9 per cent, and that should also be the term deposit rate for three years. People should be encouraged to save more.
There are some ministers who believe, like you do, that interest rates were kept too high. Are we to believe, then, that the next RBI Governor will be one with a more benign view on interest rates?
First, it was never in our scheme of things or the Constitution that the RBI can function independently of the government. It is something that Raghuram Rajan took advantage of. I will give my inputs on who should not be the next Governor. They should not select someone who has the legacy of the previous administration. I would like to see a governor who understands that government policy is set by the ruling party which has got the mandate. He may give advice but, in the end, he should implement it.
Banks have not followed through on cutting lending rates, even to the extent the RBI has. Arvind Subramanian’s Economic Survey in February put this down to liquidity mismanagement by the central bank. Do you agree that this is the reason why rates did not come down for the borrower?
That’s a bureaucratic description of the situation. We need leadership. The banks are mostly government banks, 85 per cent of the deposits are still with PSBs. We should lead them and tell them this is what you have to do and they will do it. That’s the scheme of things; otherwise why did we nationalise banks at all?
But bankers led by the SBI argued that small deposit schemes and their high rates were taking deposits away from banks, which in turn kept the cost of funds high for them.
I don’t accept that argument at all.
So how do you propose to get them to act on the lending rates?
I could find ways. I am not a great believer in keeping the fiscal deficit at 3-3.5 per cent. If the money is going to be spent on creating assets, I would not mind keeping a 6 per cent fiscal deficit. All these are traditional views… like the one where in a depression it was thought the only way to increase employment is to cut rates. It turned out that you also cut purchasing power, and demand falls and, in turn, you have a bigger depression. I’d say that’s what Raghuram Rajan did as well. I would tell the bank chiefs, ‘if you are not able to do what we are telling you to do, resign and go, we will find somebody else’.
Can you list out, item-wise, the policy ‘course correction’ that you called for in a speech in Mumbai last week?
First course correction: abolish income-tax, full stop. Second: do not have PLR higher than 9 per cent, and offer that rate for term deposits as well. If I had a say, I would appeal to the public — I am going to abolish I-T, but please don’t spend it for three years. I am sure that patriotic Indians will save, particularly the middle-class, and women, who have traditionally been savers, will oblige. That will provide huge funds. Third, of the 2,761 commodities subject to excise, levy excise only on 21 — those give you 90 per cent of your revenues.
Like that, the simplification of labour laws can also take place. You can hire and fire provided you give three years of salary that a person was getting when employed. Let the money go to his bank account, but he can’t come to the factory. Then, I believe that the agri sector must be globalised. We are the cheapest producers of agri products, but our yield per acre is low. The Indian Council of Agricultural Research’s experimental plots have yields that are 6-7 times what the farmers are producing.
Since you brought up taxation in detail, I’d like to understand the concerns you voiced recently about the current GST framework.
Well, GST is fine. If our Finance Minister wants it, I have no difficulty. But to point to it as some kind of a panacea for all our ills… no, it is nothing of the kind. The best analysis I have seen is that of Narendra Modi as the CM of Gujarat, when he wrote to the Centre; I would read that. There are unresolved issues of paperwork and of sharing. I have disagreements with Ms Jayalalithaa on many things but on this she has produced a very good document, which explains why she will not agree to the GST. Those have to be addressed.
Are you saying there is a problem that’s creating a disadvantage for manufacturing States like Tamil Nadu or Gujarat?
Yes, that is something that has to be rectified… the issue of how you are going to share the money. This whole issue of where you are going to put the tax, the point of sale, determining that, there’s a lot of paper work.
Does the Congress have reasonable ground for its opposition to the GST in the Rajya Sabha then?
The Congress will go and find some excuse or the other, I would not even pay attention to what they say. I think what Jaitley can do is tap potential within the party and see what can be done to improve the GST. He needs to find a way for all of us to be enthusiastic about it.
If Modi raised these issues earlier, why is he signing off on something that he found problematic when he was CM of Gujarat?
Well, the PM is a democrat and the FM is pushing hard for it, so why should the PM come in the way. That’s how the PM should function… if a minister is offering something as a big solution, the PM is saying, ‘okay do it, let’s see’. I like the PM’s attitude… no one can pressure him. The Rajan case is such an example, the whole world was pushing for Rajan but the PM didn’t bend.