Former Governor of Reserve Bank of India (RBI) Raghuram Rajan has jotted down major issues that the new government needs to tackle immediately. PM Narendra Modi and his Council of Ministers will take oath on May 30. Rajan took to social media and shared some of the recommendations detailed in his book ‘What the Economy Needs Now’.
These include reining in fiscal deficit at both the Central and state government level and focusing on distressed sectors like agriculture, power and banking.
“We should aim to hit the Fiscal Responsibility and Budget Management (FRBM)-suggested five percent by 2023, but not by creative accounting or off-balance-sheet transactions. Instead, we must increase revenue through better compliance and more progressive taxation, and target spending better,” he said.
India’s general deficit, or combined fiscal deficit of Centre and state, stood at 5.8 percent in FY18 but is likely to increase in FY19 due to higher spending by states ahead of elections. For the Centre, the government has pegged its FY19 fiscal deficit target at 3.4 percent. It was at 3.53 percent a year ago.
“Three sectors that are distressed today are agriculture, power, and banking, despite massive past government intervention, and often because of it,” the post said, adding that instruments such as loan waivers, inflated Minimum Support Prices (MSP) without adequate procurement, and input price subsidies often exacerbate the problem.
Rajan also talked about creating a better business environment and reviving the idea of Special Economic Zones (SEZs) by a Centre-state productivity council. “Such zones, not necessarily targeted at exports, may also be used to experiment with reforms such as changes in labour laws before an all-India roll-out to provide the evidence needed to build consensus for them,” he said.
The recently concluded 17th Lok Sabha elections paved way for the Bhartiya Janata Party (BJP)-led National Democratic Alliance’s return to power with sweeping majority. The country’s stock market gave it a big thumbs up as they touched record highs on hopes that a stable government will see less obstacles in policy making and lead to faster implementation of reforms.
“As we see it, rethinking government is key. Government capacity is limited. We need to target it better, while trying to enhance it. Stability in government policy is important so that our farmers and firms can plan better, and markets can play a more effective role,” Rajan said in a blog post on May 25. The blog refers to an article co-authored by Rajan and economist Abhijit Banerjee for The Times of India earlier this year.