Cheers, Rajan! Now for a tighter rope walk!

I read the online articles in Economic Times and the Financial Express on retention of the reverse repo rate and the CRR by RBI.
Raghuram has done a wonderful job, so far, as well as this time, by hardly changing anything much (the repo rate and CRR), but ahead lies a rough in the water raft ride!
(i) The GoI missed making an appropriate (or any) provision for the impact of 7CPC in the current fiscal at the time of Budget FY1516 (see here), even though, if timely implemented, 25% of the fiscal would have seen revised pays for over 4.4 million central Government employees and revised pensions for 5.5 million pensioners (see here). The estimated impact of 7CPC in the first fiscal is expected to be upwards of Rs 1.6 lakh crore by conservative estimates, and so, if implemented in time, about Rs 40,000 crore in FY 15-16 itself, enough to shake inflation in the markets, and then some!
(ii) Add to it the promise of OROP which will cause additional financial burden on the exchequer along with flow of liquidity in the markets (a moneycontrol estimate for the first year of OROP, with arrears, plugs it at around Rs. 16,000 crore, see here) . A substantial part of both, of course, will dissolve into TDS.
(iii) At the start of the subsequent fiscal, FY1617, all private sector employees in India are also looking at one of the highest ever annual salary increases in last few years!
This extra liquidity is capable of causing more than a minor hiccup, especially due to the spiral inflationary effect of domestic spending. Are the markets capable of absorbing this flow of sudden money without any impact on inflation? In my opinion, hardly. Can we do something to curtail the impact?
Not that the boost to economy likely to be brought by increased household capability to spend is undesirable, however, there are several simple steps that Raghuram and the GoI should contemplate immediately to enhance the individual and household savings, even though propensity to save in India is the highest in the World.
Some suggested simple steps that the GoI can take and should announce immediately (I hope GoI starts contemplating now, if not already in it) are:
(i) Deduct one time contributions to PPF, EPFO etc. at source itself. Less flow into hands will lead to less household spending and lesser pressure on inflation. This can also be done in part mandatory and part voluntary fashion.
(ii) Considering a perpetual raise in the percentage of salary deducted towards PPF / EPFO. This too presents a good case for discussion now, voluntarily, if not mandatory, including its further increase for FY1617.
(ii) Consider raising the annual upper limit for individual tax payers’ tax saving deposits in various tax saving instruments (aren’t all of them already too complicated for the ‘common man’ and deserve simplification, such as, consideration of investments in all schemes equally with only a single upper individual limit, without divisions into sections 80C, 80CCC, 80CCD, 80D, 80U…poof?). From the current Rs 1.5 lakh pa limit, a major jump, such as to Rs 2.5 lakh pa, is desirable from current fiscal itself.
(iii) Life and health insurance (if necessary, up to a limit) premiums present a strong case to be brought into the band eligible for direct deduction from salary. Experts frequently opine that the Indian households have a very low appetite for all insurances.
(iv) Launch a tax free GoI Infrastructure long term Bond sold through Government banks. Advise the state Governments to do so too (if they do not themselves see and seek the opportunity!).
These funds would help fund the needed rapid growth in roads, bridges, small city airports, Railways, green energy generation, and a host of other infrastructure development across the country. The state Governments may be allowed to bid in an auction for grants from the central Government for these funds for improvements in infrastructure in their states providing motivation and pressure for improved handling of Government owned or partnered infrastructure projects.
(v) Direct the Government banks (and private banks, too, if possible) to waive any loan pre-payment penalties (at least for a period of next few months) for the benefit of saving savvy individuals and households.
The additional savings (or pay offs of past expenses) will result in a more robust household economy, availability of funds with banks and other financial Institutions for appropriate further investments, and also for GoI to support its capital intensive growth drives.
Will Rajan be able to convince the Government to take such steps or will he have to increase (hic!) the repo rate to control inflation? Keep your balance, Raghuram!
(perhaps, more on this later… If you liked this article, please do not forget to leave a comment…and share it with your friends).


4 thoughts on “Cheers, Rajan! Now for a tighter rope walk!

  1. Its food for thought. A strong will is required for implementation. There must be some limitations too for implementation.
    Article is a very good read


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