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- Jul 23, 2014
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NEW DELHI: Ahead of NDA's first full-fledged budget in February next year, Reserve Bank of India Governor Raghuram Rajan called for more tax sops for households to encourage them to set aside more money and boost the country's flagging savings rate as he urged companies and policymakers to look inward as much as they're looking outward to strengthen the Indian economy and shore up its finances.
He said that the Narendra Modi government's 'Make in India' manufacturing initiative should not be read too narrowly as merely seeking to mimic the export-led growth strategy followed by China. Instead, he proposed a more open idea that focused on making Indian business more competitive.
"Make in India will typically mean more openness, as we create an environment that makes our firms able to compete with the rest of the world, and encourages foreign producers to come take advantage of our environment to create jobs in India," Rajan said as he floated the idea of 'Make for India'. "If external demand growth is likely to be muted, we have to produce for the internal market." The governor also wondered whether there was a need for more institutions to "ensure deficits stay within control and quality of budgets is high". Rajan was delivering the Bharat Ram Memorial Lecture at FICCI in Delhi on Friday.
The governor pointed out that tax benefits for individuals had been largely fixed in nominal terms until the recent budget, implying that after adjusting for inflation the value of the benefits had eroded over the years.
The Modi government had in its July 10 budget for FY15 raised the exemption limit on savings by Rs 50,000 to Rs Rs 1.5 lakh. The governor felt there was a case for enhancing this incentive."Some budgetary incentives for household savings could help ensure that the country's investment is largely financed from domestic savings," Rajan said, adding that local demand should be financed as far as possible through domestic savings.
He said low and stable inflation and launching new institutions and products to seek out financial savings in every corner of the country will also help halt the erosion in the household savings rate.
The household savings dropped to 21.9 per cent of GDP in FY13 from 25.2 per cent in FY10, largely because of a decline in financial savings to 7.1 per cent from 12 per cent over the same period.The government has already re-launched the Kisan Vikas Patra savings instrument and the ambitious Pradhan Mantri Jan Dhan Yojana (PMJDY) to raise financial savings. PMJDY is aimed at ensuring all Indians have access to the banking system. With regard to the Make in India initiative, Rajan pointed out that a slowing world economy is not in a position to absorb substantial additional imports.
"There is a danger when we discuss Make in India of assuming it means a focus on manufacturing, an attempt to follow the export-led growth path that China followed. I don't think such a specific focus is intended," Rajan said, adding that industrial countries were themselves improving capital-intensive flexible manufacturing that had even caused some work that had been outsourced earlier to be "re-shored".
India will also have to compete with China as it pushes into global exports. Make in India should also not be seen as an import-substitution programme, Rajan said."This strategy has been tried and it has not worked because it ended up reducing domestic competition, making producers inefficient, and increasing costs to consumers," the RBI governor said.
Rajan urged the implementation of measures including the goods and services tax (GST) for the creation of the "strongest sustainable unified market'."We are more dependent on the global economy than we think. That it is growing more slowly, and is more inward looking, than in the past means that we have to look to regional and domestic demand for our growth - to make in India primarily for India," he said.The governor said India needed to get its policy framework right because it did not belong to any power blocs.
Crucial to this was "a sound fiscal framework around a clear fiscal consolidation path", he said as he called for debate on how this could be achieved.
"Whether we need more institutions to ensure deficits stay within control and the quality of budgets is high, is something worth debating," Rajan said. "A number of countries have independent budget offices/committees that opine on budgets. These offices are especially important in scoring budgetary estimates, including unfunded long-term liabilities that the industrial countries have shown are so easy to contract in times of growth and so hard to actually deliver."
Need to rethink 'Make in India'; must strengthen Indian economy from within: Raghuram Rajan - Economic Times
He said that the Narendra Modi government's 'Make in India' manufacturing initiative should not be read too narrowly as merely seeking to mimic the export-led growth strategy followed by China. Instead, he proposed a more open idea that focused on making Indian business more competitive.
"Make in India will typically mean more openness, as we create an environment that makes our firms able to compete with the rest of the world, and encourages foreign producers to come take advantage of our environment to create jobs in India," Rajan said as he floated the idea of 'Make for India'. "If external demand growth is likely to be muted, we have to produce for the internal market." The governor also wondered whether there was a need for more institutions to "ensure deficits stay within control and quality of budgets is high". Rajan was delivering the Bharat Ram Memorial Lecture at FICCI in Delhi on Friday.
The governor pointed out that tax benefits for individuals had been largely fixed in nominal terms until the recent budget, implying that after adjusting for inflation the value of the benefits had eroded over the years.
The Modi government had in its July 10 budget for FY15 raised the exemption limit on savings by Rs 50,000 to Rs Rs 1.5 lakh. The governor felt there was a case for enhancing this incentive."Some budgetary incentives for household savings could help ensure that the country's investment is largely financed from domestic savings," Rajan said, adding that local demand should be financed as far as possible through domestic savings.
He said low and stable inflation and launching new institutions and products to seek out financial savings in every corner of the country will also help halt the erosion in the household savings rate.
The household savings dropped to 21.9 per cent of GDP in FY13 from 25.2 per cent in FY10, largely because of a decline in financial savings to 7.1 per cent from 12 per cent over the same period.The government has already re-launched the Kisan Vikas Patra savings instrument and the ambitious Pradhan Mantri Jan Dhan Yojana (PMJDY) to raise financial savings. PMJDY is aimed at ensuring all Indians have access to the banking system. With regard to the Make in India initiative, Rajan pointed out that a slowing world economy is not in a position to absorb substantial additional imports.
"There is a danger when we discuss Make in India of assuming it means a focus on manufacturing, an attempt to follow the export-led growth path that China followed. I don't think such a specific focus is intended," Rajan said, adding that industrial countries were themselves improving capital-intensive flexible manufacturing that had even caused some work that had been outsourced earlier to be "re-shored".
India will also have to compete with China as it pushes into global exports. Make in India should also not be seen as an import-substitution programme, Rajan said."This strategy has been tried and it has not worked because it ended up reducing domestic competition, making producers inefficient, and increasing costs to consumers," the RBI governor said.
Rajan urged the implementation of measures including the goods and services tax (GST) for the creation of the "strongest sustainable unified market'."We are more dependent on the global economy than we think. That it is growing more slowly, and is more inward looking, than in the past means that we have to look to regional and domestic demand for our growth - to make in India primarily for India," he said.The governor said India needed to get its policy framework right because it did not belong to any power blocs.
Crucial to this was "a sound fiscal framework around a clear fiscal consolidation path", he said as he called for debate on how this could be achieved.
"Whether we need more institutions to ensure deficits stay within control and the quality of budgets is high, is something worth debating," Rajan said. "A number of countries have independent budget offices/committees that opine on budgets. These offices are especially important in scoring budgetary estimates, including unfunded long-term liabilities that the industrial countries have shown are so easy to contract in times of growth and so hard to actually deliver."
Need to rethink 'Make in India'; must strengthen Indian economy from within: Raghuram Rajan - Economic Times
