Intellectual Autonomy First

The Reserve Banks Report on Currency and Finance is a salutary reminder of how ill-founded this complacency was. The finance ministry likes to keep its cards close to the chest; it issues tax revenue figures in dribbles, and does not give mid-term assessments of how close the public finances are likely to be to the budget estimates. The overall figures, provided by the Reserve Bank, are shocking: tax revenue in April-September actually fell by 1.5 per cent; one would have to delve into ancient history to come across a similar fall. Unless there is a sharp recovery in the last quarter, Mr Chidambarams wisdom in making swinging cuts in income tax will come to be doubted. Manmohan Singh had criticised them, saying that they went beyond what anyone asked for, and that the euphoria they generated would soon evaporate. It certainly has.

 

Mr Chidambaram could argue that he was only following in the footsteps of Manmohan Singh, who often pleaded for moderate taxes strictly enforced. But Dr Singhs tax cuts led to above-target revenue collections; Mr Chidambarams have had just the opposite effect. Why has tax elasticity been so nice to one and so nasty to the other? The answer is that Dr Singhs tax cuts were accompanied by big revenue increases because he presided over a mostly booming economy; Mr Chidambarams were not because he has piloted an economy in growth recession. His miscalculation over taxes can be traced to his failure to recognise the change in macroeconomic balance a change that was known, but the calculation was that the economy could be kickstarted into growth with just such a budget. That has proved a serious miscalculation.

What could the government do? The figures in the RBI report shows that people have money and, not knowing what to do with it (primary stock market activity is down 83 per cent), are putting it in bankswhose deposits are bulging. The banks dont want to lend to corporates because most of them are not creditworthy, so they buy government securities (twice as much money has gone into these this year as to the corporate sector). This could change if lending to companies were less risky, to the bankers themselves who risk CBI cases, and to the banks because there is no effective debt recovery system . But the debt recovery tribunals which have been kicked off are functioning poorly, and a couple are reputed to be quite corrupt. The result is that bad loans stay in the system and the poison spreads instead of being flushed out.

If the government and RBI could find a way to make debt recovery effective, it would hasten the shake-out that is required in the corporate sector and clean up bank books at the same time. Both will facilitate future growth. But the RBI report does not go into the issue, and its analysis of the current economic situation underplays the problem. RBI autonomy may still be far, but intellectual autonomy is within the Reserve Banks reach. It is to be hoped that its future reports will be less inclined to paint a rosy picture, and will focus on the problems that need urgent attention.