Stating that the Indian economy is not just in the midst of a downturn but that it was experiencing a ‘Great Slowdown’, former chief economic advisor (CEA) to the Centre Arvind Subramaian, on Wednesday said that cutting personal income tax rates or increasing GST rates would be ill-advised. “The notion that consumption drives growth is a peculiar Indian feeling, which is false. Investments and exports fuel growth and that’s how most economies, even in East Asia see it. So slashing income tax rates is something I would say no to. Also, this is a bad time to increase GST rates as is being considered by the council,” he said. “…Look at the oddity of the thinking here.
On the one hand, they want to slash income tax, and on the other hike GST!,” he added. Arguing that despite macro economic situation not being anywhere close to what it was in 1991, Subramanian said that India is experiencing a slowdown as severe as the nation saw in 1991. He quoted various statistics on investments, exports, non-oil imports, among other indicators to make his argument. Playing down hypotheses that either have structural problems like lack of reform or cyclic problems like weak demand, among other things, Subramanian said that the slowdown was caused by a mixture of all these factors. “There are indicators of how the economy grew despite there not being any reforms in the past, and the theory that consumption fuels growth is flawed. So, either of these theories or hypotheses can be accepted as they are,” he said. ‘Realty bubble’ While pointing out to a variety of issues that may have contributed to the present slowdown, including unfavourable export markets in view of a global slowdown and continuing effects of the 2008 recession, Subramanian said: “Something like IL&FS (Infrastructure Leasing & Financial Services) issue with an exposure of Rs 90,000 crore was enough to cause concerns.” If IL&FS was the trigger, he said the workings of the realty sector, or the non-performance, amplified the effect.
“IL&FS was the trigger, and this woke up the financial community which began looking into lending and risks in other sectors too, including exposure of non-banking financial companies (NBFCs). And, the non-bubble bubble in the real estate sector has hurt the economy,” he said. “I call it the non-bubble bubble because there actually was no boom in the prices of properties but there was a lot of lending to the realty sector…There was a ripple effect. The sector’s anticipation that the great Indian middle class would lap up properties didn’t come true and there were a lot of unsold properties. The price didn’t correct itself, which meant that the inventory was being funded by banks and NBFCs,” he said.