Former RBI governor Raghuram Rajan hits a jarring false note in his GST critique : 13-11-2018

Last weekend’s was not the first‘ he said-he responded’ episode involving former RBI governor Raghuram Rajan and finance minister Arun Jaitley. But it was probably the first time Rajan, who his admirers always say brings analytical rigour and honesty to any debate, hit a false note, and a jarring one, too.

Demonetisation (DeMo) and the implementation of the goods and services tax (GST), said Rajan, were twin policy shocks that hit India’s growth rate just as the world economy was recovering. Therefore, he argued, India’s growth rate, at a recent average of 7%, is less than both what the economy can potentially do, and what the country needs.

Jaitley’s response principally focused on the growth rate part. The finance minister pointed to a two-quarter dip in GDP growth and to the subsequent upturn, with the last quarter’s rate being 8.2%.

But the bigger critique of Rajan’s critique is bigger than an argument based on quarterly growth numbers. Because Rajan can always argue growth numbers would have been higher had DeMo and GST not happened. Where the former RBI governor hit a jarring false note is in his description of GST as one of the twin shocks, without any qualifier.

The FM, and the Modi government in general, argue that DeMo and GST were both necessary and systemically game-changing reforms. Many independent observers agree that GST is indeed a game-changer, but that DeMo achieved less than it promised and/or that it didn’t achieve what the government said initially it would.

That’s a fair and honest position for an independent observer. There can be fair and honest rebuttals to the critique of DeMo by pointing out that tax compliance seems to have increased, that notoriously crooked economic agents like those operating in the real estate sector have taken a deserved hit, that there’s now a list of shell companies and that they can be investigated, that there’s at least a little more fear about off-the-book transactions in India now because of DeMo.

Fission, not frisson
The DeMo debate should go on and it deserves more dispassionate analyses. The GST debate should also go on. But that debate doesn’t, and can’t, centre around the question whether GST was a good thing or a bad thing. GST is absolutely, totally, unqualifiedly a good thing. It’s a tax reform that will over time bring the entirety of India’s production-consumption system into modernity.

The debate on GST should be around details. How’s the back-end system? Are some goods and services still too highly taxed? Are compliance requirements too cumbersome? Is the anti-profiteering body too overzealous? This is the kind of scrutiny GST is being, and should be, put to.
Note that Rajan didn’t pause to say anywhere in his speech that yes, GST hit growth, but yes, it was also a much required and good change. Neither did he say India needed GST, but that the details of the new tax system should have been better worked out.
No, Rajan said this: “What happened in 2017 is that even as the world picked up, India went down. That reflects the fact that these blows (demonetisation and GST) have really, really been hard blows… Because of these headwinds, we have been held back…”.
He also said, in similar vein: “The two successive shocks of demonetisation and GST had a serious impact on growth in India. Growth has fallen off interestingly at a time when growth in the global economy has been peaking up…”.
So, the ex-central banker described GST as a “hard blow” and a “shock”, and left it at that. In effect, he equated GST with DeMo. However, as everyone and their minimally economics literate uncle know, while there can be a debate on whether DeMo was really required, there’s no such debate about GST.
Why would an academic of Rajan’s considerable calibre — a man who held public office in India when the painstaking work on setting up GST was ongoing, an economist who was smart enough to spot, before almost anyone else, that a tsunami was about to hit the global financial system — simply describe a path-breaking tax reform as a “hard blow”, and not say anything positive about it?
Rajan’s admirers may argue he was critiquing the timing of GST implementation, not the tax reform itself.
But, in that case, good analysis and good speech writing demand even more that Rajan should have qualified his adjectival negativity on GST. He didn’t.
So, we have this strange coincidence that an economist and public office holder known to speak his mind, and speak straight, seems to view GST through the same filter that, say, Rahul Gandhi does when the Congress president calls it the ‘Gabbar Singh Tax’.
Figure thy speech
No one is, of course, saying Rajan’s speech or his views have anything to do with how Congress wants to play its election time rhetorical game. It’s about what the former central banker said — that’s what invites this comparison. Rajan, an excellent public speaker, has spoken many times on many issues of import, and his critiques, whether one agreed with him or not, have been rightly framed most times.
This time, though, by seeming to simply trash GST, he’s framed it very wrong. If Rajan’s best qualities are analytical rigour and honesty, the error should perhaps be acknowledged.
Source : PTI
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