So, what needs to be done?
To become a $5-trillion economy, economic growth rate needs to reach 10-12 per cent a year and not the current 4-5 per cent. For that, we need to improve the liquidity and demand conditions in the market. After demonetisation, the market deposited all the money into banks and mutual funds. But the banks were not able to lend that kind of money directly, so they lent it to non-banking financial companies
(NBFCs). Mutual Funds also put money in stock market. NBFCs
were the one to lend money to most businesses. But after the IL&FS debacle, the liquidity in the NBFC sector went down and they stopped lending because they themselves were sick. Now, there is a lack of liquidity both from the banking system and NBFCs, which is the structural problem that we are facing. So, we have suggested that NBFCs
be revamped fast, allowing them to become banks while more private banks are created.
Aren’t licences given on tap for small finance banks?
I want 50 new banks to come up. NBFCs
need to be incentivised to become banks.
But how do you activate demand?
There is a lack of confidence right now. For that, I suggest a cut in the GST rates
and an infusion of Rs 1.2 trillion into the economy in six months. The fallout of this will be higher fiscal deficit and more money would have to be compensated to the states due to GST cuts. But both these risks are worth taking, because these steps will spur demand at the end. On the supply side, the government has reduced the corporation tax rate to 25 per cent. But the tax cuts are also needed for individuals, partnerships firms, and all other kinds of businesses that are still paying much higher tax rates.
Will widening of fiscal deficit not raise the inflation rate?
This is the only way to save the economy today.
Why aren’t investments rising despite a cut in the corporation tax rates?
There’s an issue. The government’s decision to reduce corporation tax rate to 17 per cent for new companies is faulty. I am here running my company for 35 years and now need to set up a new company to take advantage of the 17 per cent tax rate, which I think is wrong.