Don’t Cut GST Rates So Frequently, Let The Economy & Tax System Stabilise First: Former RBI Chief Raghuram Rajan

Raghuram Rajan, the former RBI chief, spoke about demonetisation and GST in Davos, Switzerland. In an interview with NDTV, he said that one of the many factors contributing to India’s slow economic growth economically was demonetisation.

Rajan, who is now a Chicago University professor, is credited with having predicted the global financial crisis of 2007-2008.

Demonetisation

“I think the jury is still out. We have an argument that it will improve compliance till we see the last tax numbers in, I feel the jury is still out. That said, I would suspect that a substantial part of the growth slowdown was because of the effects (of demonetisation)… some of it was in the informal economy which wasn’t immediately captured, which we are seeing now. Businesses that have shut down, because they couldn’t survive that episode,” told NDTV in Davos.

He further said that during his tenure, the government consulted the RBI regarding demonetisation.

He added, “Yes, any monetary economist would say that, better print the money before taking it away. But, that said I think the real sort of question is, should the RBI be a fifth column if the government wants to go ahead on something. In my guess, both legally and ethically you can’t stop the institution. You may refuse along with it, but you cannot stop the institution.”

Goods and Services Tax

Regarding GST that was implemented last year in July, he said that GST will have a positive impact in the long term. He also advised finance minister Arun Jaitley to not cut rates so frequently and let the economy and tax system stabilise first.

The GST after its implementation has gone through a range of rate cuts. The biggest rate cut came in November when the council announced tax rate cuts on 177 items, and restaurants and also changed upper limit of the composition scheme. Again, on January 19, they changed the rates for more than 40 items.