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Universal basic income can boost consumption instead of I-T cut: Arvind Subramanian

A file photo of Arvind SubramanianPremium
A file photo of Arvind Subramanian

  • 'If you want to boost consumption, it has to be a direct benefits transfer or a universal basic income, not a personal income tax cut,' the former CEA said in New Delhi
  • Subramanian said that India has infused quite a bit of capital into stressed state-run banks and any further capital infusion should be linked to reforms

New Delhi: A universal basic income, rather than a cut in the tax on personal income, can boost consumption as India tries to come out of the grips of a deep economic slowdown, former chief economic advisor (CEA) Arvind Subramanian, said on Friday.

Subramanian, who delivered a talk on "India’s Great Slowdown" at the Observer Research Foundation, said that India should moderate its long-term economic growth expectations and take urgent steps, including setting up bad banks to acquire failed power producers and builders to counter the economic slowdown.

Subramanian, who had served as the CEA between 2014 and 2018, said that to tackle the demand slowdown, a cut in personal income tax will not be of help. “I think a personal income tax cut motivated by the desire to increase consumption is highly inequitable. If you want to boost consumption, it has to be a direct benefits transfer or a universal basic income, not a personal income tax cut," Subramanian said. Only about 6% of the 1.39 billion people in the country pay income taxes. “I think we should not do a personal income tax rate cut or a GST rate increase," said Subramanian. "Raising GST rates during an economic slowdown could be perverse," he added.

Subramanian said that India has infused quite a bit of capital into stressed state-run banks and any further capital infusion should be linked to reforms. He suggested a fresh asset quality review in light of banks’ lending to the non-bank sector.

Subramanian argued in a paper published by the Harvard University’s Center for International Development that India’s twin balance sheet problem — the stress in the corporate and the banking sectors — has now spilled over to non-bank and real estate sectors. The paper proposed that the Insolvency and Bankruptcy Code should be amended to incentivize rescuing sick companies and state-run asset reconstruction companies should be set up for the real estate and power sectors

“The problems are serious and protracted. We need to moderate our long term growth expectations. But not so much as to say we can’t do anything about it. We can do some things. But hard work lies ahead," said Subramanian. He also said that there will inevitably good news on economy within a few quarters, but one should not be complacent about fixing the long term problems associated with the Indian economy.

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