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An open letter to Manmohan Singh with some ideas to deal with recession

Dear Dr Manmohan Singh: If you want to lift the Indian economy out of the ditch it has got itself into, you must think out of the box. I think the best way to get India’s growth story back on the road is to give individual taxpayers a one-year income-tax holiday in 2009-10. That way, they will begin to buy, spend and create demand. Only the resumption of private spending will save our economy from a fate worse than 1929 — the beginning of the Great Depression.

If you think I have gone off my rocker, feel free to think so. But hear me out first.
You are an economist. I don’t need to tell you the economy is spiralling downward. Your own responses to the crisis since the collapse of Lehmann Brothers in September have only served to embellish these fears. You and your finance minister — before he dashed off to rescue the home ministry from ignominy — have cut interest rates, offered excise rebates to vast sectors of the economy, and doled out small bailouts to sectors that seemed to be in desperate need of it (aviation, for example).

Industry has already scented blood. Not satisfied with the Rs30,000-crore-and-odd package announced on December 7, they are asking for a whopping Rs70,000 crore top-up to rescue sundry favoured sectors — from steel and cement to real estate and construction. You should lend them a sympathetic ear, but don’t fall for this kind of lobbying. This money is better spent on people who spend — the middle classes.

Doc, there are times when band-aid will not save you from haemorrhage. Cough drops will not cure tuberculosis. Ordinary measures will not do when the world economy is on the brink of a depression, and dragging India down with it. True, we are not (yet) doing as badly as the rest of the world, but it is foolish to believe that the Indian economy is somehow going to grow at 7 per cent when everything around you is crashing and thudding.

The last industrial output numbers (IIP) actually show negative growth — it has fallen from 12.2 per cent in October last year to -0.4 per cent this year. Export graphs
have headed for the basement. The Indian growth story is almost over, going by these numbers. Employers are talking openly of pink slips.

Jet Airways did it crudely and withdrew in haste, but staff has had to take pay cuts. The IT industry is battening down the hatches for hard times. The real estate market is
moribund. Banks are asking people to leave their homes if they can’t pay the EMIs. No one is buying houses anymore. Worried about jobs and income stability, consumers are
delaying or abandoning previous spending plans.

That’s what should be worrying you, not the breast-beating by businesses. I don’t need to tell you that the Indian economy zoomed primarily due to the spiral of higher incomes and higher consumer spending. In 2009, few companies will be giving any real ncrements to staff, and employees are curtailing spending in anticipation of worse times
to come. In sum, despite the fact that people still have high incomes and jobs currently, they are holding back — and compounding the dramatic demand slowdown. When people don’t buy despite having incomes, you are already half-way to recession.

Cutting interest rates and reducing excise will not prompt people to buy cars or fridges when they are worried about their future. How are you going to get them to change their mindsets?

Quite simply, you bailout measures are not going to dig India out of the pit it has got into. Our problem, let me repeat, is to get people spending and buying again, so that India can resume its growth story and even contribute to lifting some of the gloom enveloping the world.

My simple remedy is to give a one-year tax holiday to all individual taxpayers. You have to get the middle and upper middle classes out of the recession mentality. If you are worried about the rich getting away with murder, you can always put a cap on the income exemption limit: say, a generous Rs1 crore a year. Or at least Rs50 lakh.

Everybody must still be asked to file returns, so that in 2010, when the tax holiday is withdrawn, people will pay enough taxes to start bridging the budget gap. But a tax holiday is a must now.

You can give concessions to industry, which it will swallow gratefully. But to get the economy moving again, you have to get ordinary people to put their shoulders to the wheel. While the poor should get greater safety nets (food for work, unemployment benefits, etc), taxpayers need a tax holiday to improve their sense of well-being.
In short, you need to help Main Street, not Dalal Street.

Email: r_jagannathan@dnaindia.net