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Rediff.com  » Business » Survey's take on economic challenges

Survey's take on economic challenges

February 27, 2016 10:41 IST
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The Survey had a series of short notes on economic policy issues.

 

A few of them are excerpted below:

Analytical taxonomy of financial crises, past & future

If a crisis occurs in China or another large emerging market, it would be different from the ones which took place in the past 80 years

It would more likely resemble events of the 1930s when the UK and then the US went off the gold standard, triggering a series of devaluations by other countries, leading to a collapse of global economic activity.

In the Latin American debt crisis, governments went on a spending binge financed by foreign borrowing while pegging their exchange rates, the spending led to a classic sequence: Economic overheating

Defaults on foreign borrowing - India's external crisis of 1991 belonged to this category- though the country has never defaulted

A potential tail event in a systemically important emerging market would resemble the events of the early 1930s more

Addressing the Twin Balance Sheet challenge

Resolving the TBS challenge comprehensively would require 4 Rs: Recognition, recapitalisation, resolution and reform

Banks must value their assets as far as possible close to true value (recognition) as RBI has been emphasising

Underlying stressed assets in the corporate sector must be sold or rehabilitated (resolution) as the government has been desiring 

Future incentives for the private sector and corporates must be set right (reform) to avoid a repetition of the problem

But there is a needed sequence to these: Recognition must come first, but it must be accompanied by an adequate supply of resources; otherwise, banks will be vulnerable

Tax treatment of savings

The case for concessional tax treatment of savings is built on the consideration that a tax concession for savings leads to higher post-tax return for the investor

The higher returns, in turn, create a positive substitution effect, in favour of savings rather than current consumption

There is some empirical evidence to suggest the positive and negative effects are neutralised at the economy level

Tax incentives for savings, as designed in India, do not encourage net savings (contribution plus accumulation minus withdrawals) since withdrawals are also exempt from tax. In addition, national savings comprise of household savings, government savings and corporate savings

Tax incentives for savings distort the interest structure and choice of savings instruments, and merely help mobilise funds to specified savings instruments

Improving economic policymaking & implementation by getting public servants to decide without fear or favour

Widely held perception, within the civil service and outside, that civil servants have in recent times become increasingly reluctant to decide issues quickly and firmly 

Most staff of investigative agencies don't have the tools, skills or training to do a proper probe of modern-day financial crime and corruption

Desirable for the government to set up a commission to recommend a new prosecutorial policy for the offence of corruption to balance the need for probity with the need for bona fide decisions to be taken without fear of false allegations of corruption

Commission should also recommend measures to improve capacity of both investigative agencies and public prosecutors

The government and public sector are dotted with a large number of vigilance officers. But, quantitative evidence and public perception both suggest this has not been accompanied by any reduction in levels of corruption

Vigilance officer system is felt to be ineffective and in some cases even counter-productive; time to consider whether the costs of this elaborate, but apparently ineffective, system are worthwhile

The Prevention of Corruption (Amendment) Bill 2013-14 , pending in the Rajya Sabha, seeks to carry out major improvements to the Bill and strengthen the anti-corruption law by bringing it into conformity the UN Convention against Corruption.

It proposes to replace the provisions of Section 13(1) with new wording in conformity with international norms that is fairer and would prevent prosecution for mere administrative errors

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