A structured investment tax credit regime for industry could help aid economic revival, according to a working paper authored by a professor at the Indian Institute of Management, Ahmedabad (IIM-A).
'The Way Out of the Current Macroeconomic Mess', written by IIM-A professor Sebastian Morris suggests that if the government introduces a structured investment tax credit regime for industry for the next two years, then it could be a major factor to attract investments.
"The industry should be allowed an offest against future tax payments. If such a tax regime is instituted by the government, then an economic revival is possible," Morris has written in his paper, adding that by doing so, the government may lose on the direct tax front, but may gain considerably in terms of indirect taxes.
The economic 'crisis' which has persisted for over a year now, was anticipated way back in 2011 by many, when the government not only prematurely exited the fiscal stimulus but the RBI also began raising repo rates, the paper written by Morris has stated.
"I (Morris) would call it a (rate hike) madness. It will kill industry and investments. A repurchase rate increase under the present circumstances is against elementary understanding of macroeconomics," Morris stated in his paper.
There is possibly a way out of the crisis, if credit could be expanded to close the differential between low-end government bond yields and the repo rate, accompanied by a large push towards investments with a structured investment tax credit regime valid for the next 24 months, the paper stated.
"It could crowd in investments to attract foreign direct investments as well as portfolio investments and if the RBI does not allow the rupee to appreciate in real terms, the then Current Account Deficit (CAD) could close, along with reasonable growth as well," the paper stated.
Without these actions, the "holding out" operations on the currency by RBI can at best delay a further fall in the value of the rupee, the paper said.
Ideally India should have a CAD surplus, instead of a deficit. Last year, India's CAD stood at around USD