MUMBAI (TIP): RBI governor Raghuram Rajan has made a strong pitch for allowing inefficient organizations to die even as he called for a safety net for individuals. Rajan’s statement assumes significance in the backdrop of the government preparing to introduce the bankruptcy bill in Parliament.
The governor also called for global agreements on taxing corporates that sought to avoid taxes through offices in havens such as the Cayman Islands.
“In India we have a lot of empty sheds in industrial parks. Those sheds are not empty because we do not need space, they are empty because there is some dead firm which is not allowed to die. Which is the living dead. It is not allowed to go out of business and it has a hold over that shed. Can we terminate it for the benefit of all concerned and put in a new entrepreneurial firm?” asked Rajan while delivering the 13th Nani A Palkhivala Memorial Lecture in Mumbai in Tuesday.
“Entry is important in a free market but exit is equally important. Once the resources are allocated, if they are not being used effectively, it makes sense to take those resources away and give them to somebody who can use them more effectively,” said Rajan. Stating that organizations that fall behind should be taken out through the Bankruptcy Code, Rajan said that there was a need for individual safety nets. “We need a safety net. Any free enterprise would have ups and downs.
Without a safety net, the way down can be steep indeed,” he said. According to the governor, a safety net was needed so that individuals can take risks and feel confident in day to day activities and so that they are kept off the streets and don’t rebel to overthrow the system when there is adversity. On the role of taxation, Rajan said that the debate over retrospective taxation has allowed us to clarify our thinking on the issue. But he also said that it was true that multinational corporations across the world tend to find tax evasion and tax avoidance as appropriate techniques. “Some corporations find that all the intellectual property is manufactured in the Cayman Islands. I have not seen a lot of smart scientists sitting in the Cayman Islands. So clearly there is an issue there.