To stop it, Swamy wants to end RBI's independence and abolish income tax.
We're used to Bharatiya Janata Party leader Subramanian Swamy making dire predictions – but they're usually about his opponents. He's tweeted often enough about what is going to happen to Congress leaders and how soon other political parties that he dislikes are going to get hit by catastrophe. This week, however, the former Harvard economics professor has a target that it is a little more dear to him: the Indian economy.
In a letter to Prime Minister Narendra Modi dated September 15, Swamy says that the economy is in the early phases of a "tailspin" and warned that if curative measures were not quickly taken "a major crash is inevitable". And in typical Swamy style, he has even put a specific time range on it.
"Based on my reading of the various indicators of Indian economy, I feel compelled to inform you that the economy is in its early phase of a tailspin. If curative measures are not take, then a major crash is inevitable between the coming November and February, 2016."
Indicators have in fact been sketchy on this regard. Inflation, for example, has steadily fallen over the last year, thanks primarily to falling oil prices, a development that has allowed India to get on to much more stable ground on the fiscal front. Gross Domestic Product figures have been less positive, partly thanks to a change in the way they are measured leaving most people confused about the final numbers, although analysts are generally confident that the economy is nowhere near the booming levels it reached in the 2000s.
When asked which data had so alarmed him, Swamy told Scroll.in, "all the indicators of the economy". He added, "We need to do something about it, otherwise the tailspin has already begun."
His letter goes on to explain what he thinks Modi needs to do to fix the problem: abolishing the income tax and bringing down the lending interest rates.
*Income Tax abolition
This, a standard talking point for conservative economists in the West, is usually seen as a policy import that makes less sense in a country where the tax net covers a tiny section of the population. Swamy has repeatedly called for this measure, and insists in his letter that "the loss of revenue due to abolition of income tax can be recouped by auction process of 2G, 3G and 4G Spectrum as well as comprehensive auction of coal blocks", all of which the government was planning to do anyway. Swamy says the indirect taxes additionally will be enough to tide the government over from the loss of revenue.
*Lower Tax rate
Swamy doesn't like Reserve Bank of India Governor Raghuram Rajan. It was murmurs from Swamy right before Modi was sworn-in that suggested the BJP could be considering replacing the well-regarded RBI Governor, before realising that the international outcry that this move might cause would not be worth the headache. Of late, many in industry and the government have been adamant that the RBI cut rates to reflect slumping inflation levels, to the extent that Chief Economic Adviser Arvind Subramanian even suggested that India should be concerned about deflation.
Moreover, Swamy feels international financial companies are "taking advantage" of India's high interest rates through interest arbitrage, and adds that of the $24 billion that has come into India since Modi took over, "$18 billion have come through Mauritius and Singapore." According to the Department of Industrial Policy and Promotion, in FY2014-15, India received about $15 billion in foreign direct investment from those two countries, of a total of $30 billion.
Swamy alleges that this is just recycling of black money and not new investment, asking instead for the government to end the independence of the RBI and bring the prime lending rate down to 8% and eventually 5%. "Therefore, I urge you to take personal interest and create a Crisis Management Team within the PMO for taking urgent steps to see that Indian economy does not spiral down to crash," Swamy says in his letter to Modi.