How do you see India’s growth from a country that was forced to borrow 30 years ago, to the situation it is now?
There has been a tectonic shift in many ways. In the 1980s, we decided to promote growth through higher public outlays from internal borrowing and external debt. The concessional flow of credit, which was around 89%, has come down to 39%. This put pressure on the balance of payments, leading to the crisis in 1989. This challenge was taken up by the Chandrashekhar government, which also included pledging of gold. But the government changed and reforms were announced in 1991. we needed support world Bank, International Monetary Fund and bilateral donors, who were important members of the Aid India Consortium. At the time, the ethos in multilateral institutions was known as cross-conditionality. We had to implement obligations every quarter to access resources from the IMF in addition to the World Bank’s structural benchmark. At that time, we wanted the fastest disbursement loan because foreign currency Stocks were at historic lows. Fast forward 30 years: The whole language has changed. Our reserves today are probably an embarrassment – the question is how to use these reserves in imaginative ways. Our conversation today is on how to deepen economic reforms and cover areas we didn’t have, such as completing the elusive agenda on reforms in the agriculture sector, labor and power sectors. The mantra is no longer on increased public outlay, but increased public outlay to focus on reliable infrastructure and more robust social sector spending.
Should states now be the primary drivers of reforms?
States need to be more proactive, energetic and imaginative stakeholders. Very few states like Gujarat and Andhra Pradesh understood the importance and consequently not all states benefited equally from the 1991 reforms. The next headlines may not be New Delhi but Lucknow, Hyderabad and Bhubaneshwar. Unless states become active stakeholders, many important reforms will not make much impact on the ground. For issues like health, the third tier has to be a part of it.
Is it time to rework the direct tax mode where successive governments have failed to expand the tax base and raise the threshold? Is it time to repeal the 60 year old Income Tax Act also?
Public outlay in India is not significantly wrong with such a lower middle income country. In fact, there is a need to expand them in terms of improving inequalities. The overall tax-GDP ratio has not exceeded the highest -21.6% in 2007-08. The tax-GDP ratio of such an average middle-income country would be 27.2%. In Asia, the average is 25%. Our tax-to-GDP ratio is too volatile to bear the public outlay of about 20%, without the spillover effect on fiscal deficit and volatile debt targets. If you go on increasing the exemption limit as a populist thing, the result is that people go out of the tax net. Almost half of the population, which is engaged in agriculture, is already out of the trap. If 5.5 crore returns are filed, 40.5% have no taxes, and it is 6.3% who bear the burden of 79% taxes. We need to look at this fundamentally again.
What is your take on GST and the changes required?
On indirect taxes, calculations given by the IMF show that failure to comply could result in around 4-5% of GDP, which is huge. GST is surrounded by many issues. I don’t know that a big deal of assured 14% revenue growth to the states was necessary because the economy was very good at that time. We haven’t been able to arrive at a real revenue-neutral rate. There are different estimates – from 14% to 16%. The IMF had suggested 11.6%, but without a discount. Our effective rate of about 11% is wrong with any estimate. These include inverted fee structure, compliance issues, broadening of rates and politicizing operations. GST Council. The future of GST must be addressed.
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