If we take exemptions out, we can simplify and lower tax rates: Arvind Panagariya

Panagariya spoke on various economic issues, including demonetisation, disinvestment and the upcoming Budget.

By: Express News Service | Mumbai | Updated: December 30, 2016 8:50 am
niti aayog, niti aayog vice cair, niti aayog Arvind Panagariya, Arvind Panagariya, Arvind Panagariya demonetisation, Niti AAyog demonetisation, Niti Aayog cashless policies, India news (From left) Janmejaya Sinha, Chairman, Asia-Pacific, The Boston Consulting Group, Niti Aayog Vice-Chairperson Arvind Panagariya and P Vaidyanathan Iyer, National Affairs Editor, The Indian Express

At the latest edition of Express Adda held at Express Lawns, Nariman Point, Mumbai, Niti Aayog Vice-Chairperson Arvind Panagariya was in conversation with Janmejaya Sinha, Chairman, Asia-Pacific, The Boston Consulting Group, and P Vaidyanathan Iyer, National Affairs Editor, The Indian Express. Panagariya spoke on various economic issues, including demonetisation, disinvestment and the upcoming Budget.

On demonetisation

This was an unprecedented move. The basic objectives of demonetisation will be achieved. I never saw this move as an isolated step. There were half a dozen steps taken prior to this. This being the biggest so far, and I don’t think this will be the last one either. India has a long way to go in terms of setting the policies right. While this is going to be a milestone, and when the economic historians write the history 10 years from now or later, this will be seen as a turning point. But I think there are still more policies to come and we need to follow up and build up on what has been done.

…its impact on GDP

To make any estimate of what the growth impact is going to be with the available information today is dicey. There is some painful transition that we are going through, but we would more than recover wherever we lose in terms of growth in the current quarter, or may be in the next one. It will be more than recovered as we go forward. We need to ensure that the shift that happens today towards digital transactions as a result of compulsion actually turns into a habit. Whatever can be done is being done and Niti Aayog has been very much involved in this. Many ministries are also doing this. Collectors have been asked, they are in turn going to the block and panchayat levels. So the whole digitisation campaign is being done. Also efforts are being made to ensure that the apps that banks are using are user friendly.

…its impact on jobs

Nobody can anticipate the unfolding. But that being said, I don’t think any of this is going to be permanent. The supply chains that get temporarily disrupted will recreate themselves very quickly. For example, I think of the hurricane that came to New Orleans; it looked like the city will never be rebuilt again and, of course, New Orleans is back to life. And that is the history. Actually, in many cities when they experience some gigantic shock like that, eventually they come back and rebuild themselves. And ultimately, it is all a matter of incentives. People react to incentives and as long as we go in and ensure that we recreate the incentives, which we will recreate when the liquidity is fully there in the system. Many digital technologies would have also been adopted by then, at least by a significant proportion of the population. So I think in the longer run we will come out more stronger.

On the US election

You have to pay attention to what Donald Trump has been saying after the elections. Generally the tenor after the election has been quite positive and that’s how the markets have reacted. Some of the rhetoric, like building the wall etc, existed. In fact, in the previous administrations, the wall was erected. He said it perhaps more forcefully. But on the trade side, let me get to how I see the impact on India. In the end, the global economy is extremely large. Our own economy is about $2 trillion, of which more than half is services. Our goods economy including agriculture and industry, is less than a trillion dollars. We are talking $18 trillion of merchandise exports. I am not sure exactly how the protectionist sentiment, which the president-elect has expressed, will translate itself into policy. If you go by the appointments that he has made, these are people who have been dependent on the well-functioning markets in an open global economy. At least by the appointments, one can take a bit of an optimistic view that in the actual execution, we will not see what we saw in the election rhetoric. In the end, for India what happens as far as the global economy is concerned doesn’t depend so much on what America does but on what India itself does. I think if we get our house in order, our policies in shape, we will be competitive.

On trade agreements with other nations

In this particular area, we are a little slower but we will get there. As far as EU is concerned, the problem has been on the other side. The ministry here has been wanting to open the negotiations. EU was much keener that we do something first on investment. Our position has been that investment and trade issues both have to be taken together. So, that is the story but it will happen. Apart from the trade agreements, we should also take up the issue of Regional Comprehensive Economic Partnership (RCEP) — the free trade area within Asia involving China and the ASEAN countries. With Australia separately, there’s negotiation on and off. That’s certainly part of the strategies we should pursue more aggressively.

On government initiatives towards job creation

On multiple fronts, first of all the government can provide a good environment for the creation of jobs. There’s been a continuous emphasis on the ease of doing business and also the Bankruptcy Act. The Niti Aayog has tried to get the states to do a lot of reforms that we were not able to do at the central government because of not having enough votes in the Rajya Sabha. Also, in terms of small and medium firms, the government has worked on easing up the credit constraint. So, it is a continuous process. We have to keep exploring newer avenues and push wherever we can. Jobs are the top priority for the government.

On the NPA issue

The Indradhanush was launched and several steps as part of that package were taken. Some recapitalisation did happen. More will happen. If some revenues become available, perhaps some of those could still be used for the recapitalisation of the banks. The big issue or the central problem that needs to be solved is that of non-performing assets (NPAs). There are these assets that are not fully functioning, therefore not being productive. Something needs to be done there. There is full recognition of this. I have been very much an advocate for some time internally. This also tends be a difficult problem. Recapitalisation cannot happen very fast because we face the fiscal constraint. That only leaves the option perhaps of cleaning up the assets through some sort of asset reconstruction company. It’s being discussed. Some momentum has been lost temporarily because of demonetisation but there is recognition in the government that something needs to be done.

On disinvestment

I would like to think we have made a lot of progress in that direction. The issue has been centrally put on the table. The Prime Minister is firmly behind it, that I can tell you first hand. He asked the Niti Aayog to do the analysis and identify the public sector undertakings (PSUs), which we have done. The first list we have already given out, we are working on a second list. For the first list, the matter is now in the finance ministry. Finance Ministry tends to be a little slower, for whatever reasons. But this will happen, I stand by it. I said this a few months ago that we would see the sale or disinvestment of PSUs. I stand by that.

On the upcoming Budget

This is the Finance Ministry’s domain and the final decision lies with them. It seems to me, against the background of demonetisation, where we are trying to frontally attack black money, this is an opportune time. There are two ways to attack black money. If black money has been created, then you punish those who created it. The second avenue to work at is to create conditions in which black money will not be created in the first place. And that, of course, means going after tax reform. So I’ve been advocating and I very much hope the Finance Ministry moves in that direction and tries to minimise exemptions. In any case, in corporate tax, there is a commitment already in existence. In last year’s Budget, it was implemented for the new companies. Any new company that wants to take advantage of 25 per cent tax rate can do so, provided it doesn’t take exemptions. And we need to keep moving in that direction.

But we should also look back at personal income taxation. If we take the exemptions out, we can not only simplify, but also lower the tax rates. The trick is to expand the tax base, simplify it and minimise the grey area over which the tax official on the ground makes the decision. If the tax laws are fuzzy, it gives power to the tax official on the ground, in which case the room for evasion expands. That is one way to combat the creation of black money. This is a great opportunity to do that.

On subsidies for digital economy

We all have to worry about fiscal constraints and what subsidies are given, there has to be a sense of priorities. And I’m not quite certain whether you want to subsidise a smartphone. I think you want to subsidise digital transactions themselves. The strategy that the government is pursuing recognises this fact. There is a platform for those who have smartphones, there are also platforms which allow digital transactions for feature phones. And then for those who don’t have phones, you need the POS (point of sales) terminals. In fact, Niti Aayog — in collaboration with TCS — has developed an instrument now, which you can attach to any Android phone and it turns it into a POS machine. It lets you read your thumbprint, which can then be verified against the Aadhaar database. So even for those who do not have a smartphone, in principle, this instrument can be used if there is difficulty in getting a POS machine. So the government is working on multiple fronts.

Today, we spend enormous amounts of money to not only print cash, but also to transport from where it is printed to the final location where it is disbursed. There’s a very large cost for running the ATMs. So, cash transactions do have an implicit effective subsidy. We could think of giving subsidy on digital transactions likewise, and that is a better way to go rather than subsidising smartphones.

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  1. N
    Dec 30, 2016 at 3:33 am
    Don't just talk the talk Mr. Panagariya, WALK THE TALK. The congress did the same for at least 40 of the last 60 odd years it governed.lt;br/gt;lt;br/gt;In a country where politicians across the entire spectrum (and Modi is no exception) have carved out exemptions for everything under the sun just in order to cater and pander to narrow vested interests, EXEMPTIONS HAVE BECOME THE NORM.lt;br/gt;lt;br/gt;Merely having a change of NITI is not enough; there has to be action on the ground.
    1. Dr. Jagannath
      Dec 30, 2016 at 1:29 pm
      In a diverse and democratic economy like India exemptions make fiscal policy more inclusive.Simplicity and low tax rates are not the only important objectives of taxation in a welfare economy.This advise shows lack of 'India awareness/exposure'. It is like advising someone suffering of cold to cut off the nose as that is the simplest. But in your blissful stature you may get away with such statements
      1. T
        Dec 30, 2016 at 3:08 am
        Yes, simplify the tax laws , eliminate all exemptions except for savings and the system is bound to become a little clean.
        1. C
          Dec 30, 2016 at 3:44 am
          Good hope the present rulers would simplify the tax laws and also eliminate subsidies starting from the elected guys of all types. They have remunerated themselves quite high. Rulers may think of making it mandatory for all the people to file tax return so to get the subsidy of any type linked to Aadhar. Make filing by a user friendly web site. Jaihind