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Bibek Debroy interview | ‘The key question is: are we on a trend economic growth rate of 6% or 7%’

The government can increase efficiency of overall government expenditure (both states and the Centre), cut direct tax rates, and harmonise Goods and Services Tax rates, to spur growth, says Bibek Debroy.

By: Express News Service | New Delhi |
Updated: August 19, 2019 9:48:27 am
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The Indian economy is slowing down. People are pruning their expenses even on non-discretionary items, let alone automobiles and homes. In an interview to The Indian Express, BIBEK DEBROY, chairman, Prime Minister’s Economic Advisory Council, says the government can increase efficiency of overall government expenditure (both states and the Centre), cut direct tax rates, and harmonise Goods and Services Tax rates, to spur growth. Also, he adds, it will be good not to expand the fisc or extend sectoral incentives as many are demanding now.

Some economists have argued for counter cyclical policies. Would you agree with them — spending more during a slowdown?

If I just look at it from an academic point of view, I’d probably say, yes. But looking at the past, the moment you open the tap, there is no controlling it. I will widen the deficit for capex, but control revenue exp. Eventually, we will bear the cost later on.

There have been demands for sectoral incentives, the latest being for the automobile industry.

In my personal opinion, we should not have any sector-specific interventions. These will create distortions. Fiscal concessions to specific sectors will complicate the tax story even further.

In the last quarter of 2018-19, the economy clocked less than 6 per cent. Is the trend growth rate shifting down?

There are questions whether the slowdown is cyclical in nature or structural. All of this depends on the benchmark that we use — the real rate of GDP growth, given the GDP deflator (the RBI target of 4 per cent). The GDP growth rate last quarter of 2018-19 was at 5.8 per cent. In 2018-19, the growth rate was 6.8 per cent. The Survey makes the point that in the preceding five years, the average rate of growth was 7.5 per cent. This year, the Budget has a projection of 7 per cent. This is what determines different people’s perception.

Are we on a trend of 7 per cent, was 5.8 per cent in the last quarter a blip? Or are we on a trend of 6 per cent? This, to my view, is the key question. Given the global uncertainty, or all that is happening in the external world, even the 6 per cent is not dismal. It’s not enough, we need to grow faster. End of the month, we will have the first quarter figures of 2019-20. We will know whether it is a 6 per cent or 7 per cent trend.

We all know that reforms that are necessary. Irrespective of what the trend GDP growth rate is, it must be remembered that many of these require legislative changes. Many of these are factor markets, and in the domain of states. Obviously, these reforms are necessary. But the national government in Delhi has limited degree of freedom for pushing those reforms.

But given the slowdown, what best can the government do to get the most out of its expenditure?

Let’s look at government expenditure — here, there are limits to public expenditure, because there are fiscal consolidation issues. The Union government is fiscally constrained, because of Fourteenth Finance Commission recommendations and has to spend on defence, railways. However, there is a package of central sector and centrally sponsored schemes (CSS). In central sector schemes, there is 100 per cent funding by the government. But there are too many Central sector and CSS. The Shivraj Chouhan Committee had ostensibly collapsed these into 28 schemes, and they come to an end in March 2020, since they are co-terminus with Fourteenth Finance Commission.

The centrally sponsored Schemes are outside the mandate of Fifteenth Finance Commission. Yes, you can rationalise these schemes, have a small set, which increase the efficiency of public expenditure.

Here, let me digress and point to the phenomenal success of the GST Council as a decision-making body. This was about indirect taxes.

Time has now come for a similar body on public expenditure to do exactly what the GST Council did for taxes. This body should decide about what should be public expenditure. Every state wants more money.

Taking an extreme point to illustrate my point, let us ask a question — whether health is important? Should there be a Union government scheme for health? But health is a state subject. So, if we think health is important and we want the Union government to spend on health, by the same token, the state government should pay for defence. After all, I have got limitation in terms of resources available for public expenditure, I need to prioritise. That prioritisation cannot be done by the Union government alone, but also by states.

What about GST itself?

I think a lot can be done on GST also. Essentially, it has to be done by the GST Council. But to a large extent, the Union Finance Ministry can navigate what happens on GST. The issue is pretty simple: that we need to streamline and harmonise rates. As an economist, I would argue, there should be a single GST rate.

In practice, it is impossible. No country in the world has a single GST rate. From a pragmatic point of view, we must have three GST rates. For illustrative purposes, say 6 per cent, 12 per cent and 18 per cent. Everyone wants the 24 per cent to come down to 18 per cent, but no one wants the items under 0 per cent to come under 6 per cent.

And is there scope for a cut in direct tax rates?

The task force on Direct Taxes was supposed to submit its report by August 15. The direct tax rate can be reduced significantly. The only way to reform direct taxes is to eliminate exemptions for both personal and corporate taxes.

Land, labour, will take 4-5 years to yield payoffs. In rural India, enormous changes have been brought about by providing them electricity, LPG … now these yield productivity benefits that are difficult to quantify … in the long run.

However, if I am talking about what the Union government can do, is tax, expenditure, and monetisation of assets, particularly land assets of public sector enterprises. It’s important from the point of view of privatisation. These too will take time to yield benefits. It will take a year to reap benefits.

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