The compensation payable to the States for the revenue loss arising due to Goods and Services Tax (GST) is just ₹5,000 crore, far lower than estimated, according to Chief Economic Adviser (CEA) Arvind Subramanian.
In a candid interview to The Hindu , Mr. Subramanian also batted for the lateral entry of talent into the government, saying that it was a “no brainer” in a situation where demand for talent outstripped the supply within the government. He, however, noted that it wasn’t sufficient to get the talent from outside. There was need to ensure that the person can also effectively work with and within the bureaucracy.
“Consistent with my revenue neutral report and against what everyone said, the GST compensation requirements are only about ₹5,000 crore for the entire first year ,” he said. “We were surprised at how strong the revenue performance has been in the first year.”
While it is difficult to ascertain its exact contribution, demonetisation “certainly did” contribute to the deceleration in the economy, he said.
Excerpts from the interview:
What is the one lesson you would want the government to have learned from your tenure?
I guess the broader point, and certainly what Mr Jaitley [Union Minister Arun Jaitley] has embraced quite enthusiastically, is it is important to have independent advisors in the government who speak their mind. This job is something they should continue, nurture and enhance. The CEA should not be seen as just another technocratic cog in the vast machinery of the government of the day. This government has embraced that, but I think it should be embraced by all governments.
Looking forward, I think the success of the GST, one important lesson from that is that cooperative federalism has to be a method, an instrument, a kind of technology as it were, for many of the reforms going forward. Whether it is in agriculture, implementing DBT [Direct Benefit Transfer], so many of these things have to be done with the State governments. Otherwise I think big reforms will be more difficult to implement.
What advice would you give your successor?
I’ll be honest with you — in all these questions, there’s the trap of vanity. If you think you’ve done a great job, you’ll say “Oh, follow me, I did these great things”. I think everyone has to learn from both my successes and my failures. The [Economic] Survey has become a strong document. The latest number is 15 million hits in four months from 350,000 unique visitors and 170 countries. Evidently, there are people in Chad who are interested in the Indian Economic Survey! Those are things I hope will be maintained.
There is, in fact, no other country that has a job like the CEA. In the U.S., you have the Council of Economic Advisors, purely advisory in function. If you combine that with the chief economist of the treasury and put both in the U.S. Treasury, that’s what the job of the CEA is; that I am close enough to decision-making to provide high policy input and I have this medium of the Survey; I have my independence and distance to propagate the big ideas as well. So, that is a very unique system we have.
So, what would you have counted as your ‘failures’, what would you have done differently?
One thing is that about seven chief ministers and State finance ministers have said they wanted me to create an office of CEA to the States, and I have not been able to meet that demand. And they’ve done it because they thought what we are doing here is extremely valuable. I greatly regret not being able to do it. To put it pompously, in my future incarnation if I earn good karma, then I would want to be the CEA to not just the Central government but all the State governments.
What do you think about the idea of lateral entry into government positions?
I think it is an absolute no-brainer in terms of being necessary. But then whether that alone will be enough is not clear. Take for example, Parameswaran Iyer (Secretary, Ministry of Drinking Water and Sanitation) who has come in, I think that he’s done a very good job. The point is, you have to have some basic premises or assumptions. If you think for the government to improve state capacity for the delivery of everything, that there is more demand for talent then there is supply, then it is a no-brainer. The only question is where do you get the talent from.
The second question is, if you think you can get the talent entirely from a recruitment process, that seems so antiquated. If you were to tell me that the Secretary of some important department is going to be someone who 35 years ago got three more remarks in some exam compared to someone else, and so he gets to do a fairly technical job... In some ways you can almost say that you can't make this stuff up, it's so strange! You would think that every job has a specific expertise component.
But I think why it is not a sufficient condition. You have to get the right people and then you have to create the conditions for that person to be able to work with the bureaucracy and be effective. That I think is the next challenge. It's easy to get the outside talent, but how do you make them work with the existing system?
In these politically partisan times, there is a fear that the people being brought in might be aligned to a particular party, whichever one it is.
That risk will always be there. But if a government wants to do that, they can do it without getting external talent. I just think the Indian government needs a lot of expertise and talent, especially since so many of the tasks of government are becoming much more sophisticated. If you think you have a regulator and that needs specific expertise, then that extends to administering health, education, financial markets, everything. Right now, we have too many generalists and not enough specific experts. Nobody is saying get rid of the generalists, but the balance right now is so skewed, that we need to rectify it.
Of course, we need safeguards in terms of how you appoint them, what are the conditions of working, conditions of exit. It's not an easy task.
Do you think that this idea of having specific skill sets for the task at hand should extend to the rank of Minister? A Law Minister being a lawyer, a Health Minister being a doctor, a Finance Minister being an economist...
You see, I think the difference at the political level is that there you have the option and the status and the rank to actually acquire the talent. At that stage, there are deciders and people who provide inputs. If deciders can also be experts, then good, but they have so many other roles to perform so maybe for them one could relax that condition. But it is good to have at every level expertise and knowledge.
In the last six months, a lot of the macroeconomic indicators such as the CAD, FD, and even inflation, have been tracking slowly back to risky territory. Do you feel that our macro indicators' stability is overly dependent on oil prices?
If you are a big net oil importer, it's going to come with the territory. But while these indicators have reversed to some extent, they are nowhere in danger territory. The CAD [current account deficit] at 2%, inflation at 4.5%. Compared to where we were in 2013, of double digit levels, I think by no means are things in unhealthy territory. They have worsened to some extent but in a very manageable situation.
But the broader point is true that we have a vulnerability to oil prices in the long run and it's something we need to be aware of and over time try to address. Also, this time around it's a combination of oil prices, the dollar appreciation, and the kind of currency trade wars that are happening. It's a combination of all three. We should not lose sight of the fact that when China depreciates its currency, that's a major shock to all competitor countries, to some extent India as well.
What is the real impact of the ongoing trade tiff involving the U.S., China, and India? Or is India too small compared to the other two?
I think we are a bit small. It’s not just the size of the economy, but also how integrated we are with the global economy. Our exports-to-GDP [ratio] is not that huge; our imports are still not crucial in that sense. I don't think we are key players in this. We are going to see the fallout from this and mostly it’s going to be worrisome. But I think there are also pockets of advantage that come about. Today there was a piece by Harish Damodaran on soya, for example. One way of thinking about the trade wars that are happening is that in the old days, we used to have a debate about whether preferential liberalisation is better than multilateral liberalisation.
Now essentially we are getting preferential protection. There are trade diversion opportunities through preferential protection as well. So, if China slaps tariffs on soya from the U.S., all other producers of soya can get access to the Chinese market, which they didn’t have earlier. But those are going to be isolated and product by product.
Overall, I feel if trade wars and currency wars take place, the global economy declines, growth declines, risk premia go up, capital flows out, and all of these things create uncertainty in all emerging markets.
How should India react to the U.S. threat of sanctions on countries trading with Iran?
I think this is both a foreign policy decision as much as an economic one. The U.S. is apparently saying that they will enforce this more strictly than last time, which means there will be fewer waivers. If that happens, then we will have to find other sources of oil.
The costs of not adhering to the U.S. are quite stiff. Essentially what it means is that you can’t be part of the dollar based international system and almost everything takes place in the dollar… It’s the role of the dollar that is so all-permeating, not just in trade but as a payment mechanism and an instrument of finance that makes the cost of non-compliance very high.
What is the signal we should get from the large amounts of FPI outflow that is happening? Is it that the Indian market isn't as attractive as advertised?
Remember that the FPI [foreign portfolio investment] outflow is almost predominantly happening because of exogenous factors such as oil, dollar appreciation, currency wars. There is a generalised flight of capital away from emerging markets. But on top of that there could be some India specific elements. For example, oil prices go up, India is more oil intensive, so that may have a slightly bigger impact on India in terms of outflows. We just have to make sure we don’t have any major vulnerabilities and we don't add to vulnerabilities. The government has done a great job with how it has dealt with oil prices, macro stability, committed to fiscal targets and fiscal prudence. That’s all you can do. We can't change oil prices or sentiments.
Do you feel our revenue situation right now or in the near future is going to be strong enough to do away with the 28% slab, as you had spoken about?
We wrote a piece where we were surprised at how strong the revenue performance has been in the first year. It's the first time anybody has done this analysis since we have access to the data on the first nine months of the GST performance. We see about 11.9% growth, a buoyancy of 1.2 which is historically rarely seen for indirect taxes. At a time when growth decelerated and when major tariffs rate cuts were implemented, it is unprecedented. Second, consistent with my revenue neutral report and against what everyone said, the compensation requirements are only about ₹5,000 crore for the entire first year, in the first year of implementation for the entire country.
So, in that sense the revenue performance has surpassed expectations and it has happened in a way where the poorer States, the consuming States, have seen an expansion in their tax base, with one or two exceptions. The five-year guarantee we did was a bold one because it was based on confidence that it would not be necessary.
That being said, the asking rate for the overall GST revenue growth rate for next year is not small, about 16-17% in aggregate. It grew by almost 12% in the first year with a difficult implementation. It's ambitious, hopefully it's doable, but if you start getting there, then I think confidence in the revenue will start to come in order to do away with 28%.
So, what this means is that, sooner rather than later, if the compensation requirements are lower than expected, then the entire rate structure and the cesses can be rethought. With the inclusion of fuel in the GST, there are other political dynamics at play. If oil prices go up, the political process will demand that petrol be brought under the GST.
The FM has expressed his commitment that we will meet the fiscal target of 3.3% this year. But given it is an election year, and given the drastic increase in MSPs, how likely do you think that is?
The government is committed to meeting that, so I think they will do everything they can to meet it. The more uncertain the environment, the costlier it will be to depart from these limits. I think the political and economic incentives are more aligned than not. Say you depart and something happens to the currency, then very quickly you are tarnished by this tag of 'loss of control'. I think lessons of 2013 are vivid, have been internalised, and have to be kept in mind.
Given your outspokenness on other issues, you were strangely silent on demonetisation...
In the first chapter of the Economic Survey, we had the courage to say “demonetisation will create short-term costs”, and we say they have taken the form of inconvenience and hardship especially for the informal, cash intensive sectors. Hopefully these are transitory, but the costs have been significant.
What we said then is that there have been short-term costs and potential long-term gains. I think that is a provisional assessment that we will have to keep making two years, three years... What’s happened to tax, formalisation, taxation, and what happened to the costs. In the latest Survey, we said that there was a slowdown and decoupling of the Indian economy, and one of the four reasons was demonetisation. It is very difficult to say how much was the contribution, but it certainly did contribute to the deceleration.
On a lighter note, who were you supporting for the World Cup, and with the final as it is, who do you support?
I didn’t have a strong starting support. To be honest, I was for the African nations to win. But as they have got eliminated, I find that for all of us cosmopolitans, at a time with all this latent racism and nativism coming back, I think the French team kind of represents a young, multicultural movement. They have immigrants, players of colour, etc.
The thing about France is that, although they won playing pretty solid defence, they have flair on offense. When (Kylian) Mbappé sets off... That Argentina game was thrilling to watch. (Antoine) Griezmann is very good. And I am a big fan of (N'Golo) Kanté... So, I will be rooting for France. But I think the final should have been between Belgium and France.