‘Costs of not adhering to the U.S. sanctions are quite stiff’

July 13, 2018 12:00 am | Updated 05:11 am IST

In the event of non-compliance, we can’t be part of the dollar-based international system... and almost everything takes place in the dollar: Chief Economic Adviser

The costs of not adhering to the U.S. sanctions on trade with Iran will be very high, Chief Economic Adviser Arvind Subramanian said, adding that India stood to be negatively affected by the ongoing trade war between Washington and Beijing.

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. 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.

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?

Do you feel the revenue situation right now or in the near future is going to be strong enough to do away with the 28% [GST] 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 Rs. 5,000 crore for the entire first year, in the first year of implementation for the entire country. 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.

What is the likely 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 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 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 they will enforce this more strictly than last time, which means 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.

Given your outspokenness on other issues, you were strangely silent on demonetisation...

In 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...

The U.S. is apparently saying that it will enforce sanctions more strictly... then we will have to find other sources of oil

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