At a time when rising protectionism and stagnant growth have left several countries baffled, Dr. Bibek Debroy, a member of the government think tank NITI Aayog, sees no dearth of opportunities for Indian businesses. In an exclusive interaction with The Dollar Business, he explains the logic behind the policy decisions taken up by the government in the recent past and how they will help India’s economy going forward.

Interview by ahmad shariq khan | April Issue 2017 | The Dollar Business

TDB: How do you read this year’s Union Budget? Do you believe it serves the broader reform blueprint of the government? 

Dr. Bibek Debroy (BD): The Union Budget this year was presented against the backdrop of a few institutional changes such as the abolition of the distinction between planned and non-planned expenditures (drawing from the 14th Finance Commission Recommendations) and the end of the Railway Budget and its merger with the Union Budget. Another important change was the advancement of the presentation of the Union Budget by a month, which in my view broadly aligns with the government’s realisation that there is a need for changing India’s financial year and moving to a calendar year cycle ultimately. This will help in better policy planning.

I would say Finance Minister (FM) Arun Jaitley has indeed managed to present a balanced Budget that would not just help the government move ahead with its development plans, but would also promote economic growth and create an enabling environment for entrepreneurs across the country.

Now, talking about fiscal consolidation, it’s well apparent that this time the Finance Minister has stuck to his fiscal targets. However, before delving deeper into the subject of fiscal consolidation, let’s for a moment uncover the nuances involved in preparing the Union Budget. We know that these fiscal targets are primarily a function of revenue and expenditures. Revenue, particularly tax revenue, is largely a function of what the growth is going to be, and therefore while dealing with it one needs to make certain assumptions about the nominal rate of growth and out of that about the probable growth in tax revenue and the non-tax revenue.

After this as we arrive at the expenditures, much of which, particularly the current expenditures (like wages salary, pension, etc.), not only makes up a significant part but are frozen and as such there is nothing much you can do about them. Out of what is left, the government has to decide its priorities. As of now, much of this share is being spent on what’s called the public goods and services, broadly transport and railways. One must also remember that the Budget this time had to incorporate the broader reform template of the Goods and Services Tax (GST). And that was the rationale behind not tampering with the tax rate, both on the direct side and on the indirect side because while on the indirect side there is soon-to-be-introduced GST, on the direct side the plan for phasing out of exemptions has already more or less been pronounced.

TDB: What benefits do you envision from the unification of the Railway Budget and the Union Budget? 

BD: The Railway Budget has been a legacy of a bygone colonial era and we had to revisit the policy and align it with the changing threats and opportunities faced in the new globalised world. At the same time, assuming that clubbing of the two Budgets will alone treat all ills faced by Indian Railways will be wrong. In my view, it’s high time the Indian Railways adopts a reform plan, including these five broad strands: a comprehensive accounting reform with the latest management information system (MIS); introduction of private entry into the sector; setting up a truly independent regulator; imparting more decentralisation in decision making; and breaking down the silos affecting the Railways. I believe the merger of the two Budgets will be a big trigger for all these reforms to start taking shape.

TDB: Industry representatives expected more clarity on GST rollout from the Budget. Your comments?

BD: Without the nod of the GST Council, which now has representation from both the Centre and state governments, I think it would have been extremely improper for the Finance Minister to come up with any announcement with regards to GST in the Budget.

TDB: The GST rollout date is just around the corner, however the Centre and states are yet to arrive at a consensus over certain aspects of rate and tax-sharing arrangements. Your take?

BD: We now have a GST Council in place that is working quite effectively to address concerns of each stakeholder. Yes, I accept there are some hiccups, but just because there are two differing viewpoints does not necessarily mean there will not be a consensus amongst stakeholders.

TDB: An ideal GST would be one where all other taxes are subsumed into it. However, due to several tax exemptions, a huge amount of revenue may never reach government coffers. Don’t you think that the more we allow exemptions, the more it nullifies the whole objective of GST.

BD: Frankly speaking, since we don’t know as of now what those ‘exemptions’ are going to be, it would not be fair to presume that the final exemptions list will defeat the purpose of GST. No one is against the scenario of an ideal terminal GST which includes the abolition of all indirect taxes, subsuming all of them in one standard rate. But then, for that we might need to wait for another 20 years, till we have built consensus with all the stakeholders. Given the available alternatives, we need to realise that this multi-tier tax system is a work-in-progress that could be revisited and improved upon as we go along.

TDB: Finance Minister Arun Jaitley, in one of his previous Budget speeches, spoke about asset recycling. We believe NITI Aayog had also identified a list of companies for divestment. But in Budget 2017 there is no mention of asset recycling and even the list of companies identified for divestment is missing. Could you tell us why? Also, do you think the government’s divestment target of Rs.70,000 crore for FY2017-18 is really achievable?

BD: I believe, except for the targets, there isn’t a need for everything to be announced in the Budget. Announcements would be made subsequently. I think the government has made a clear roadmap in this regard. As for listing of companies, a revised mechanism with clear timelines is in place now. That includes many central public sector enterprises to be listed and some more would follow going forward. With regards to divestment targets for FY2018, the government is not just going to achieve, but surpass it this time.

TDB: Under the current WTO-led regime, how relevant is the idea of promoting SEZs in the country? NITI Aayog, in its report titled ‘Make in India – Strategy for Electronic Products’, called for setting aside large coastal areas, which may be called Costal Economic Zones (CEZs) to distinguish them from SEZs. Could you elaborate a bit more on this?

BD: Be it CEZ or SEZ, the idea of pushing select industrial conclaves is not sustainable in today’s liberalised era. Historically, import duty reductions were important and that led to the growth of SEZs in the country.

The first SEZ that India set up way back in Kandla in 1965 was not even called so; it was rather called a free trade zone. Today, what possible help can I extend to these SEZs? Not much. I can’t selectively and arbitrarily announce fiscal concessions; if I do it, I must do it for everyone across the spectrum. On one hand, I am pushing for a unified tax structure like GST and pitching for standardisation of taxes. How can I, on the other hand, encourage special treatment for some select zones or promote selective development?

If I give concessions in labour cost or on land cost, it would be a violation of the Constitution. With SEZs, all I can possibly do is to say that I am going to develop infrastructure across SEZs. But in that case, infrastructure being a state subject, it becomes difficult for the Union government to say it would only develop a national highway in a particular state and not anywhere else. So, this SEZ idea would have worked some 25 years ago; today it’s a meaningless concept.

Even in China, the concept worked in the 1980s before the country opened its economy to the world. As they initially liberalised (or rather geographically liberalised) only southern coastal provinces, they managed to create an uneven advantageous position for the players of that region. It was only when they liberalised their entire economy (except the north-western part) that the whole country effectively became a SEZ.

Also, if you look around, most of the currently operational SEZs are IT-based, and thus do not fit into the standard perception of what a SEZ is or should be. Take away the contribution of IT, what percentage of goods produced are they left with? Not much! Today, all major exports activities are happening around an industrial cluster because a cluster gives you the advantages of infrastructure.

Look at Tiruppur apparel clusters that were created even before the government decided that there should be one. A cluster is created by a vibrant market adjacent to it. Additionally, SEZ players cannot sell in DTA, unlike EOUs that enjoy a better deal in many ways. Hence, there is nothing much the government can do today to push SEZs.

TDB: Several critics believe that by imposing dividend distribution tax (DDT) and minimum alternate tax (MAT), policymakers have damaged the pro-investment image of SEZs amongst foreign and domestic investors. Do you agree?

BD: Why should the government resolve the MAT issue only for SEZs? What about others who also fulfil the MAT criteria? There are companies that are using exemptions to show zero profits and pay no tax. If they agree not to use exemptions, the MAT issue will automatically go away. Moreover, just because SEZ players and developers are said to have invested money into their projects, it is no guarantee that they are entitled to a no-change in policy in all times to come. Governments do change policies from time to time.

TDB: Since Finance Minister has announced the abolishment of the Foreign Investment Promotion Board (FIPB), how will the new framework that replaces FIPB effectively serve its intended goal of reducing red tape and boost investments into the country?

BD: After the 2014 Foreign Direct Investment Policy, foreign direct investments (FDI) inflows have been significant. If you look at FDI in manufacturing, it’s completely liberalised and even defence production has now been liberalised to a certain extent. Today, there are only a few services where equity restrictions still hold. In some sectors, there is 60% FDI permitted via the automatic route and for cases above that approval is needed; and that is where FIPB used to be just another bottleneck that needed to be unblocked.

Any investment through non-automatic route comes for specific clearance to the Cabinet. Then why was FIPB needed in the first place? Hence, going forward, I believe the new framework will only be formulated after a thorough study of the old model, and thus will do away with all unnecessary bottlenecks that have been hurting investments into the country. This will streamline the process further.

TDB: Many economists have expressed doubts over the government’s claim of a potential windfall gain in the wake of demonetisation. Even apex global financial institutions like World Bank and IMF have lowered India’s GDP forecast for FY2017. How would you react to such criticisms?

BD: A lot of people (including many foreign analysts) have over-estimated the quantum of reduction in GDP that can be attributed to demonetisation. Economists who are reacting to demonetisation and judging the whole activity on the basis of only economic costs and benefits are making a big mistake. What happened on November 8 last year was not driven by just narrow economic costs and benefits, but was just the beginning of a clean-up process of an entire economic ecosystem. Apart from demonetisation, the government has taken several fiscal and economic measures and is contemplating more such steps to be unveiled in due course of time.

TDB: What are your thoughts on Donald Trump’s election as US President and its possible consequences on Indian businesses, particularly on sectors like IT and outsourcing?

BD: At NITI Aayog, our priorities are fundamentally domestic. Your question should ideally be targetted at the Ministry of Commerce. Having said that, I can add a lot of people say a lot of things before their elections, but once they are elected, such election rhetoric gets toned down. This is because the candidate gets more realistic about the world he or she has to operate in, and the same is true for Donald Trump too.
Suppose if he ever clamps down on H-1B visa as fiercely as he once advocated during his election campaign, then those affected companies are not suddenly going to stop looking for cheaper manpower alternatives overseas – which, in fact, is their necessity. Alternatively, these companies, in a bid to locate cheaper manpower and remain competitive, may start shifting base to India where they would enjoy not just cost competitiveness but better tax benefits as well – a win-win for both parties.

TDB: Inspired by Brexit, several EU nations are increasingly witnessing a rise in protectionist movements. How do you see the Indian economy withstanding such changing paradigms?

BD: Yes, developments such as Brexit and the subsequent rise of several protectionist voices across Europe and some other parts of the world, and more recently Trump’s election as US President, definitely pose challenges for the Indian economy in many ways. We will not achieve a double-digit growth unless the global economy recovers.

Today, no economic forecast suggests that the global economy is going to recover in the next three years. To counter protectionism, countries like India now must raise their concerns aggressively through various bilateral or multilateral trade agreements/platforms.

Also, it is important to note that growth, including exports growth, today is not coming from western Europe alone, but rather from Middle East, ASEAN region, South Asian region and increasingly from the African continent. In other words, uncertainty about global growth is different from getting paranoid about these protectionist measures and tendencies of certain world leaders and powers. The world would continue to offer limitless opportunities to Indian players, both in the short term as well as in the long term.

TDB: India’s tax-to-GDP ratio, at about 16.6% for FY2016, is much lower than that of many emerging markets and OECD economies. What reasons do you attribute to such low figures? Will GST help change that?

BD: Yes, India’s tax-to-GDP ratio is abysmally low today, but if you go by the Revenue Forgone Statement of the Budget, 5-5.5% of GDP is lost because of exemptions each fiscal year. So, if you can add that up, this does boost the said ratio quite significantly. So, the answer to raising the ratio is to remove exemptions.

Now, GST is supposed to be a revenue-neutral rate, but in practice, because of the broadening of the base, this 16.6% will surely go up.
To what extent will it shoot up? As of now, no one can accurately predict because the GST Council has not yet decided the thresholds and whatever projections have so far been made public are based on old figures that may not finally hold true.