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Broad-based investment pick-up in India another two quarters away: Bibek Debroy

06 February, 2017

Bibek Debroy, a member of the government think tank National Institution for Transforming India (Niti) Aayog, feels that finance minister Arun Jaitley’s budget for 2017-18 managed to strike a balance between growth measures and fiscal prudence. In an interview, the noted economist also talks about the impact of Prime Minister Narendra Modi’s shock decision to demonetise high-value banknotes, the trade-off between tax cuts and public investments, and other topics. Excerpts:

What is your opinion about the Budget? Will it support economic growth?

Some of the expectations that were being articulated by people were somewhat unwarranted, all the talk about big bang and things like that. This budget has to be understood against the backdrop of a continuity in government policies. Several initiatives have been in place since May 2014 and the budget builds on that; it is incremental. I think we should appreciate it. 

There is an element of indirect tax reform in the budget but the goods and services tax (GST) is in the works and the GST council will take decisions about it. On direct taxes, the agenda is simple that tax rates cannot be reduced without removing exemptions. A little bit of the reduction has happened.

The issue is simple and has been the same for all finance ministers. Do I fritter away the resources at my disposal by giving concessions or do I use them for public investments that enhance the productive potential in the slightly medium term? That is what the finance minister Arun Jaitley has done. And those public investments are necessary to catalyse private investments. How do I do all this without sacrificing fiscal consolidation? Given all this, I think this budget is pretty good.

After demonetisation, there was expectation that the finance minister will give tax exemptions to boost consumer spending.

If you look at the second income declaration scheme, everything that is declared does not go into the consolidated fund. What comes into the fund is the amount paid in the form of taxes and penalties. The window for that is end of March. I don’t know what that figure is going to be.

Whatever is there is the trade-off that you can legitimately expect a reduction on. But you cannot simultaneously expect that the railway, the national highways and airports will become better. You cannot have both. Most people don’t recognise the trade-off. They recognise it only while managing their household budgets. They think the Union Budget is different from their budget, but it is not. There is no infinite kitty.

There are plenty of exemptions in the form of fiscal concessions, both on the direct and the indirect side. For years now, the budget has been including a statement about revenue lost due to these exemptions. If you add all of that up it comes to more than 5% of gross domestic product (GDP).

Today, if I look at Union and state governments together, the tax-GDP ratio is just over 17%. Had these exemptions not been there the tax-GDP ratio would have been 22%. That’s the money the government could have spent on public goods and services.

The exemptions also make us think of tax evasion. Because of these exemptions there is a lot of litigation about interpretation, unleashing of inspector raj. It makes compliance cost very high.

The exemptions should go, they are inefficient. When the finance minister said in his earlier budget speech that the corporate tax rate would be reduced to 25%, he also said this is contingent on the exemptions being removed. 

Are you saying that Arun Jaitley did a good job by not announcing a very populist budget?

There was great temptation, I am sure, to present a populist budget. But I think the FM has been phenomenally successful in sticking to the reform agenda and not deviating from it.  

Do you think the growth and fiscal targets for the next fiscal are achievable?

I don’t think the GDP growth target is overoptimistic. Is the tax revenue growth at just over 12% excessive? I don’t think so. When people look at the budget they sometimes fail to realise that some of that money is not coming from the budget. Take the railways. Out of the Rs 1.31 trillion allocation, only Rs 55,000 crore is coming out of the budget. The only way these numbers could go wrong is if tax revenue is seriously affected in first and second quarters of the next fiscal year.

By when will private investments start coming in?

The answer depends on the sector. There are some sectors with excess capacity. Unless the excess capacity is exhausted there is no reason why private investment should come in.

Bank credit is probably not a good indicator anymore to judge whether private investments are happening or not. This is because many private investments are now funded from non-bank sources. It’s not that private investments were not happening before 8 November. But most of these have not been greenfield investments. They have actually been acquisitions.

There are some sectors where private investments have begun to happen like in software-related sectors, garments, cement, steel and even in real estate—not the residential segment but commercial real estate. But we would have to wait another two quarters for investment to pick up across the board.

The budget outlines a plan to list railway entities such as IRCTC. Will this negate the railway ministry’s plans to set up a holding company for its PSUs?

I haven’t quite understood the notion of this holding company. The original holding company idea was—and I may be wrong—for the production units and not for all railway PSUs. It will be for the rolling stock and allied stuff, the manufacturing units.

So far as the listing in concerned, this is part of the broader disinvestment template being contemplated for all PSUs. Each PSU will be handled differently.

How successful has demonetisation been?

A lot of people have misunderstood what happened on 8 November. It is not simply a narrow economics-defined, cost-benefit calculation. It is part of institutional cleansing. Institutional cleansing of gold markets, of real estate markets, the way elections are funded, the way some capital market transactions are conducted. All this has to do with the tax-GDP ratio as well.

The banknote ban was not meant to prevent the creation of new black income. For that there are other measures, some of which have been announced. Nor was 8th of November meant to address the existing stock of black money which existed in non-cash form. This was strictly limited to addressing the black money that was in the form of cash at the time.

A lot of people outside the government are criticising demonetisation and saying that it has failed because the bulk of the money has come back into the system. That’s the wrong yardstick to assess success or failure. Just because cash has come into the system does not mean black money has become white. In fact, I will regard that in a positive light because it is subject to broader scrutiny.

Do you think the transition toward a less-cash economy should be based more on incentives than on controls?

There have been disincentives for using digital methods. There is also an awareness issue. Many poorer households are not even aware that they can use these little pieces of plastic for digital transactions and not just to withdraw money.

No one is saying that India is going to become cashless. That is neither possible nor desirable. What one is saying is that excessive use of cash is inefficient and it needs to be reduced incrementally. 

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Broad-based investment pick-up in India another two quarters away: Bibek Debroy

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