Finance Minister Nirmala Sitharaman is set to create history when she presents her seventh straight Budget on Tuesday for the fiscal 2024-25, surpassing the record of former prime minister Morarji Desai.
In the build-up to the Union Budget, economist and author Dr Rajiv Kumar, Chairman, Pahle India Foundation, and former Vice Chairman, NITI Aayog, shares his thoughts on taxation, reviving the rural economy and GST exemption in an interview with Sabyasachee Dash.
Edited Excerpts:
Considering your long association with a multilateral agency like the Asian Development Bank (ADB), it would be of interest to know your perspective on how international institutions view India’s prospects, especially in light of the reforms implemented over the past decade.
All multilateral agencies like the IMF, the World Bank, and the Asian Development Bank have retained their growth forecast for the Indian economy; some have even improved it. The general consensus seems to be that in 2024-2025, the economy will grow at 7 per cent, which will make India the fastest-growing large economy in the world. Moreover, my understanding is that India will contribute a substantial percentage to the overall growth of the world economy as a whole in the next decade. Now, this growth momentum that we are beginning to see, and I think which will be retained for the next decade, or even couple of decades or so, has been due to the reforms undertaken not just in the last 10 years by the Narendra Modi government, but the whole series of reforms that started in 1991 when I was in the Ministry of Finance working in the Department of Economic Affairs. The good thing has been that the direction of reforms has been consistent, though the pace has varied, which has created a strong expectation that the Indian economy will continue to see these structural reforms and therefore retain the growth momentum.
Where did the idea of the “100-Day” initiative originate? Do you think this timeframe is too short to effectively implement major programmes in a country as vast and complex as ours? I hope this initiative isn’t merely symbolic and perpetuating ad-hocism rather than addressing long-term issues.
The idea originated from the prime minister himself, and he had done this in 2019 too, when the new government was formed. I was then in the NITI Aayog. We also contributed to the programme. The 100-day timeframe is not meant to be the window for implementation. It is meant to indicate what all reforms and the steps that can be or rather should be undertaken at this time. Then ministries are given these go-aheads, which are to be implemented over a longer period. I don’t think it leads to a downturn, but my only issue is that very often, the 100-day programme starts and then pretty much remains on paper. It gets forgotten, except for a few which are directly supervised by the prime minister himself. This is the weakness that we have to address i.e. how to hold the ministries accountable to the plan of action or to the programme that they have outlined.
In my time at NITI Aayog, we had established a strong Development Monitoring and Evaluation office. The DMEP (DMEP) would ask for targets from the line ministries and then review and monitor them. Something like that ought to be done with the 100-day programme as well, otherwise it loses credibility and becomes a part of the rhetoric.
Generally, there’s an expectation that the government will stick to its projections for tax revenues and non-debt capital receipts, including asset monetisation, as outlined in the Interim Budget of February 2024. What are your thoughts on this?
The first part is true, which is that the government will adhere to the tax revenue projections. In fact, it may even improve them from the last interim projection because GST has shown greater buoyancy than in the past.
On the non-debt capital receipts, I’m afraid I’m quite disappointed. This non-debt capital receipts, the vast majority, come from the privatisation of public sector enterprises or asset monetisation. We had prepared a thorough list of potential candidates, all the values were given when I was in NITI, but I’ve seen in the last two or three years that the targets have been diluted. The momentum and the attention on the privatisation of public sector enterprises has shifted. There’s no talk now of privatisation of two public sector banks as there was earlier and the entire asset monetisation programme has been put on the back burner.
Now this, in my view, is something which is essential. It’s because the revenues from the non-debt capital receipts can be and should be used to reduce the amount of debt that we have in the country, which is now about 83-84 per cent of GDP. The real issue is that 40 per cent of our tax revenues is spent on paying the interest on these debts. This leaves very less for allocation of funds to the important sectors like health and education. So, the Debt to GDP ratio has to be reduced and the only way to do it really is to have a very vigorous programme of asset monetisation and public sector enterprise privatisation.
Do you suspect it’s possible that the speed of the reform journey may be impaired due to the re-emergence of the coalition era?
I don’t think so at all because, in the past actually, the coalition governments have shown a much better performance of reforms than a majority government. Also, because the TDP, especially, is a pro-reform party. I have no fear that the coalition government is going to directly imply that the reform agenda or the reform push will slow down.
The February 2024 budget showed a strong commitment to improving healthcare infrastructure and services. Can we expect this focus to continue and strengthen in the upcoming budget?
The focus on health, as well as education, has increased quite significantly. These are the two sectors which require a lot of attention and a lot of public resources. Universal access to high-quality education and universal access to high-quality primary health services is a sine qua non for a democracy. It’s an absolute must for any market economy and democratic society. I think that’s what we have to ensure. We are a long way away from that at the moment. Ayushman Bharat was a particularly good initiative covering 500 million people. But I think the next 500 will have to be covered sooner, which will still leave about 400 million who presumably can take care of themselves, but that’s not the case. The social sectors have to be strengthened very rigorously.
What measures do you believe the government should take to revive the rural economy, which is largely dependent on agriculture? Additionally, how eager do you think the government is to implement the National Cooperative Policy?
The first thing we must recognise is that our agriculture is quite backward at the moment. We are living in a state of denial because we have food security. Our agriculture sector, yield, productivity, price, and costs are all way out of line if you compare it to any other country. We need to recognise that. Only 10 per cent of our food products are processed. About 20-25 per cent is wasted. I’m told that we need 70,000 cold storages in the country, which would make life very different for our farmers. About 50 per cent of our workforce is engaged in agriculture, and that produces only 18 per cent of the GDP. So, you can see that the per capita productivity of agricultural workforce is much lower than the workforce elsewhere in the economy. Agriculture needs a lot of attention, requiring a complete paradigm shift.
Green revolution, the biochemical-based revolution which gave us our food security, did very well, but it has run its course. There are now declining returns to chemical fertilizer. They are spoiling our environment, our soil health, and much worse, the health of both our farmers and consumers. So, therefore, rural Indian agriculture needs a fresh look. I’ve been passionately propagating the spread of natural farming, like zero-chemical farming, and I hope that this budget will at least do one thing — give proportionate amount of subsidies to those not using chemical fertilizers and pesticides and following a much better and healthier agricultural practice.
Regarding energy security and transitioning to sustainable energy sources, there’s talk of a new hydro policy to promote carbon-free energy, subsidies for battery storage, and India’s first offshore wind concession. How do you view these initiatives in the context of our economic goals?
In the last 10 years, we’ve connected all our villages. The power availability is much better, but we still use only 1,200 kilowatts of energy per capita compared to the global average of 3,700 and the Americans guzzle up to around 25,000. So, we have a long way to go to meet the energy requirement of our population. A large number of people live with much less energy than they should be using, but then we must ensure that we have a green energy transition. If we go the fossil fuel route, then we will neither have an Indian environment nor will we have a planetary environment left for us to sustain and survive.
Therefore, the green energy transition is a big issue, because we have to quadruple the production and yet we must reduce our carbon footprint, which is a huge policy challenge. This will require significant concerted attention for us to be able to do that by putting together a platform where government, industry, academia and experts all come together to make this green energy transition a success.
There’s a general demand for 100 per cent GST exemption on all educational expenses for students from Below Poverty Line (BPL) and Low-Income Group (LIG) families. What is your reaction to this? Also, how do you see the potential for a closer collaboration between policymakers, the government, and startups through PPPs in the education sector?
I completely agree with it. I mean, there’s no reason for us to have GST on educational services, especially for our students from below poverty line and low-income groups. I would even go as far as to say that except for private higher education establishment, everything else in the education sector should be exempt from GST. Essentially, you’re investing in human capital. There is no reason for us to charge tax on human capital.
On GST itself, though, I’m in favor of two rates. Today we’ve got a plethora of rates, all the confusion, which it causes, leading to rent seeking. The ideal GST is a uniform GST, with one Sin Tax, leviable at a higher rate. The present GST to GDP ratio is not revenue neutral. It’s a little lower than what it was earlier when we had 14 taxes, which were all subsumed in the GST. So, the middle rate has to be raised, so that we can have a more rationalised tariff structure, say 5 per cent and a 14 per cent and be done with it, to achieve revenue neutrality and simplicity. I also think the GST Council must now discuss the inclusion of petroleum products, natural gas and electricity within GST and prevail upon the states to let this be included.
The food manufacturing sector expects the government to address the current inverted tax structure under the GST framework. This structure affects food manufacturers’ ability to claim full Input Tax Credit (ITC). Do you think there’s a chance this issue will be resolved?
I think to encourage downstream food processing, the ability for claiming full input tax credit should be simplified. It’s fair to rule out segmental distortion across industries.
The retail and consumer sector are awaiting the formulation of the National Retail Policy and a financing window specifically for retailers and distributors. What are your thoughts on these expectations?
The previous government had already allowed the entry of multinationals in retail trade. I think it’s time that we open it up and liberalise it because modern retail is a necessity for our economy and to improve our productivity and overall efficiency. I don’t think the fear that it will destroy our mom-and-pop stores and our small traders is true. Only about 5 per cent of the total retail trade is done by large stores. Even if it quadruples in the next 20 or 30 years, it will be 20 per cent. Both can coexist and help each other better compete and improve productivity for consumer welfare. I had done a study in which 3,000 people were surveyed where we found out that they will compete with these guys and they will improve their own services, home delivery, and credit availability, etc. A liberal retail trade policy will uplift everybody across the board.
The aviation and tourism industries are keenly anticipating strategic measures from the government to support their growth. Do you believe these sectors will play a crucial role in our economic growth trajectory?
The aviation sector doesn’t need handouts from the government, that’s for sure. But what needs to be done, the prime minister has been talking about it very often, is to now concretise our tourism plans and infrastructure. Our infrastructure capability at tourist destinations is extremely poor. We don’t have the capacity to handle large numbers of tourists. For example, in the Char Dham Yatra, we haven’t paid enough attention to sustainable levels of tourism. In fact, I was surprised to see in Garhwal that the local residents don’t want tourists any longer. Because they think that they are disrupting the society and the social fabric. A review of the policy framework and how to create a dynamic and yet environmentally and socially sustainable tourism in the country is the need of the hour. It can become a large employment generator and a revenue earner, but we must do it carefully.
There are expectations for enhancements and tax reliefs, such as increasing the 80C deduction limit and offering additional incentives for taxpayers to switch to the new tax regime. How do you view these potential changes, especially in terms of boosting investments in property and affordable housing projects?
I believe we have had enough of tax reliefs. We should not tinker with the tax structure, the longer we leave it in place, the better off we are. Essentially, we need to whittle down the existing exemptions. We need to take them away because that only complicates matters, benefiting CAs and not taxpayers. If we want to expand the tax base as we must, then our tax structure should be as simple as possible.
Moreover, the trust in the tax administration has to increase so that people feel that they are being fairly treated. There should be no retrospective demands that go back 10 years, 20 years. Trust is the basis for improving our tax collections, our tax compliance and for widening the tax base. Despite the digitisation and the faceless mechanism, I still find that at the level of the trader, the middle-class professional, the businesspeople, the degree of trust is still abysmal.
There is one school of opinion that’s advocating for abolition of income tax and, at the same time, rationalising GST slabs to mitigate their inherent regressive nature. Do you think such concept has any viable background in our economic landscape?
I did work on this in great depth in 2013 when I prepared the vision document for the BJP and I got in touch with the people of ‘Arthniti’ in Pune who had been advocating this. It’s a very tempting and attractive idea but I don’t think we are still prepared for it politically. We’ll have to shelve it for a while, but a day must come when, what as they propose, the abolition of income tax as well as all indirect taxes could be tried and replaced by a marginal levy (the transaction tax). Since this will be foolproof, corruption-free and rises with the economic growth, it is something worth examining. No other country has tried it, but I don’t see any harm in at least looking at it much more carefully.
Do you see there are inconsistencies and lack of fairness under the mask of climate action? To put in perspective, EU’s carbon tax and recent ban on import of certain Indian-origin products someway go to suggest it’s a concerted effort to prevent import from developing countries. Do you see climate cause is being used as a smokescreen?
I don’t want this but the carbon tax etc by developed economies is bound to be there because they are doing the same with their own citizens. I don’t think there is discrimination here and it’s just that we need to be better prepared because this is coming. You can’t deny it. So, let me leave it at that.
What is your perspective on freebies and subsidies (other than merit subsidy) in the context of the ongoing debate of Good Politics vs Good Economics?
You use the word merit subsidies and that’s good enough. Handouts are not a substitute for quality employment, and they don’t add to your self-dignity. They don’t meet the requirements of a holistic consumption. I think it’s high time that we remove all of these things and pay much greater attention to generating high-quality employment to reintegrate our small and medium enterprises which is where real employment is going to be. Integrating the small and medium enterprises into the global and regional production chains by bringing anchor investors who can create a supply chain of local vendors is the way forward.
Still, 80 per cent of our employment is in the unorganised sector and that’s something that we need to look at very carefully. The labour codes, which have been there in the making for the last six years, should be finalised in such a way that entrepreneur has zero incentive to replace labour with capital. Lastly, crucial point is that this requires huge thrust on our export industry, which is generally labour intensive. That’s where the real benefit will come from and not in handing freebies and subsidies to all and sundry.
Before you sign off, we would like to hear your views on ‘Atmanirbhar Bharat’ and India being seen as the substitute to China as a trusted partner in the global value chain, particularly in the aftermath of the pandemic. As a corollary to it, do you see a resultant interplay between comparative and competitive advantage?
Let’s be clear that ‘Atmanirbhar Bharat’ or self-reliance is not equal to self-sufficiency. That is an important distinction to remember. Self-reliance means a country which can pay for all its dues and look after its people without having to be dependent on others and can look after its own security means without being dependent on import. So, in that sense, this government has done quite brilliantly, to reduce the import dependence on our defence equipment — which used to be 78 per cent in 2014, and now it’s down, I think, by about 20 per cent. Manohar Parrikar started the process and it’s particularly important because defence production can also give a huge spurt to our domestic economy. That’s what the Americans and Chinese are doing. The defence production, technologies, procurement; all can boost our domestic industries.
However, on the other side, which is the manufacturing sector, we need to be plugged into the global and regional production networks, which require multistage imports and exports of components and of services, etc. It means that you become an export surplus nation, like China has become. If you’re structurally in a current account deficit, i.e., imports are much higher than your exports, your dependence continues, and it must be replenished by capital inflows from abroad, either in the form of debt or, hopefully, equity, but very often in the form of debt.
Now comparative advantage is seen to be an old and outdated idea. If South Korea can become competitive in steel, which it has become, it is only competitive advantage that matters. That implies you create capacities, which are efficient and have high productivity. We can learn from many countries in this regard.
Unfortunately, our states and our line ministers are not yet prepared to implement the China plus one option. There are still a large number of regulatory compliances despite a clear call by the prime minister to eliminate them. These result in rent-seeking. What you need to become a substitute for China is an ecosystem where your private enterprise can flourish and for support look towards the government at critical times.
We have to change that on the ground by recognising and pursuing that it is only the private enterprises, headed by private entrepreneurs, that can give India the growth dynamism. The government must be in support of such enterprises, and neither be a substitute for it nor certainly be an obstacle to it. Till we do that, we can’t succeed in China plus one, as Vietnam or even Bangladesh have done. The people who are moving out of these countries are looking for the ease of doing business that they experienced there. I think it is time that we look at this very carefully.
