The Vijay Kelkar Committee has finally submitted its report on medium-term fiscal consolidation for the Government of India. The government has partly acted upon this report and will be acted upon in the days to come. Dr Vijay Kelkar in an interview to CNBC-TV18 talks in dept about the report.
After the report being made public by the finance ministry the headlines are varied. Some say that the Kelkar panel wants the government to bite the bullet on subsidy, bring down excise service tax to 8 percent, act on fuel, food and fertilizers before this situation goes back to 1991. You described that the Indian economy is in a condition of a perfect storm in the report.
They say the Kelkar panel wants the government to bite the bullet on subsidy, bring down excise service tax to 8 percent, act on fuel, food and fertilizers before this situation goes back to 1991. Your own description in the report is that the Indian economy is in a condition of a perfect storm.
Below is the edited transcript of his interview to CNBC-TV18.
Q: How would you describe the actions that the government has taken post the submission of the report and are you enthused by the response that you have seen to your recommendations?
A: The honorable finance minister called me, Dr Sanjeev Mishra and Professor Indira Rajaraman and gave us four weeks to prepare a roadmap for fiscal consolidation as the ministry of finance was aware of the need for fiscal consolidation.
We were able to bring out the report in four week time due to the cooperation from MoF and other concerned officials. We made the report as per the requirements of the ministry; they required a report on medium-term roadmap and framework. But, in the report we wanted to mention that why theres a need for fiscal consolidation. The Prime Minister in his nation address made a remark that ‘money does not grow on tress’ and I think that he was implying that if government cannot pretend in spending continuous spend without raising adequate resources then we will have unsustainable fiscal position.
However, there is one important twist to this, just like money does not grow on trees although one could argue that Indian currency can be printed by RBI but even RBI cannot print foreign currency. The fiscal deficit sooner or later gets translated into current account deficit (CAD), where our imports are higher than our exports. Our CAD is increasing from last two years which created stress on balance of payments (BoP).
Last year, our CAD was 4.2% and we quickly realized that if we dont allow the present trend then fiscal deficit will increase, and will lead to higher increase in current account deficit roughly around 4.2-4.3% of GDP which is about USD 90 billion. Plus, the short-term debt which will mature in next 12-18 months raised a very important challenge to the Indian economy for raising resources for financial current account deficit.
That really flashes the red light. So, there is urgency for fiscal consolidation otherwise our BoP will become unsustainable, not unlike 1991 crisis. CAD exceeded the limit, went above 4%. We are exactly going through a similar phase and that is what we have highlighted. Fiscal consolidation is a must because present trend indicates that this year our fiscal deficit may increase compared to last year.
Last year revised figure which was talked was 5.8%. We felt that it can exceed 6%, and our CAD will exceed 4.2%, which could exceed. Certainly, it is not a total unstable. So, in the first chapter of our report we mentioned the reason that why do we need fiscal consolidation.
Q: The government has had almost well over three weeks to consider, discuss and implement some of the recommendations. There has been a credible move on fuel subsidy front. In fact going a rupee beyond on diesel, but not acting on kerosene, doing something different on LPG. The MoF even now maintains that it is on track for only a marginal increase over the budget estimate of 5.1% of the fiscal deficit for the current year. Your report mentions 6.1%. How enthused are you by the recent steps of the government as far as fiscal consolidation is concerned? Do you pick it up as a positive signal of a commitment from this government that it will act on the fiscal front?
A: I am quite encouraged by what is being said and done by the ministry of finance. The FM is totally seized up the issue, he is concerned, committed for fiscal discipline and promoting fiscal consolidation. I think that the FM has been successful in changing the perception of his political colleagues.
Q: We got the message that Chidambaram’s return to finance and North Block has reduced the gap between North Block and South Block. The most crucial responses that we got after the report was made public, the is suggesting that it would not be possible to do away with all the subsidies using specifically the word that it is not possible to eliminate all subsidies. Is that a negative signal? Why do you think that is the situation because your foreword itself recognises the need for these recommendations to be relevant to the political economy?
A: Our report itself does not suggest elimination of all subsidies. We mentioned to remove inequitable subsidies like LPG. LPG subsidies do not go to our people who fall in the low income bracket. So is the diesel subsidy. We are not against kerosene subsidy and food subsidy. In fact we mentioned that food subsidy must be there, we only have to contain it.
Similarly, we said subsidy must be continued for kerosene as long as it is affordable.
We are quite convinced that diesel subsidy is not defensible both for efficiency ground or equity ground and even on the ground of environment protection. What is subsidised diesel doing to the Indian economy? Today’s subsidy of fertilizer is distorting the nutrient ratios in Indian economy. We also mentioned to rationalized fertilizer subsidy and have given a method for rationalising it. In our report we have taken a proposal which is already made by fertilizer and food department. As soon as Aadhaar scheme is successfully implemented we can completely shift it towards cash based transfers.
It is a logical transition what we have proposed. Annexure 6 of the report, mention about executive reforms where this transition is mentioned. So, I agree with people who argue that we cannot eliminate subsidies, we shouldn’t eliminate subsidies. Food subsidy is defensible. For undernourished children or lactating mothers food subsidy is not only defensible, it is ethically right and morally correct.
Q: On the taxation front in your report there is a very crucial suggestion moving from 12 percent to 8 percent as far as excise and service tax go in a period of few years. This suggestion along with the fact that there is a proposal for the goods and service tax where some of the rates are basically being talked about at the level of 14 percent how do you think this will work out? Is this something that can be done and what is the logic behind having suggested this gradual reduction?
A: We have analyzed this in our GST rates discussion and in our finance commission report. I hold to the conclusion then and now that revenue neutral rates would be around 12-14 percent, where Centre and state both would not exceed 8 percent, it can be lower than that. So, 8 percent unifying goods and services is moving the direction of overall rate of taxation coming to 14 percent or less compared to present level of 24-26 percent.
So, reduction and unifying rates because we are enlarging the tax base for Centre and the state. We are now going to include all service transactions except negative list; we are going to include oil manufacturing sectors, we also going to have GST on imports which we don’t have today, so that enables to reduce the tax rate because it enlarges the tax base. It is revenue neutral in fact it will increase total tax collection for simple reason is going to improve compliance because transaction cost will go down, as the rates go down compliance improves; it’s going to increase the growth in the Indian economy so its also increased tax. So, it’s going to increase tax buoyancy, tax compliance, and tax collections so I think that direction we are proposing we should move on indirect taxes.
Q: Is there scope to move on this front on this suggestion in steps starting with the upcoming Budget itself because one of the points really would be that if you also need to ensure that growth continues. Tax stimulus, a return given in 2008 would provide some impetus, wont you agree?
A: We had given a map for medium term for GST implementation, there can be variation to that but commitment for unifying single rate in a shorter possible time is the key. Now, how do you make transition, the political economy will decide but what is more important, market wants the vision which they have for indirect taxes and how it’s going to workout.
Q: At this point really the task therefore before the government and the FM would be to come up with a type of redrafted version for tax structure of the GST proposal is concerned and the Constitutional Amendment Bill also has to play out. Do you expect any realistic progress on it in the next couple of quarters because the political uncertainty that seems to have compounded and added to the perfect storm as mentioned?
A: This country also has the capability of surprising people. Modi, deputy chief minister, Bihar, is a very seasoned and knowledgeable person as the chairman of state finance ministers along with a very enlightened FM and I won’t be surprised if we find certain progress made as we also have Yashwant Sinha whos chairing this standing committee which is examining the bill. He was also one of the architects of reforms of indirect taxes. With this combination there is a possibility that we may see a breakthrough.
Q: If you were to look at the timeframe of the next couple of quarters it would also logically be the right time for the finance minister to go ahead and do what he has proposed to do with the DTC and that is to sort of review it look at the draft that has been put out and possibly push for a more definitive road map announcement with the next budget, if not before really?
A: I would not be surprised if that happens.
Q: You spent a long life in government and the political economy. One of the imperatives that will come up is that even as the government, the PM, the FM act towards fiscal consolidation, make it clear that it is very important to prevent a rerun of what has happened many years back to the Indian economy, the politics would possibly demand that the government reach out through more and more welfare schemes. The food security law many people would say is the biggest weapon that this government will deploy in the forthcoming elections or in the run-up to the forthcoming elections, just like the bank loan wavier program worked in the previous elections. You have suggested a staggered implementation, a phased implementation; the government has immediately said that the food security law remains a priority. Given all of this it is clear that the contradiction between fiscal consolidation and political needs would not allow the government to fully implement the prescription that you have prescribed?
A: It is totally understandable if government wants to pursue, in fact it is obliged to pursue their objectives of maintaining macro economic stability both external and internal stability as well as pursue the objective of equity. If there is tension between these two objectives in short run, it will be resolved, but I don’t think there is any tension in medium term in these two objectives.
You cannot have equity without stability and you cannot have stability without equity. So, there is no tension in medium term. Short term there will be tension between these two objectives and we have to sequence it in a very informed, innovative and creative way they will have to do it. We did it earlier and why we cant do it now? I don’t see any difficulty in meeting these two important objectives of a democrat polity. So, I am quite confident that, this can be done and this will be done.
Q: In the report you have mentioned which is possible but given the overall administrative inefficiencies that we see with regards to tax collection we have seen a situation where the government has vacillated, the finance ministry vacillated from a position where the cash management went for a toss because there was a sudden spurt of refunds. Refunds were actually given in time and possibly even before times as per standard averages to a situation where now there is a sort of a full stop break on the refund process. This type of tax inefficiency is more worrisome than an increase in the basic tax rate that corporates and other tax payers would be worried about. Is it possible for any government, for the system to act on upon this? How can we break that lock-jam?
A: Correct. In any country and particularly in emerging markets tax administration is tax policy. In other words improving tax administration is very important part of tax policy and we have an advantage that we are capable. This country is capable of using, mobilizing IT, Information Technology for improving tax administration. A lot of advance has been made by both direct taxes and indirect taxes people in the area using IT for improving administration. In our report we have given full section on this class of issues. It’s quite detailed proposal we have given, how to improve this, how to reduce transaction cost for tax payers, how to improve tax payer services. I think they are all doable and I have no reason to believe that it will not be done.
Q: You say that it is doable, but in the days and once the government receives the public comments that it has sought on this report do you expect more measures to be implemented in the immediate short term, possibly within the next couple of months to shore up the fiscal further?
A: We should recognise that it is very important that government’s policies have credibility. So, it doesn’t matter if the pace may be little slower in initial stages but as long as your performance is better than promise, as long as we do what we say, as long as we continuously maintain this program of fiscal consolidation. Markets will react to it. There will be investment flow. Central bank reducing interest rates more rapidly than it would have otherwise and it will promote growth and employment. To my mind nothing is more inclusive than increasing productive employment. So, if employment starts growing especially productive employment that will be key instrument to move towards more inclusive growth. It will happen, it will happen step by step, in a measured way it will be done. The whole world is watching us. World respects the statecraft if done well. We will again show the world that this country is capable of finding its own destiny in its own way.
Q: You made an important points about disinvestment where you spoken about the need to move faster. You recommended an exit from all minority shareholding including companies like Hindustan Zinc and Balco, decisions which have needlessly been kept pending. We see a sense that this government intends to move along with the uptick that it is seeing in the markets. Are you hopeful of the disinvestment strategy that seems to be articulated at this point of time?
A: Disinvestment is a very important instrument for government not only for resource mobilisation, but more as an instrument for resource reallocation or rebalancing the governments balance sheet.
Government can move increasingly into the assets which are more in line with the new needs of the economy and exit from assets which now can be taken over by other actors in the economy, but move into the assets which otherwise no investment will be made. We have proposed a number of possible instruments which can help to accelerate this process of disinvestment and Rs 30,000 crore is certainly doable this year, even more so next year and even more so in the following year because by that time we can also get a place to mobilise governments underutilized land resources.
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