DEBATE

Swapan Dasgupta: Welcome. India Today decided to conduct this discussion to blend considerable expertise which we have around the table with popular concerns for the lay reader. Ours is not a specialist magazine on economics, we always try to project lofty economic issues whether it is on the micro level or at the macro level so that it relates to the average reader. Now, budget is, at one level, a very rarified exercise with bewildering array of statistics and even a more confusing amount of television programme, which leaves people less enlightened that it is.

So, we thought that from the various positions, and I can assume that when many economists get around the table no two positions are likely to be compatible, we will try and distill some sort of a sense of what the budget could mean for the people, could mean for the economy, could, in a sense, mean for the future of India. No doubt, it is not the definitive or the final exercise and the importance of the budget has diminished over the years. It is no longer the only policy-making statement of the Government of India. It is just one of the inputs. But regardless of that, it is one of those events, it is one of those very very momentous defining events which people look forward to. So, we will just use the budget as a peg to look at what the state of the Indian economy is, what we can look forward, what the average Indian, perhaps the average middle class Indian can look forward and what are the significant changes, the progressions, the regressions which can be.

Now, there will be the usual clashes and Jairam is most competent. He wears many hats. Last seen, he was wearing a hat of spokesman for a party which might come forth in one major State in India. He also, sometimes, pretends he is an economist; sometimes he is a columnist, a journalist. He is quite a versatile person; but above all he is quite well-tuned with the idea of chairing and conducting these sort of round-tables. So, without much ado, I request Mr. Jairam Ramesh to take over.

JAIRAM RAMESH: Well, there are two main ideas we are discussing today - the Budget and the hung economy. We are looking at the current state of the economy in the context of the Budget. So, I thought, just I will start off by saying what is the current state of the economy, what are the positives and what are the negatives. If you were to look at the economy today, it seems to me that there are five big high points, there are five major plusses as far as the economy is concerned. You have foreign exchange reserves touching 50 billion dollars, an embarrassing surplus of reserves - one might put it that way. But, certainly, on the foreign exchange front India is on a very rapid upward move. Inflation is down to record low levels falling less than 1.5%. It is the headline rate of inflation not the underline rate of inflation; but at least the headline rate of inflation is down to, as I said, between 1.2 and 1.3%.

A very safe external sector - a current account deficit that refuses to rise beyond one per cent of GDP; a very safe external sector; the advantage of which should not be under-estimated particularly when you have countries like Argentina, Turkey, Brazil, Russia, Mexico, East Asia being subject to external turbulence. India seems to be an island of stability in a sea of turbulence.

Fourth point is - again a very embarrassingly high level of foodgrain stocks; about three-and-a-half times the optimal level touching almost 60 million tonnes of foodgrain stocks. But, I should point out, these are basically foodgrain stocks. These are not stocks of pulses or oilseeds in which we are still net importers. But, insofar as the staples are concerned, rice and wheat, we have, as I said, about 70 million tonnes.

Fifthly, a privatization programme that seems to be finally on track. Big ticket privatization has taken place; profit-making public sector companies are being sold and certain sectors of the economy, the pharmaceutical industry, the I.T. industry, some of the consumer goods industries certainly undergoing major churning process and coming out stronger.

So, there are five positives - high level of foreign exchange reserves, a low rate of inflation, a very safe current account deficit, a very high level of foodgrain stocks and a privatization programme and an industrial restructuring programme that is very much moving forward.

Now, let us look at the negatives. Are there any negatives? Quite clearly, a fourth consecutive year of growth recession, so to speak; a decline in growth, overall GDP growth but particularly in industrial growth, is a cause for concern. Some might say that it is only appropriate that the 'Hindu Nationalist Party' is restoring to India the 'Hindu rate of growth' and that is the only political comment I am going to make today. Secondly, a continued, of course Swapan Dasgupta might decide to chop it off, that is upto him.

Mr. Prabhu Chawla is also here.

Swapan: I am not going to call it the Congress way of talk.

JAIRAM RAMESH: So, certainly a cause for concern that in the last four years, growth has slackened considerably and in the last twenty months there is every sign that industry is in a deep recession. Second is a continued investment famine, both public investment and private investment, both domestic investment and foreign investment - quite clearly we are not investing as much as we ought to be to get in the economy moving, to expanding our infrastructure both physical and social. So, quite clearly, a major famine as far as investment is concerned.

Thirdly, a continued deterioration in public finances both at the Central level and at the State level. The state of public finance being what it is, is cause for grave concern and, in fact, there is evidence to show that instead of improving, the state of public finance is actually coming down. Fourthly, a wide gap between promise and performance; a lot of intentions that have been announced in the past three to four years; but unfortunately, very poor translation of that into concrete action - whether it is politics within the coalition or whether it is politics between the Government and the Opposition, we could take it up during discussion. But quite clearly, policy paralysis is a very major area of worry.

And finally, the whole issue of governance. I think no economy functions in a political vacuum and the fact that the poorest States of India and the slowest growing States of India continue to exhibit poor governance, not just on economics but in terms of politics. It should be a cause for worry.

So, there is growth stagnation, investment famine, deterioration in public finances, policy paralysis and a continued slide insofar as governance is concerned. To my view, this is as balanced a picture as one can present of an economy that is in a 'TRISHANKU' stage, which is not collapsing, which is not growing spectacularly but which seems to have settled at a somewhat neo-Hindu rate of growth.

So, let us open it up. What I will do is, maybe I should just go around the table first and get from each of you a sense of where the economy is at and more importantly what the Budget can do to address this. Let me start with Arvind, because he is the person who has worked in the Finance Ministry and he is now in the Planning Commission. Arvind, let me put this question to you - can the Budget address these issues which are not cyclical in nature, but, perhaps, more fundamentally structured in nature; to what extent is the budget can be used as an instrument for reviving the economy and what do you feel are some of the priorities as far as you are concerned?

ARVIND VIRMANI: Well, thank you Jairam. Let me first then, start with a little bit of analysis to put the things in perspective. It has been clear, to me at least, since middle of 2000 that there was a severe decline in investment emerging. Now, basically at that time it was not very clear how strong the cyclical component was. But, given the Asian crisis, my initial analysis was basically that it was connected to international developments. Secondly, that revival would depend, obviously, on changing the perceptions of investors. Now, as you well know, the reform process is critical to that. In fact, there is a paper which is actually on the Finance Ministry website where I pointed out the number of sectors which now is well known. I will just mention them very quickly - sugar, drugs, oil, coal and fertilizer, which, in a sense, are the orphans of the so-called first generation reforms. These are industrial things; the price, distribution and investment controls remain on these sectors. To my mind, in some sense, they are no different in terms of economics; but, perhaps, different in terms of politics. So, it was essential to stimulate investment through a revival of investment opportunities and the best way to do that was by speeding up reforms of these sectors.

Now, as you have seen, this has taken, a kind of, like a year-and-a-half of what is due to, I think, some of you where the political stuff is involved, I think you people are in a better position; but clearly, we are beginning to see finally in February, 2002 action on some of these. You got some action on the sugar front. In the oil, APM is being committed that it will go; on drugs there has been some movement - not actually complete in any of these areas to the extent that I had put down in that note.

JAIRAM RAMESH: So, are you saying that sugar and drugs ….

ARVIND VIRMANI: Two places, it had not happened - just to credit this thought. Coal and fertilizer are just no more.

JAIRAM RAMESH: Are you saying, therefore, two things? One is that the slowdown in the Indian economy reflects the slowdown in the regional Asian economy and a dip in the world economy and secondly, the fact that key sectors like sugar, drugs, fertilizers, oil had not been reformed contributed to the growth stagnation? Is that what you are saying?

ARVIND VIRMANI: There is the initial thought. If you can give me two more sentences I will say it. I do not want to leave it only at that. I think the structural problem has come out more strongly and so there is a bigger element now, I think, of the structural problem than I had thought, maybe, two years ago.

JAIRAM RAMESH: Subhashis, do you feel that - I know that we should not take this debate too long, but just to finish it here - that there is an agreement that now the economy is facing a structural crisis as opposed to a cyclical crisis. Can the Budget do something really to address these structural reforms? Or, are we expecting too much from the Budget?

SUBHASHIS GANGOPADHYAY: Well, as an economist, we are expecting too much from the Budget. The Budget is not supposed to do any of these structural changes. But, yes, since the Budget has become a policy statement, one expects that this year there would be some attack on the structural reforms in the economy. I do not think these structural problems are coming up now. They were there. But now they will be in effect.

JAIRAM RAMESH: To you what would be the one or two key areas of structural reforms that you would like to see in the Budget - not promised but actually done through the Budget?

SUBHASHIS GANGOPADHYAY: Well, I will still concentrate on the Budget before we get into the more general thing on the structural reforms. One, I think, is there is a lot of talk about the deficit. But I am not going into that. I do think that there is reason for us to sit back and see - is there any radical method of increasing the tax base? Now, one of the things that has been talked about is, obviously, agricultural income-tax; we have talked about getting more people into the tax net and all that.

The real problem I find with this approach is that what are the major reasons for us not being able to collect taxes is that our transactions are not recorded. So, yes, it is great if we can get more people into the tax net. But the whole issue in India is not just one of making policies but also of implementing them, especially for the tax policy. So, what I am going to suggest is something which is not my own idea. So, I do not want to create or I do not want to assume that or let anyone assume that I thought of this idea. It is a very creative idea. But I fully support this idea. The idea is very simple one. It states that everybody uses the bank; even a trader who is having a Rs. 10 lakh or more turnover in Lajpat nagar is not paying tax, but he is using the bank. Nobody keeps money lying around at home. So, if there is …

JAIRAM RAMESH: Incidentally, there are 350 million bank accounts in India. It is just a number.

SUBHASHIS GANGOPADHYAY: Once you get into the bank all transactions are recorded. So, if you say - just as we put in a revenue stamp every time we collect money, if you have a transaction tax of one rupee for every Rs. 500, say, of transaction that will be a huge amount of money that can be collected. So, a turnover of Rs. 10 lakh in a year; in one cheque transaction of Rs. 10 lakh which you are not going to do, but even if you do that, you are still paying only Rs. 2,000 over the entire year for a Rs. 10 lakh turnover company or a Rs. 10 lakh turnover self-employed non-paying taxpayer. So, it is a huge amount of money that can be tapped without creating any ruckus and the enforcement issue is not a problem.

JAIRAM RAMESH: So, to you the central issue in the Budget is how do you raise more resources.

SUBHASHIS GANGOPADHYAY: Yes, because we have talked a lot about expenditure cut which should be done; we have talked a lot about the deficit.

JAIRAM RAMESH: So, it is a very paradigm shift from expenditure cutting to revenue realizing.

PRABHU CHAWLA: Just a minute, when you are talking about raising the resources, you must bring in how the States are not able to raise resources.

JAIRAM RAMESH: Let us bring in INDIRA RAJARAMAN because, I think, she has worked a lot on service taxes, expanding the tax base etc. Indira Rajaraman, what specifically would you like to see in this Budget insofar as the tax part is concerned? We will talk about other economic issues. But, it is on raising the tax revenues.

INDIRA RAJARAMAN: Yes. Thank you Jairam. Let me first begin with my thinking on the public finance crisis which, I see, as actually very fundamental and prudent if not anything else. But I will just say in passing that I think that Subhashis has transmitted the idea. You said it did not originate with you - it is a bad idea. I will go a little later into why I think it is a very bad idea. But, Subhasish's intentions of expanding the tax base, obviously, I go along with it 100%. Let me go into why the fisc is in as bad a situation today as it is. It is an outcome really, a negative outcome really, of the reforms that we have had since 1991 in two very critical respects. We have had trade reform which was good for the real economy but which was bad for the fisc; because trade taxes which were contributing one-third of the Central Government's revenues in 1991 are dwindling and the bad feature of the reform programme that we have had is that there was absolutely no systematic attention paid to the need for compensating revenue in a federal fiscal set up at the level of Government at which tax revenues from trade reforms were being lost. So, this was a critical failure on the first round of reform.

I have absolutely no quarrels with trade reform whatsoever. But in countries where no compensating revenue has been systematically provided for, and incidentally Argentina is one of them, if you look at the fiscal history of Argentina - one of the reasons that has led to the current macro economic turbulence which found expression in an external crisis was that they had precipitate trade reform without compensating resources at the level of national Government. So, that is very very important.

The second reason why the fisc is in as bad a situation today as it is, is because we have had a lifting of financial suppression right since the mid-eighties that accelerated since 1991.

JAIRAM RAMESH: Simple English, please. What is financial suppression?

INDIRA RAJARAMAN: As a result, the low rates of interest at which the Government was borrowing earlier, during the command and control era, are no longer true. Even though we have had a recent reduction in interest rates what has happened with the lifting of the clampdown on the interest rates at which Government was borrowing - both Central and State - is that today the interest bill of the Central Government amounts to 4.5% of GDP. This means that unless taxes raised exceed 4.5% of GDP the Government is not going to do anything. All it can do is service its interest bill. So, whenever you have the lifting of the financial suppression, the implications for the Budget have to be immediately put through.

What we have today is interest accounting for 4.5% of GDP and gross tax revenues at the Centre amounting to 9% of GDP. One half is removed right there and it is only a half that remains for honouring salary, let alone the kind of non-salary expenditures that we are looking for.

JAIRAM RAMESH: Having diagnosed the problem, what is the way out? How do you get more taxes? What does it mean for the reader of INDIA TODAY? Will he pay more taxes or will she pay more taxes? That is the issue.

INDIRA RAJARAMAN: Critically, what we need is more revenues and a wider tax base. Why do I think that Subhasish's idea, simple as it sounds, is going to be a very bad one? And that is because already transactions at banks are heavily loaded in terms of transaction costs both of waiting time and so on. If you further raise the transaction costs with this trivial addition, no doubt, you can imagine what this is going to do to snarl up the whole system and you can imagine what it is going to do to banks which are already unwilling participants in a VRS scheme where the waiting time at banks has already increased and you are told this is because people have been VRS-ed out of the bank. This is going to set back the VRS programme.

So, what then do I suggest in terms of positive suggestions? In the U.S. there is a provision called FINCEN whereby banks communicate details of large transactions. The definition of what large is can, for a moment, be shelved for the time being. This is stored in a central database and it is available to the internal revenue service to tap when they want to get out at the big fish. I want to point out that the failure of the Indian tax system to get at large income-earners, wealthy people in India is immediately apparent when you look at the all-India income-tax statistics which show, unfortunately, there is a huge time-lag there; but the 1997-98 data show that 20,000 individuals were recorded as having gross income, withheld income, of Rs. 10 lakh or more.

JAIRAM RAMESH: So, Indira, your suggestion is that any transaction of about, say, Rs. 10,000 - just as an example - that any transaction of over Rs. 10,000 that would be stored in a central computer; presumably in the Central Board of Direct Taxes and there would be a levy or a cess on that transaction.

INDIRA RAJARAMAN: No, no way. It is using of that information to track down individuals engaged in that transaction. It is a record-keeping, with safeguards that this information is not misused. I think this is very very important. What has happened with the expansion of the tax base to the present 25 million with the one-by-six system and so on is that you are essentially bringing in small fish into the net and people are resentful when big fish are so demonstrably outside the net. So, I think, a restructuring of the direct tax mechanism is important not merely to restore the fisc's better health but as an ignored plank of what should have been an element in the 1991 reform programme to begin with. When you knew that trade tariffs were going to come down, when you knew that there was compensating revenue needed at the level of the Government at which this revenue is ….

JAIRAM RAMESH: So, what you are saying is that reforms so far have made a lot of - a big amount of small fish and what you need is to ensure that the big fish do no escape. We will come back to this. But, have you exhausted your wish-list? One is this storing of information.

INDIRA RAJARAMAN: Let me get to the State level because you wanted to know what is happening at the State level.

JAIRAM RAMESH: We will come to the State level. Let us focus on the Centre because it is what Mr. Yashwant Sinha can do on the 28th February because whatever he can do is for Centre. Let us keep the States aside.

JAIRAM RAMESH: So, as far as Mr. Yashwant Sinha is concerned, do you feel that - for example, you have done a lot of work on service taxes, do you feel that there is scope for increasing the contribution of the services sector to tax collections, to tax revenue of the Centre?

INDIRA RAJARAMAN: There is a correction. I have not done a lot of work on service taxes.

JAIRAM RAMESH: It is green channel tax. That is what it is called.

INDIRA RAJARAMAN: Well, the green channel tax was the brainchild of Raja Chellaiah and I have attacked it. But, let me just say that service taxation as an avenue for the Central Government to explore is not a good idea - the reason being that service taxation should fall within the domain of State Governments which are moving towards a VAT and you want to have an intimated VAT on goods and services. I think the service tax channel is a bad one; I think the Central Government has to confront the fact that it is the income-tax which is in its domain; it has to confront that.

Let me also add very quickly - one of the problems with the lack of reform and incomplete reform which, as I have said repeatedly, is what characterizes the 1991 programme, is the fact that there is no political consensus. There is no political constituency for reform. Now, with the growth rate having come down, the growth rate is something that has passed into popular perception as something to worry about, and the kind of external trigger that we had in 1991 is presently available in the form of the reduced growth number. Our politicians are concerned about it; they are worried that the whole mechanism which supports them, maybe, dwindling away. And so, there is a constituency which Mr. Yashwant Sinha can use to point out that the support of all political parties is needed in order to expand the tax net in the directions in which it needs to be expanded.