Govt may revisit GST in 2-3 years and unify many rates: Arvind Panagariya

Niti Aayog's outgoing V-C says critics overreacted and overestimated the costs of demonetisation

The goods and services tax (GST) has some anomalies in its present form. In many cases, inputs are taxed at higher rates than final products, says outgoing NITI Aayog Vice-Chairman Arvind Panagariya in an interview with A K Bhattacharya. Some compromises had to be made, Panagariya agrees, but adds that these would be streamlined in three years. Edited excerpts:

Your tenure at the NITI Aayog saw two of India’s boldest government decisions – demonetisation and GST rollout. How have these panned out for the Indian economy?

I have been a strong defender of both. In demonetisation, the foremost objective was fighting corruption. In terms of how it went, there was no real precedent for such a step. So, there had to be some uncertainty; we saw some, with things unfolding and then the government reacting. That was a process; now we have an experience. So, if any other country were to do it now, it could use India’s experience. 

Demonetisation promoted the anti-corruption objective. Many more people are filing income-tax returns. Also, the number of suspect bank accounts has gone up. I am sure anyone who doubted the prime minister’s resolve to combat corruption before November 8, 2016, will now be sure of his commitment. 

What about GST?

GST is a hard-fought reform – you had to align states and the central government, bring in the GST Council, build consensus across players, amend the Constitution, make up for losses. I would like to think we will make a lot more progress going forward. In two to three years, we should come back to assess and see if we can unify several of these tax rates. Due to multiple rates, a lot of tax inversion has happened. In many cases, inputs have been taxed at higher rates than final products. 

One of the central principles of GST is that we do not want to tax input users. It is a destination-based tax – a value-added tax, where you should avoid any tax on input so that you don’t distort production. You can maximise production and collect revenue on the final consumption. Currently, the way we have implemented GST, it has many embedded input taxes. The finance minister is aware of these and he will see the anomalies removed. State finance ministers also have a fair understanding of how to improve it.

On demonetisation, critics have pointed out that the benefits it brought were not as much as the disruption in the economy…

I still feel the critics are overreacting and overestimating the costs. At that point, output was already there. When you cut money supply, a price collapse should have happened. In fact, the prices continued to rise, at roughly the same rate. Also, gross domestic product (GDP) still grew 7.1 per cent, against 8 per cent the previous year. 



Perhaps the impact was felt more on the informal sector…

Earlier, black money got converted into white very quickly. With the help of chartered accountants and others, money laundering was happening. So, if that can be done by the rich – there should be some fear when you hold black money – the people doing legitimate transactions can also find their way easily. If you went around Delhi markets, many transactions modes were there. And, the new Rs 2,000 note had come fairly soon. In fact, once I gave a grocer Rs 2,000 and told him to keep an account. That, in a way, establishes an informal credit market. You pay in advance and when the deposited Rs 2,000 is used up, you give another Rs 2,000 note. 
 

There also were complaints that the poor in villages were hit the most. How many in villages really use big notes on a daily basis? They use low-denomination notes, and I know that the Reserve Bank focused to bring more low-denomination notes in rural areas– there was a special effort.

What do you view as your three greatest achievements as the NITI Aayog vice-chairman?

First, the fact that we were able to establish the NITI Aayog as a policy-making think-tank. When I came, I had a lot of apprehension in mind. I was an academic. And this involved a lot of state effort, economics, consensus-building, and so on. But I am very satisfied today. 

Second, when we started, we had no leverage with states, unlike our predecessor, the Planning Commission, which had the leverage as it gave funds to states. We had to build our relationship on a different footing. We had to establish that we had some good ideas to offer and we could be partners in the states’ development process – very friendly partners. 

We have made substantive progress in that direction. 

Third, we have worked closely with the central and state governments in promoting economic reforms. In states, we have made a substantial progress with marketing reforms in agriculture. With the Centre, we are close to shutting down 18-20 sick units. Likewise, on privatisation, we are making progress, at least at our institution. Actual sales have not happened because this is a matter that the finance ministry has to take up. Also, for medical education reform, we have piloted a full Bill. The proposal is to replace the present Medical Council of India with the National Medical Commission. Alongside, we have taken up the homeopathy reform. We are also working on higher education and I am hoping to see some accomplishment before I leave.

How has the NITI Aayog been different from the Planning Commission?

In two ways. One, the Planning Commission wrote Five-Year Plans and implement them. We create action agenda, which is all about reforms, far-reaching and wide-ranging. Two, in relation with states, the Commission allocated funds, so it determined the character of annual plans. The chief ministers lined up at the Planning Commission. In our case, we visit states – the members, CEO and I, all have been visiting and advising states on how to carry forward their development. 

The Indian rupee has appreciated quite steadily in the last few weeks, which is not good news either for exports or for domestic manufacturing. Similarly, interest rates have not been lowered sufficiently in line with the falling inflation rate. Your take on these two issues.

As a matter of principle, I have always stayed away from commenting on both the exchange rate policy and the monetary policy, which fall under the domain of the Reserve Bank of India.

If you were to leave one message before you leave the NITI Aayog, what would it be?

We should all be working for India. The Prime Minister is working towards that end, and we should all do our bit.