The NPA problem needs a political solution: Arvind Subramanian

Budget had sent strong signals to those evading taxes, says Arvind Subramanian

The Union Budget 2017-18 has burnished the government’s credibility on fiscal discipline and has ensured a level-playing field between large corporates and small enterprises, Chief Economic Advisor (CEA) Arvind Subramanian, said in an interview with Arup Roychoudhury. He defended the Economic Survey’s 2017-18 growth projections, adding the Budget had sent strong signals to those evading taxes. On the bad loan issue of banks, the CEA said the bottomline was that a status quo approach had not worked and would not work. Edited excerpts:
 
What are your views on the Budget?
 
There was a thematic coherence to the Budget. The fiscal deficit path laid down is absolutely appropriate and consistent with the steps the government has been taking since it came to power. Every year, it consistently shaves off 0.2-0.3 per cent of the fiscal deficit as a percentage of gross domestic product (GDP). A path of consolidation that builds fiscal credibility. You gain credibility not by doing what others want you to do, but by doing what you said you will do. We said we would have these targets, a nice glide path, and the government has stuck to it. There were the usual competing considerations. Demonetisation led to the need to reward certain sectors, and also the need to maintain credibility. What people missed is that the revenue outcome for next year is a little bit tight. After demonetisation, the individual income tax is likely to do better. If you look at the numbers closely, the income tax-to-GDP ratio will go up. But the indirect tax-GDP ratio will be challenged because first, you don’t have the bonanza anymore from oil. Second, it will be the first year of implementing a very complicated tax. GST will be very buoyant for tax collections. But the first year will be a huge change for the Centre and the states. And third, we have to compensate the states. I am a little bit worried about indirect tax collections for next year. We have to factor in some realistic realisations in terms of indirect tax collections. So we are a bit constrained. We have to spend in some areas and balance that with fiscal credibility. The Budget has done that.

 

Your Economic Survey forecast GDP growth rate of 6.75-7.5 per cent for 2017-18. Some observers have said that that is a real leap of faith.
 
The way to look at next year is to see where we will end up this year. That is the starting point. We have projected 6.75-7.5 per cent. Now to say that next year would be lower than that misses the point that the worst is over in terms of demonetisation and how that affected liquidity. So there must be something else which will happen next year. It cannot be demonetisation, because the worst is over. The worst in that sense happened this year and now there will be recovery from thereon. That is the thinking that drives our estimates.

 
The thing being said about this Budget is that it did no one any harm.
 
I think that is a very unfair assessment. Analytically, look at the steps taken. Demonetisation has happened, and we have to follow up and make us a nation of taxpayers. That means rewarding the taxpayers and penalising non-payers. I think the taxpayers have been rewarded. Then, to entice people through carrots rather than sticks you have lowered the rate and you will make it easy administratively for the first-time taxpayer. The other part of it is the other sources of black cash. One is real estate. I am a big proponent of real estate being brought under the Goods and Services Tax (GST). Then there is political funding. The finance minister has made his signaling clear on that. I am not a political expert. But his announcements have widened the debate on that topic.

 
The NPA issue is one of the economy’s biggest problems. Yet the Budget had nothing on it.
 
I think that this problem is so difficult to solve and intractable, it is not one of those things that you make an announcement and solve it. We have some ideas on it. I think it is important to realise that it is not only the state-owned banks (who have a toxic asset problem), it is also the large companies. It is a company problem as well as a bank problem. Most of these companies are not healthy. You have to take that portion of their debt which is bad. But there has to be political will on this. These calls have to be taken centrally and not by mid-level bank managers. The process needs a political solution. These discussions on how to solve the problem of bad debt have to continue. Our proposals are a bad bank. There are other solutions as well. The bottom line is that the status-quo has not worked and will not work.

 
By announcing tax cuts for smaller companies, is the government encouraging companies to stay small and essentially differentiating between the small guys and the big guys?
 
If you look at the actual numbers, the effective tax rate of the big guys is now 25 per cent, while for the smaller guys it’s 30 per cent. What you are doing is rectifying a situation. The big companies take advantage of the exemptions. The smaller companies don’t. So you are rectifying a disadvantage for the smaller companies.
 
How implementable is your idea of universal basic income (UBI)?
 
It should be a priority. I think we face some challenges. Inefficient distribution is one of them. All economies distribute resources, so do we. But does it have to be so inefficient? At some point the political class and people will realise that how costly our redistribution system is. When that attitude changes is when something can happen. Because UBI has to replace existing systems and not add to them.