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Jul 12, 2012, 08.23 AM IST
Planning Commission deputy chairman Montek Singh Ahluwalia is upbeat that the government will push measures to kick in growth.
Investors' confidence is returning to India on hopes that Prime Minister Manmohan Singh, is going to introduce new reforms, as he takes over the finance ministry. There are lots of uncertainties overhang that has punctured sentiment regarding India's economy growth.
However, Planning Commission deputy chairman Montek Singh Ahluwalia is upbeat that the government will push measures to kick in growth.
He feels that the fiscal strength of the economy will be hugely enhanced if obstacles to Goods and Service Tax (GST) are resolved. In an interview to CNBC-TV18, he said that GST is the single-most important reform.
"GST requires a constitutional amendment, so there is no prospect of a constitutional amendment getting done within a six month period. The importance of the GST is not whether it happens in next six months but uncertainty is removed that the GST is going to happen. Apart from taking care of the short term problems of uncertainties associated with General Anti-Avoidance Rules (GAAR), the single most important thing is GST and I hope it will be done," he added.
The GST as proposed by the government will replace with single levy indirect taxes such as central excise duty, services tax, and state taxes including value-added tax, entry tax and purchase tax.
The government tabled in the parliament constitutional changes necessary to roll out the tax despite many states still not backing this ambitious reform of the indirect tax regime that has been delayed by more than two years.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: I don't want to dwell on the criticism that the government has been heaped with and there is plenty of it but there is self inflicted goals, regressive tax action, not enough policy decisions, and flip-flop on the decisions that have actually been taken. I want to talk about the road ahead. In my last conversation with the Chief Economic advisor he said the next six months are going to be critical if India were to even do 7% or 6.5-7% growth. The next six months are crucial to get the reform agenda back on track. What can we expect, what will be the pillars to jump start or revive growth?
A: First of all, you like everybody else mentioned the reform agenda. Now I think we should make a distinction between what is called reform, what are structural changes in the system and what is simply called effective management of the economy. In my view, reforms are things we should do.
There are many things on the agenda and I hope that they will happen. But, right now the most important thing is effective implementation of things that are already within the scope of policy possibilities or initiatives. They are not actually reforms. They are just getting impediments to investment removed, especially in the infrastructure sector.
It is kind of doing what the government has already said it's going to do, so I won't call that reform. In my view, reforms are things like getting the GST done, FDI in retail, etc and other new initiatives.
Q: Since you have created that distinction, let me start by talking to you about the reform agenda. I will get the infrastructure in just a bit. About GST, Kaushik Basu’s view was it is unlikely to make any kind of progress or a significant breakthrough in the next six months, do you agree with that?
A: GST requires a constitutional amendment, so there is no prospect of a constitutional amendment getting done within a 6 month period. But in my view, the importance of the GST is not whether it happens in the next 6 months. Rather, uncertainty is removed that the GST is going to happen.
The fiscal strength of the economy will be hugely enhanced if people felt that obstacles to GST have now been resolved and the process of amending the constitution is underway.
Q: Can we expect that next year?
A: I would hope that by the time we start the next year we should be able to say that there is progress. Now how much progress would be there is a political issue and timing is important. But in the entire tax front, in my view, apart from taking care of the short term problems of uncertainties associated with GAAR which they are doing, the single most important thing is GST. I hope it will be done.
I have talked to some of the people, the Finance Ministers of states etc. I believe there is now an adequate understanding that this is an important reform for India and the states are beginning to see that point. So I hope they do it.
Q: You spoke about GAAR, let me talk to you about clearing the air so to speak. You have mudded the waters even further and I know this is not exactly the domain of the planning commission but, nevertheless we had the Prime Minister come out and say that, all tax related concerns would be addressed. Then at 10:30 in the night, the Finance Ministry issuing draft guidelines even as the working group that was setup on GAAR was still preparing the draft guidelines. They were in shock as to how these draft guidelines had actually been released. The next morning the Prime Minister's Office comes out and says we don't have anything to do with these draft guidelines, it doesn't have the approval of the Prime Ministers Office (PMO) or the Prime Minister himself. Why then this urgency to put out a release at 10:30 at night with the draft guidelines, without the knowledge of the working group and then distance yourself the next morning, you are adding to the uncertainty?
A: Well you have managed to attract a lot of TV audience by making those statements. Let me make the following points. Putting out draft guidelines at the official level is not an unusual thing. What the timing was I have no way of knowing. But as I read it, the draft guidelines that were put out take care of a number of problems, at least I have been told by many people.
Some of the clarifications on P-notes etc are quite welcome. What the PMO did was to put across a very simple clarification, since the Prime Minister is now the Finance Minister, these were guidelines only issued at the official level. Comments will be received and the Prime Minister will actually see what should be done based on comments received on the draft guidelines that have been released. There is no distancing, I would call that a clarification.
Q: A clarification on draft guidelines that was put out but the comments that are coming in at this point in time seem to suggest that do we really need to go down the GAAR route now given our domestic situation, given the global economic climate, does India need to embark on a GAAR roadmap at this point in time? Look at the UK; it took over four years to discuss, deliberate, and thrash out the nitigritties before it even got moving with GAAR. Why are we in such a sense of hurry?
A: All taxation is a complicated issue and since I don’t handle it I am giving you comment as an economist looking from outside. First of all it is not true that we are rushing the GAAR guidelines in a hurry. The notion that we are going to have a GAAR was there in the DTC itself.
Q: But the DTC hasn't come?
A: Yes, but my point is that its there somewhere in Parliament. But most important is that the finance ministry first thought that it could bring in GAAR with effect from this year. I think the previous finance minister deserves a lot of credit for sensing the concern and postponing GAAR guidelines by one year.
The guidelines are not going to appear this year and now the finance ministry has made that very clear that the GAAR guidelines are not relevant for the current financial year’s income.
Q: Do you believe that perhaps it should be deferred even further?
A: I am in favour of giving it the most careful consideration, as many countries have GAAR guidelines. I think in India, the key issue with GAAR is what it does it FIIs. The guidelines give 17 different examples of the kind of company decisions that might be covered by GAAR. It’s quite clear that it’s very complex and I don’t think this is important because the big investors are not actually deterred
Q: But clearly, the investors are concerned because the Prime Minister felt the need to say that the tax-related uncertainties will be addressed. So you do see these uncertainties as big problems?
A: Absolutely. The only way uncertainties can be addressed is to announce the GAAR guidelines and invite comment. What I think the PMO clarified was that the Prime Minister would take a view after he has heard what the problems are.
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