Do not want to create another inspector raj to enforce GST cuts passthrough:” Sanjeev Sanyal

Sanjeev Sanyal

Sanjeev Sanyal, member of the Prime Minister Economic Advisory Council, told Moneycontrol’s Shweta Punj that next generation GST reforms will include more process reforms, to identify more redundant departments and that the government remains committed to privatization. Edited excerpts of the interview:

Why was Navratri chosen as the first date to implement the new GST rates? Why not do it immediately?

Sanjeev Sanyal: So, whenever we introduced it, we have to give some transition time. So, in any case, this is a period that is, you know, just before the Navratri starts, tends to be a lull period, so is as good a time as any other, because you can't suddenly put this in; there are things that need labeling and all kinds of changes need to be done. So, you have to give some transition time at some point, so that is why.

But let me tell you a little bit of the longer history. When you go back to 2017, you have to remember what the focus then is. The focus is, you have this old system, extremely complicated, all kinds of different service tax, excise tax, sales tax, and you are putting them into a new system, that new system is untested. So, that transition into the new system is what the focus was. And what you didn't want at that time is further complication caused by the fact that the tax rates became completely new. So, the decision was taken at that time, that let's focus on the transition to the new GST system. And the tax rates are just flicked into the nearest bucket that we have.

Interviewer: Very complicated, yes.

Sanjeev Sanyal: And completely non-intuitive things. So, what was thought, look, at least this is some level of simplification, let's just put it in the nearest bucket. So, there was no first principles working out why something should be in some bucket, it just was the nearest one of what was there in the pre-GST period. So, then it took about two years or so to just stabilize this system, get it to work, etc. And then COVID hit. So, now another two and a half years went in that. So, then when we came out of COVID, it's like, okay, let the economy recover to some level of strength. And so, by the time that we were all confident that we can now do another round of change, it was already in 2024.

So, what did we want to do? Well, at that time, you will know, the debate discussion was, look, there are way too many slabs. There's something that the late Bibek Debroy had repeatedly made a point about. I have also talked about it many times. The other thing was that the items were, since they hadn't been worked out from first principles, all kind of random places. So, you would end up with these somewhat arcane debates about should sweet popcorn and salted popcorn be taxed at the same rate?

Interviewer: The infamous popcorn debate.

Sanjeev Sanyal: Yes, infamous popcorn. The reason is that, because you will have these kinds of illogical debates, because the whole architecture is not based on anything other than what things were on before GST. So, it said, okay, we'll reduce the number of slabs, number one. So, now, we've got two. And very importantly, and in some ways, perhaps even more importantly, they will now be in logical slabs. So, yes, there'll be some debate still at the margin. But by and large, if you know what an item is, you can just by common sense work out where that item is likely to be taxed.

So, now, you have something like cement, everybody uses cement. I also agree, it shouldn't be taxed at 28%. But because it used to be taxed high earlier, so it ended up at 28%. Now, we have put it in something that is more reasonable like 18%. Most food type items will end up at 5%. Loose food will end up at 0%. So, I don't even know of a specific, any item you get me, I would with a 99% accuracy be able to tell you which bucket it is supposed to be without too much debate about the matter. Now, this gets rid of a lot of pointless debates that used to happen earlier, because there are millions of products. Each one of them, if you have to specifically say that this has to be here or there, you know, sweet popcorn, salt popcorn, this whole debate is now meaningless.

Interviewer: So, the crucial aspect of the success of GST 2.0 is also going to be whether businesses will pass on the tax rate cut.

Sanjeev Sanyal: Well, the expectation is that they will. But let's see how that works out. I think the signal has been given by the government that it should be allowed to pass through. But then we didn't want to create another Inspector Raj trying to enforce it. So, this will to some extent have to be done by public pressure. And there is also the thing that we wanted to make sure is that all the processes also. So, there was all these things that over time, the old license permit Raj had quietly come back. So, some amount of Inspector Raj was there in terms of GST notices. Also, the thing that just for registration, the idea was that anybody registers and quite quickly you get your number. But over a period of time, that process had become complicated. And we had heard lots of complaints about it. So again, a system... Yes, there are sometimes genuine misuse.

So, it's not like the other side of the story is not true. But usually for 2-3% of the cases, 98% of the system would be stalled. And of course, the resultant rent seeking, harassment, etc., that comes with it. So, as you may have heard that that process has also been significantly smoother.

Interviewer: So, you said that you didn't want to bring in Inspector Raj. But is there a mechanism in the works? Or is there a mechanism, a broad structure in place to ensure that this happens, that the rate cuts are passed on?

Sanjeev Sanyal: We'll see how it goes. But, you know, I have very little sympathy other than the minor issue of labeling. You know, so you're already printed and the product is in the supply chain. Maybe it can go But that's a transition issue. Beyond that, I have no sympathy about the matter. Because if you are taxing something less, they should pass it on. What argument is there about not passing it on?

Interviewer: Insurance companies are crying about it. They're saying that 0% will actually increase the cost

Sanjeev Sanyal: No, I'm sorry. There is very little sympathy one can have for them. By removing that 18% tax, I think it was 18%. We have dramatically opened up the market for them. So it is up to them to now come up with some useful products that they can, that should be now available for consumers. So let us rather than whine about this, what they should do is to come up with more innovative products, which are in sync with what the new expanded demand system will be.

Interviewer: The government has been urging the private sector to come forward and invest. Now we see rationalization in GST. What is holding back the private sector?

Sanjeev Sanyal: Remember, there used to be this big major problem with the twin balance sheet problems. The banks being bust and the corporate balance sheets being bust. And so both those balance sheets and the government balance sheet itself have dramatically improved over time. The banks are in rude health and corporate India is making record profits. So the question now is, having brought them back, do you expect them to begin investing? As I said, some of them are. But it is also the case that what has happened is that in many sectors, there is perhaps not adequate amount of competition.
And there is no pressure, therefore, on entrepreneurs in that sector to innovate.

So if you see, research and development is also quite weak. I mean, Indian corporate sector invests very little in R&D. Why don't they? Because in some ways we protect, perhaps, mollycoddle and protect them too much. Now, it may have been necessary to provide that protection to bring them back from the fragile five environment. But now they are healthy. They are making record profits. The market is growing. I think the time has come to find ways of opening things up, getting more competition into the market.

I certainly don't think there is a case for protecting entrepreneurs who feel that they can sit and run family offices from Dubai, for example. Why should we be protecting that? If you're on the shop floor here innovating, we are all in favor of it. But family offices from Dubai doesn't justify providing protection. If you're not coming up with new products, if you're not using the space and domestic market created to go out there and capture markets abroad, that is what really this domestic market that has been created is for. It is not to milk for feel-good things. Like I said, family offices in Dubai is not what it is for.

Interviewer: You know, even as you say this, that this is no time for us to protect industry, we are in a very protectionist world. You have US President Donald Trump protecting American industry, and we are also in the middle of some very crucial negotiations, one with the United States, the other with the EU. Do we see more sectors opening up?

Sanjeev Sanyal: So as far as the tariffs issue is concerned, we have been quite clear. We did not escalate the matter at any stage. But we have also not backed down.

And I think the signal has gone through quite clearly to the US and to others that we are negotiating with. But we will not be unreasonable. And we will not escalate matters. But we will also simply not back down on things that we think are our interests. So on that count, let me be clear that we will protect Indian interests. At the same time, we do want investors to come, whether it's domestic investors or foreign investors. We do want them to invest in this country. As I said, make in India is our mantra. But anybody can come here and make in India. We want domestic industry to make in India. We want foreign companies to come and make in India. We want old companies to make in India. We want new startups to make in India. So we want to be as open as possible. And a lot of the things we are doing in terms of ease of doing business, deregulation, etc. is related to this thing.

Interviewer:Okay. I want to also understand from you on how are we viewing China?

Sanjeev Sanyal: So let's be very clear that for all the types of friction we have with China, we cannot wish them away. They are a global power and they are a major source of all manner of industrial inputs. So we have to learn to deal with them. Obviously, in our terms, we still have to learn to deal with them. Now, in that context, it's good that there's been a thaw in our relationship with them. And as I said, there are many industries in India which rely heavily on inputs from China. Now, in some of those cases, we may want to create our own domestic capability, but you can't do this for everything. So there will be a role for Chinese imports or even investment. And I think we should be open to that.

Obviously, I don't want them taking over our telecom industry. But there are areas where the Chinese will play a role. And for example, if we want to be in the smartphone manufacturing business, we simply wouldn't be able to do it if we didn't import significant, large numbers of inputs from not just China, but other countries as well. So if you want to be in the global supply chain, you cannot wish away China. So we have to be pragmatic about this. Now, as I said, that doesn't mean we rush to join RCEP. We are unlikely to do that. But there will be many areas where we will collaborate, even as we compete with them.

Interviewer: What are these next generation reforms going to focus on? And what are they going to look like?

Sanjeev Sanyal: So there are a whole bunch of things we need to do. A lot of it requires really straightening out the thousand small things that add friction to the system. So, usually the newspaper headlines focus on what is called structural reform, which are big structural things like introduce GST or create the insolvency and bankruptcy code or shift to inflation targeting and so on. Now, we can do some more of those things, but the bulk of what really causes friction in the system is not these big things. It's actually a myriad of small things. So you have to really sit in there and do these things, which I call process reforms. And so these process reforms are very important and they can be of various kinds.

One is that there are government processes that can be, you know, there could be a law, there could be a regulation, there could be an administrative process. Those can be smoothened out. Then we also need to go and look at the structure of the government itself, like the central government. There are all kinds of bodies in the government. Are these bodies needed? Are there outdated bodies you can shut down? Is the distribution of civil servants correct for today's needs? I mean, do you? So all of these kinds of things are important parts of process reforms of the system or reforms of government architecture. So these are the kinds of things that we need to do and some of them are pretty major efforts.

Interviewer: So when can we expect some movement on this?

Sanjeev Sanyal: By the way, this is not new. We have been doing it anyway. I myself have been involved in several of these. There has now been a committee set up under Mr. Rajiv Gauba, the former Cabinet Secretary, who is now a member of Niti Aayog. He will be looking at some of the deregulation part of it. So process reform is a big area. It's a general word. So there's the space for deregulation. So particularly for business, that bit he is looking at. Then there are a whole host of other things, ease of living type issues. I'll give you one example. I had myself written about, for example, EPFO. So I have made quite a big fuss about it. And I hear the labor ministry is now working to sort that out. I'm myself working in a similar thing, which relates to the IEPFA, that's the Investor Education and Protection Fund. That's where unclaimed shares go to die. So if you ever have unclaimed shares you inherited or something like that, it is impossible to get your money out. So that fund has got something almost like a lakh crore worth of lying there.

And they get about 8000 crores worth of shares of dividends coming in new, plus new stuff gets piled on to it. So its corpus is growing, but they are only able to give back in any year about 2-3000 crores worth. So I looked into the matter and this is what I discovered. First of all, the system has three different websites. One website where the claimant puts their stuff in. Once all the approvals goes, there are two separate websites. One for giving their money back and the other for giving the dividends back, which is a separate website altogether. And they don't talk to each other.

This is not the end of it. Then the person has to manually, the officials have to manually take all the information from one, put it in the other in order to give the share back. So then I mapped the entire process and I discovered that the whole process from the point you put in your application to the point you get your money is 25 steps. If on the 24th step you make a mistake you go back to step one.

So it's like snakes and ladders, except it doesn't have ladders. So it's an unbelievably inefficient process. So I'm working right now with the Ministry of Corporate Affairs and smoothening this out. By end of this year, the new integrated website, so those three websites will get integrated. And this 25 steps, first we'll bring it down to 15 and then ultimately to maybe single digits. And smoothen it out. So what will happen is what used to take years to do, we can do in days if not weeks.

Interviewer: And what about the shares that are lying already?

Sanjeev Sanyal:
So many of the existing stuff will be onboarded onto this new system. Onboarded into the new system. And the new claims will, of course, be done entirely in the new system. And it'll be done by the end of this. So four more months, please wait. And then we'll see first six months of 2026, if we are able to dramatically... I mean, this is easily measurable, right? Has there been a dramatic increase in the number of shares given back or not?

Interviewer: Absolutely, absolutely.

Sanjeev Sanyal: I will be able to tell you by this time next year, whether I managed to simplify it or I failed.

Interviewer: Well, that's a really heartening thing to hear, you know, because when Prime Minister Modi was voted into power, he spoke about minimum government and maximum governance, right? But over the years, we've seen not a dramatic reduction in the number of ministries or in the size of the government.

Sanjeev Sanyal: So I think some part of it is not true. We have actually removed hundreds of outdated laws. We can give you a list of them somewhere. Similarly, I've been personally involved in dramatically simplifying many things. And many, many things, I mean.

For example, it used to require 77 clearances to fly a drone. So I and this government official who was then in PMO, now he's in Taiwan, Manar Yadav, over a few weekends, we reduced it from 77 to 7. That's how the entire drone sector took off. Then there used to be a monopoly earlier of the survey of India on all maps in the country. So technically, Google Maps, which all of you probably used to come here also, that was technically illegal. So it was again, it was somewhere during the COVID period that I wrote a note, which eventually got implemented, which ended the monopoly of the survey of India. Then I personally can take some credit of shutting down all kinds of useless bodies of the government of India.

Interviewer: Give me some examples.

Sanjeev Sanyal: Tariff Commission. There was All India Handicraft Board, All India Handloom Board. What do you call it? There used to be Children's Film Society, because it was not closed, it was merged, but anyway, it disappeared as an entity. I mean, I could keep going. Some of these bizarre bodies, nobody knew what they did.

Interviewer: So now what's next on your target? Because you are working on process reforms, you are identifying agencies that are redundant or no longer needed.

Sanjeev Sanyal: So I have been working on this, as I said, even when I was in finance ministry. These are the ones that I talked about, because they have been completed. We are right now doing an exercise of mapping the government to see where all various agencies and all are. And once that is completed before the end of the year, we will have a very good sense of the landscape of the Indian central government. How many bodies it has, how many people are in each of those bodies and so on. And that will allow us then to be able to see if the government can be restructured. And one of the interesting things of all of this is that, in fact, the government of India, the union government is perhaps not too large. It's probably too small, contrary to what people think. The problem is that there are too many people in outdated parts of the government, and not enough people in the bits that should grow. So the more severe problem is not that there are too many people, but the more severe problem is that it's all imbalanced.

I mean, how many people do we have in cyber security? Almost nobody. I mean, very small number. Whereas this should be a huge department with large numbers of people. We don't. But there are other outdated departments with lots of people.

Interviewer: You're expected to submit this mapping report?

Sanjeev Sanyal: So this mapping is an ongoing process. It's still getting done.

Interviewer: Any timeline that you're working on?

Sanjeev Sanyal: As I said, by the end of the year, something will come out of it.

Interviewer: Okay, and I'm assuming that this is part of the next generation reforms, this whole streamlining process that...

Sanjeev Sanyal: And by the way, this process reform and all of this that we talked about, we talked about from central government. Exact same thing can be done at the state government level. And I have myself gone and made presentations about how to do process reforms in state capitals. And I've also begun to work on teaching this in some of our administrative institutions like LBSNAA and so on. So we are trying to put it as part of the thinking that the bureaucracy has as part of its daily thinking. Because one of the problems is that, you know, you can blame the bureaucracy for not doing these things. But the fact is, there's nothing in their training which trains them how to do reforms. So what happens is that every official is reinventing the wheel.

Interviewer: Okay, fair enough. I also want to get a sense from you on the impact of this whole tariff that we're seeing on the Indian economy. Now, we've already seen a dip in trade numbers where India-US trade is concerned. Our shipments to the US went down by nearly half in August as compared to July. So if this goes on for a while, MSMEs are very vulnerable to this, there are jobs at stake. What's the thinking in the government on moving and acting at the right time?

Sanjeev Sanyal: So obviously we do understand that there are certain segments of the economy which will get affected by these tariffs. But let me say that we are cognizant of this issue and we are providing certain amount of support to them and will do more if necessary. Indeed, this simplification of the GST itself is a relief because there were a lot of inverted duties and all that. So in fact, one of the sectors that would benefit from this is textiles. So, I mean, this alone provides a certain amount of comfort, but we will do more if necessary. Let's see how long this goes, but meanwhile, of course, the negotiations between India and the US on trade deal are also progressing, as you are aware. So let's see how that works out.

Interviewer: What about India’s growth. How strong is the momentum likely to be?

Sanjeev Sanyal: Let’s say we go from 7.8 to something a little bit, let's say 7 or even a little bit less than 7. I think it's still momentum enough that it's generating jobs. Maybe not as much as we would like, but it's still generating jobs. And we have enough monetary and fiscal space to provide support. Particularly monetary space, given that inflation is so weak. There is no stress on the system at all. The external accounts are very well behaved. We just got an upgrade. Inflation is, in fact, if anything, too low. So in that environment, it creates lots of leeway for doing macroeconomic demand support, if necessary. That also we need to see.

Interviewer: Also on disinvestment, there was again a lot of excitement and expectations around a very renewed agenda towards divesting stakes in public sector companies. However, that lost some of the steam last year, and we've seen a very subdued performance on that end.

Sanjeev Sanyal: We are willing to keep doing that. Privatization and disinvestment remains a part of our agenda. And as and when it is thought that the market is right and the timing is right, we will do it. It's not something we need to rush into doing. It's not the government desperately in need of money. So we will do it as it comes.

Interviewer: From a neighborhood perspective, how vulnerable is India in a situation where our neighborhood is looking so volatile? It impacts us in many ways.

Sanjeev Sanyal: We certainly should take care to watch what happens. As I stated then, and I'll state again, the way in which these kinds of sudden spirals happen. You know, one has to ask, is there a pattern in all of this? And so what you saw in Sri Lanka, then in Bangladesh, and also in Nepal, very similar kinds of things are there. And there are rumors and otherwise of foreign NGOs, particularly USAID funded NGOs which were involved in all of this. One can look into the matter. But certainly the fact that these kinds of things have happened and happened in a certain kind of pattern is something we should look into. After all, we have also had things like farmer protests. Shaheen Bagh and all of this. With very similar patterns. Funded by very similar kinds of agencies. And all of this, by the way, happens in a wider global context of narrative manipulation. Done by the likes of VDEM Institute in Sweden.

All of these funded again by the same, you know, open society and other kinds of agencies. So, there is a certain consistent pattern to it. Now, whether or not they are operating in India and can do something is something that we should keep our eyes about. I am not saying that every protest is caused by this. But to be wary of these is something that, I think every sort of sovereign nation should, it's our business to keep track of this.