In an interview to CNBC-TV18's Shereen Bhan, Arvind Subramanian Chief Economic Advisor, spoke about the launch and future of the goods and services tax (GST).
Below is the transcript of the interview.
Q: July 1 is here, there is no looking back now as we get ready for the implementation of the Goods and Services Tax (GST). Let me start by asking you about some of the concerns that have been raised and specifically the concern being raised by the former Finance Minister P Chidambaram, saying that this is going to be inflationary at least in the short term. How would you respond to that?
A: I would like to begin by saying that historic landmark achievement and a day for rejoicing and celebration, we need to recognise that upfront. On the inflation challenge, I actually think that even in the short run that anxiety is overdone for two reasons, one that, the actual incidence of taxes after you take into count input tax credit and so on is going to be actually substantially lower in the GST than what we have today. So, incidence wise I expect that there should be a downward bias to prices. The second less recognised aspect of it which is kind of a bit quirky, I would say is that in the run up because people are disposing stocks, that is also having a kind of nice dampening effect on prices. So, in the short run for both of these reasons as well the bias should be towards downward prices rather than upward biases.
It is true that there are two perceptional problems which will distort some of this in the days ahead. First, it is a kind of rule of behavioural theory that the pain will be focus of all the hype and attention whereas the large reduction will get forgotten. So, we need to keep that in mind.
The second very important thing to keep in mind from a perception point of view which is something that all of us have to work towards is the following – 1) Today before the GST, the tax payer only sees the VAT but embedded in his prices is the excise tax. Going forward, he will see both and he will think you have gone from 12.5 percent VAT to 18 percent combined but in fact the actual embedded and incidence today was also 18 percent. So, there are these two perceptional challenges that all of us have to work together to overcome and kind of face down as it were.
Q: A specific concern on what could happen to growth in the short term, in the immediate term as we rollout the GST, the disruption that it is expected to cause. For instance some concerns that people are not stocking up, people are destocking ahead of the GST. We have seen significant discounting which may have actually preponed sales. How do you see it impacting growth in the immediate term?
A: What is going to happen on growth in the short run is going to be determined by two things. One, how quickly we can see through the GST challenges, is it two months, three months, four months, we still don’t know. We know there will be challenges, we know there will be glitches and we will have to work through them. So, in the short run that is certainly going to increase uncertainty and may have some impact on investment and consumption and growth. However I think that the growth outlook in the short and medium term will be determined by a lot more than just the GST. There are lots of things happening in the economy which we will describe in all their gory detail in the economic survey later this month but the GST impact on growth will probably be relatively smaller element. What is going to determine growth is what is happening on the broader macroeconomic front.
Q: The previous economic survey did spend a lot of time talking about the precarious position that state governments find themselves when it comes to their financial health, their fiscal health. I would expect that the indicators suggests that, that is going to get even more precarious given the fact that you are now dealing with significant farm loan waivers as well. Also you have the rollout of the GST which could impact state finances also, even though the centre is going to compensate at least for the first five years. Take me through the implications of not just the GST but other macro indicators when it comes to state finances?
A: The agricultural loan waiver I think is much more complicated than it appears. The central government has made it clear that if state governments want to make some decisions, they have to be responsible for the consequences of those decisions. So, if they don’t have fiscal space, they will have to meet it from other resources or cut other expenditures. So, in that sense it is not obvious that state government finances will deteriorate or not. It is true that for some states that have this fiscal space, they may be able to spend and borrow more but for other states there is a kind of hard ceiling fixed by their fiscal response legislation which as you know the centre controls their borrowings. So, how much, even the direction on the finances is complicated. What the impact on aggregate demand and the economy is going to be is also actually more complicated than what anyone thinks. I am not going to give away the secrets at this stage on that.
Q: How is this likely to impact or weigh in on sentiment at the next MPC meeting because the minutes of the meeting did reveal that while Dholakia was in favour of a 50 basis point rate cut, the others wanted to wait and watch. One of the reasons they also wanted to wait and watch was the rollout of the GST. How do you see this impacting or weighing on sentiment as far as the MPC itself is concerned?
A: I don’t want to get into the way the MPC will or will not respond. I think that there is some very serious analysis to be done on the macro economy – what is happening to inflation, what is happening to growth, what the outlook is for both inflation and growth, it is the combination of all these factors that will and should weigh into any decision about interest rates or whatever which in any case is a prerogative of the MPC to determine. However what is important is what is our diagnosis of the economy on the inflation and growth front and that I think is actually very complicated. As I said we are still working on this, refining the numbers and you will see a comprehensive assessment in the survey, which of course will also have implications for how we should conduct macroeconomic policy going forward.
Q: Give me a sense of what we should expect as far as growth is concerned in FY18? We have got all kinds of calculations being done by the likes of CII etc who talk about 2 percent gain to the GDP on account of the rollout of the GST and so on and so forth. What should we realistically expect?
A: On the impact of the GST on GDP, I have not done any serious calculation. There is lots of uncertainty about all these estimates. I do know that the impact on GDP and revenues in the medium term will be positive and substantial. In the short run it is going to be even more difficult to predict because there are all these implementation challenges ahead. So, all we can say is that the impact of GDP will be positive but the timing and magnitude are still up in the air. A lot will depend upon the experience that we gain over the next 3-6 months.
Also what policy decisions GST council takes pursuant to learning from the experience of implementing the GST in the months ahead.
Q: Rates have now been finalised and your committee, your panel had suggested rates which are different from the ones that the GST council has finally gone ahead with. We understand the political compulsions of this multi-tiered rate structure but there are complexities involved as well. In retrospect do you believe or in light of what we have now seen or what we have to live with, do you believe that this in fact is much more of a compromise than you would have liked it to be?
A: In all these things when you say multi-tiered structure, you have to compare it with what we have now. If it is multi-tiered tomorrow, it is multi multi-tiered today. So, at least you have eliminated one multi. So, in that sense it is a big improvement from what we have today because today for anyone product in India you did not have the same rate across all of India. Going forward with GST you are going to have one product, one rate by the centre, the same rate by all the states. So, much more uniformity. Also fewer rates than what we have today but relative to what we would have liked it is not there yet but the way to think about this is that in the GST council do we have a deliberative, democratic mechanism than can get us to those simpler rates and also get us to reducing the omissions from the tax base, the gaps in the tax base, whether it is land in real estate, alcohol, petroleum, health, education, power, those are also things that I think the GST council has to work towards to improve going forward.
Having seen the way the GST council works now over these many months, I think the quality and the spirit of debate is such that and remarkably well steered by the Finance Minister, I think we have a mechanism which we should, the jury is still out whether this will happen or not but one should have over time more and more confidence that this deliberative process will in fact get us to that GST nirvana of very simple rates and as wide a tax base as possible.
Remember nirvana will always allude us but the thing is can we get closer and closer to it as possible.
Q: Given the fact that you have seen the workings of the GST council, you have seen the debate and discussion whether it is on what should be omitted from the ambit of the GST and what should eventually come into the ambit of the GST, as well as the possibilities of converging these multi-tiered rates into maybe eventually one rate, what are we talking about here – two years, three years, five years? What is the sense that you get about the political will, the appetite within what you have heard and witnessed as part of the GST council meetings?
A: In terms of trying to achieve things by consensus the GST council has been a remarkable success. Who would have thought 29+2+1 set of interests could actually be brought together.
In terms of the timing of when you think these improvements will happen, a lot of it is going to depend upon the actual experience of implementation. Nothing succeeds like success. If we do a good job of implementing what we have, we will get more improvement. So, a lot of it is going to depend upon the learning by doing and the learning by undoing and the learning by making mistakes, I think those are the things that will determine how fast we can get towards that GST nirvana that we just spoke about.
Q: Rs 55000 crore that is what has been budgeted as far as the compensation to state governments are concerned. In my conversation with the revenue secretary, the suggestion seemed to be that perhaps we will overshoot that number. If that were to be the case as far as FY18 is concerned, what kind of implications will it have for the fisc?
A: Let me point a basic kind of inconsistency in many of these questions that are asked. The more you think that revenues will fall short, almost by definition your inflation concerns should melt away because the one is a direct consequence of the other. My own view is that there will be downward pressure on prices. One logical consequence is that the revenues may not be as revenue neutral as we were hoping. However some of that shortfall we should claw back through better compliance and more tax payers entering the net from the informal sector into the formal sector. At the end of the day how much we fall short we will have to wait and see. I am at this stage not alarmed that we will fall short by huge amount but let us wait and see. I am hoping that the compliance gains will be substantial, that we will get back some and if we fall short on some, we will have to respond to that. How we respond to that is going to be of course a big question but also it is also going to be a macroeconomic policy question.
Q: What gives you the most hope with the advent of the GST and what would keep you up at night?
A: Tonight is a night for celebration and rejoicing. So, I don’t think we should be worried about that tonight. There are legitimate anxieties about the IT system, the compliance burdens, the familiarity with the system, the kind of outstanding transitional issues, stocks, excise exemptions and so on, all these things we have to work through. There is no one big thing that I am going to say gives me anxiety. However on balance I am hopeful that within a few months time we will work our way through these teething challenges and come to see the GST for the absolutely historic landmark achievement that it is politically and economically.
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