Up Close & Personal with Parthasarathi Shome

Parthasarathi Shome, Advisor to FM is no outsider to the finance ministry. In his first term during United Progressive Alliance (UPA-I), he along with Finance Minister (FM) P Chidambaram were the brains behind new taxes such as the commodities transaction tax (CTT) and the fringe benefit tax (FBT). He also conceptualized the country’s largest tax reforms, the Direct Tax Code (DTC) and the goods and services tax (GST).

The two bills have now been diluted to build stakeholder consensus and Shome himself admits that going back to the original draft will be difficult. On his agenda, on CNBC-TV18 Shome ensured the introduction from 2014 as well as strengthening large tax pay units both for domestic and foreign investors. Shome’s experience in taxation is based on his work not just in India, but in over 30 countries including the United Kingdom (UK) where he was the Chief Economist with the revenue and customs department. Taxes and economics however is not Parthasarathi Shome’s first love. Attracted to the arts during his growing up years in Madras and Kolkatta his first preference was a career in rock music. Though that dream remained unfulfilled, his love for the art and traveling finds reflection in his plush Delhi home. That is particularly in his collection of naïve art; a genre of art characterized by its childlike simplicity. His collection includes works from across the world. These pieces particularly reflect magic realisim, magic elements are a natural part in an otherwise mundane environment. Shome’s most priced possession is the painting by his mother, reflecting the life cycle of a human being, a concept that finds resonance in several works in house. The circle of life, family structures and social rituals in vivid colours are what draws him the most. Since, he says the resolution of the mystery of life is ultimately a human beings most important quest. No wonder then that this is his most favourite piece letting go off the doves. Detachment he says is the key principle of life, letting go of what is loved the most. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Given the political opposition do you see GST coming even by 2014? A: I think 2014 we still have one year. If everyone works, it depends on the critical mass and the tempo. Q: Let me rephrase that question, do you think the Bharatiya Janata Party (BJP) will let the UPA get the credit for introduction of GST? A: I do not see it is a political issue that one party will stop it. There are certain ministers who feel quite strongly about how the structure should be in the GST. It so happens that it coincides with some of the ministers with that, but I have not observed that link that just because they are in the opposition, they want to stop it. Q: Let me talk about the DTC now. There were principles that you had brought in in the first draft given the fact that the standing committee has already given its recommendations on the DTC. Can some of those principles be brought back? A: We cannot go back necessarily to the first version. We have to work with the current version. Take a look very carefully at what the standing committee has given back to us. The union FM has instructed and is participating looking at those comments very carefully. So, we have to respond on that basis and we are working on the comments of the standing committee of DTC 2010. Q: DTC is simpler at least politically do you see the DTC coming in by 2014? A: Yes, I think so and I hope so. The FM has indicated that he wants to place it in parliament before May 22 close the Budget session. If we can do that then in the monsoon session, it will move forward. I think it can be done. _PAGEBREAK_ Q: You have worked in the United Kingdom (UK), in the revenues and customs department in over 30 countries, what is the stance that India needs to take on international taxation? A: There are two elements to it. One, that it is a tax uncertainty. So, one can get the right tax revenue and keep revenue stable. However, one has to ensure and assure taxpayers of the tax regime. So that is what is important. Within the tax regime certainty and minimizing the risk that investors take to bring their resources to another foreign land for investment, the important issue is to guarantee that certainty and minimize risk. So, that has to be done and then the tax regime is clear from the beginning. They can make their decisions not that when they come here and then the tax regime changes. That is what has happened in India I feel in different stages and different aspects. That we have to guarantee, but I do think change in tax regime, fundamental structural changes, the fact of the matter is that many of these low tax jurisdictions were a bit mollycoddled by some of the economies from where foreign investment was coming. So, now in the prices, the scenario has changed. This realisation is also important and it has to be corrected, no doubt but within a certain tax regime. Q: You see some kind of a doublespeak because you have the finance minister promising a stable, non-adversarial tax regime but on the other hand you have an aggressive tax department sending out notices on transfer pricing. So where do you think the balance needs to be drawn and how does India go about making sure that the certainty that you are talking about actually exists in practice? A: I do not think there is doublespeak at such, but we have to maintain comparability with the rest of the world in how we move with respect to international taxation. We cannot expect foreign investment to come to our shores unless our treatment of foreign investors is also comparable. That is a position that I have maintained. There are certain aspects of tax administration reform where I think India needs to compare itself or benchmark itself. More and more tax administrations across the world are benchmarking themselves with what is happening not just in what is happening in UK, US, Germany, Netherland. However, what is happening in South Africa, what is happening in Brazil, what is happening in even Rwanda. These are countries that are now comparing themselves in terms of structure and so on. For example, when one thinks of functional departments in the administration, they specialize by sectors within the department itself. Someone will know oil and gas, banking, insurance, telecom and telegraphs. So, that specialization is something that is very important. Most departments across the world are now dividing their departments according to its functional lines. Similarly, customer relationship that is most important, the openness with customers even with big companies, groups of tax administrators have discussions at least every six months you see how the industry is doing and so on. Similarly, with individuals, there are customer contact centers (CCCs) in UK, about seven-eight all over the world. They run like back offices and they do analysis of the kind of questions that are asked they do prohibit analysis using statistics. Q: What do you think needs to be done on the reform process now and what is missing in India’s strategy to get back on the growth path? A: That industry and manufacturing have not picked up. So, there is something to do with the animal spirits that have to be unlocked again. We were looking for what would unlock it and so the incentives were provided to manufacturing in a grand way for some large manufacturers – investment numbers as well as to small and medium enterprises. Q: Given the fact that you have so many state elections coming up and then next year you have a general election. Do you see instability increasing with the instability in the political environment and do you see a small window of opportunity for reform? A: I don’t think I see much instability. For example, in the Budget people were saying “it is going to be a pre-election Budget”, it wasn’t as one saw. We all knew it because if anyone is going to make it as little as possible in terms of pre-election then this Finance Minister and let’s face it. So, I don’t think that I expect a lot of instability of that kind. One can interpret the food security bill as election, but it is not. One can see that people have said continuously about the leakage from the system. However, if we can establish the bank and the method to reach the poor there could be nothing better. _PAGEBREAK_ Q: What about the funding of the food security bill, is that not going to be an added cost to the exchequer at the time when you are trying to achieve fiscal consolidation? A: Yes, it is going to be an added exchequer and Finance Minister is not only put away money and kept but if more is needed he will give even more, he has indicated. However, we have had this high rate of growth. We know that poverty has decreased, but we are still known globally as one of the poorest countries in the world and we are. I think whichever government is there we just cannot look at growth devoid of a very heavy emphasis on how we tackle and address poverty. We can’t say that it will decrease with growth. It will decrease with growth, but we need many added measures and sometimes they will cost. That cost has to be met from other activities, groups, etc who are gaining much more from the economic growth.  So, that redistribution cannot be de-linked from our growth process, I am increasingly convinced about that. Q: Your home is a riot of colours, one doesn’t expect an economists home to have so much art, what draws you to art and how have you amassed this great collection of art? A: I must say that my mother is an artist and I might have inherited a little bit of my preference for art from her. I must also confess that when I got out of high school I wanted to do art and it was my mother who said no you have to do something where you can earn a decent living. So, I always chastised her that she didn’t have enough confidence in me that I could also be an artist. So, I have always been attracted to art very much and I like to be surrounded by art and because of my travels all over the world I had the opportunity to see different genres of art, take time to understand some of it and I have always been riot of colours. It is true because magic realism or naïve art, which I came to know and understand in Latin America that is usually a riot of colours and it is also magical. That is why it is called magic realism. There is realism, there is village but there are all kinds of things happening trains going out into the sky and eggs being magnified compared to the birds and so on and so forth. Q: Magic realism is what draws you to art and I have seen that in the art in your home but where is the magic realism in the realm of economic policy? A: The realism is there whether we like it or not we are getting the fiscal deficit down. We have to get the rate of growth up because the real realism of rating agencies and also our own economic growth. The magic I think is something that various well meaning governments, the magic in some ways are our democracy. We try to do all these real things through the magic of democracy. I have lived in societies which call themselves democracies, but the democracy that we know in India.  I come back because you feel “Ah” despite all the grey air and everything you breathe in a different way and that is the magic of being Indian. So, that is the magic realism, the way I see it. The democracy and our increasingly market oriented economy and trying to grow, trying to control our government expenditures in a meaningful way and at the same time being so poor. How can we rush to the finishing line to get out of poverty and so all of that to me is our magic realism. _PAGEBREAK_ Q: Do you see that the inflection point of a massive change in the way politics functions in this country? A: I hope so and I am so enthused by this youth movement. I am so enthused by what youth is doing coming out, it is sort of what you see in the documentaries when during our independence movement everyone came out of home and you hear stories from your family and from your elders growing up what happened. Indian National Congress and everyone went in lay on the train tracks and I feel what is happening in India could move in that direction. I hope it does and that is what we need. I don’t know whether we have reached the inflection point and I don’t know whether governance will. That is the static needs of governance will require a kind of thwarting of that movement but I certainly hope not. I certainly hope we listen very carefully to youth and what they are saying. Q: You spoke about the fact that you wanted to be an artist when you were younger so what drew you to economics, art and economics seems like two ends of a spectrum? A: I did Economics Honours as a subject and so I stuck to it. What I liked about economics when I started studying was that it is also a very human. It is not only social science but it is a human science. So, right from the start, you are also an economist so you would understand that for example when have to speak of a cost curve the cost curve is basically technology. It is a warehouse and how given your machinery, etc how the cost move with fixed cost and average cost. We take that from engineers but then we super impose on that the preferences of consumers. What consumers want to consume, what are their preferences so the whole thing becomes much more live from a physical science to a social individual science. So that is what I feel makes economics such a live subject. Q: You also wanted to be a rock star is that still a career option? A: In our school we used to have group of ours, someone would play the guitar and some of us would sing. So, it is true that in a group we did sing Beatles and Cliff Richard much to the chagrin. I remember of my father, but not so much of my mother who was being an artist was always - and even to this day she would say put on some Beatles music, I haven’t heard the Beatles for an 87 year old lady. However, my father was in the national movement, etc and said after independence I have got listen to all this. We did all that and to this day I hear 50 percent of the time Indian classical, but I hear western pop and I hear Beatles and Cliff Richard together with Indian classical and western classical of course. I am very much an element of that generation where all the western pop was coming out. We waited in school for when the next record of Elvis Presley or Pat Boone or Dean Martin and then came Cliff Richard and Beatles and to this day I follow to some extent Amy Winehouse. It is natural in me so at that stage I thought why not be a rock star and shock my father even more but that never came to be. Q: You still have the time so after a career in government a career in rock music is what we expect from you? A: Why not.