New Delhi: India has the ability to realize its economic growth potential of 8.5% per year, chief economic adviser Arvind Subramanian said in an interview, laying down two caveats for it to do so.

This is presaged on India overcoming challenges posed by weak demand and the twin balance-sheet problem of highly leveraged corporate entities and bad-loan-ridden banks, Subramanian said.

“And here the recapitalisation of the public sector banks that the government has recently announced is a very critical step forward," he said, a day after Moody’s Investors Service on Friday upgraded India’s sovereign rating for the first time in 14 years.

Earlier, Subramanian pointed out, the centre and the Reserve Bank of India (RBI) had undertaken a rejig of the institutional framework for bankruptcy resolution.

The cleaning up of corporate balance sheets would revive investment demand and healthier banks would stoke a similar pick-up in credit offtake.

The chief economic adviser, however, cautioned that this has to be followed up with some hard-nosed reform initiatives in banking. “Here, shrinking the fundamentally unviable banks, ensuring/creating risk assessment capability in the PSBs (public sector banks), and bringing in more majority private sector ownership will be terribly important reforms," he said.

According to Subramanian, the rollout of the goods and services tax (GST) had initiated a very welcome recast of the federal polity of India and should serve as a template to address the overhang of development challenges. “I believe that the future of India lies in the virulent spread of cooperative and competitive federalism with the GST as the harbinger," he said.

In this, he believes the lead can be played by the government think tank Niti Aayog, successor to the Planning Commission. “The Niti Aayog can be for all development issues what the GST Council has become to indirect taxes."

Referring to the recent GST Council meeting in Guwahati, Subramanian said the big message was the easing of the compliance burden, which had been beginning to disrupt the supply chains in the Indian economy. “A committee led by GSTN (GST Network) chairman Ajay Bhushan Pandey will review everything relating to forms and the return-filing frequency to see how the system can be made simpler and easier for everyone. A lot of simplification is still possible."

According to Subramanian, it is only a matter of time before rates converge into three slabs and commodities such as land are brought under the purview of the GST.

Separately, Subramanian stressed the need for tax laws to emphasize greater voluntary compliance. “We need to think more about instruments of policy that rely on incentives and voluntary compliance, build on that rather than cracking down on businesses—that adds to uncertainty and raises the cost of doing business. I think that is a larger issue and mindset where we need more calibrated and less blunt instruments of policy."

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