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Business News/ Politics / Policy/  Focus on voluntary compliance for digital payments push: Subramanian
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Focus on voluntary compliance for digital payments push: Subramanian

Demonetisation on the ground has been hugely popular based on feedback, says chief economic adviser Arvind Subramanian, speaking on aspects of the Economic Survey

Chief economic adviser Arvind Subramanian. Photo: Pradeep Gaur/MintPremium
Chief economic adviser Arvind Subramanian. Photo: Pradeep Gaur/Mint

“Penalties and dictating outcomes should not take precedence over incentivizing and voluntary compliance as the government promotes digital transactions after demonetising high-value banknotes," chief economic adviser in the finance ministry Arvind Subramanian said after presenting his third Economic Survey on Tuesday. He presented the survey in his trademark style of exploring new ideas while analysing economic challenges in depth and with authority.

In an interview, Subramanian discussed key aspects of the survey. Edited excerpts:

Which aspects of the economy were in your mind while preparing the survey?

I remember when we had started working on the survey, Section 3 (medium-term issues) of the survey was an important issue we were looking at. It had to be modified due to the recent developments that happened post-demonetisation. We had some ideas which we pursued but we had to respond to changes taking place.

You have said in the survey that the government needs to ensure that demonetisation does not lead to overzealous tax administration. Do you feel that is a real fear?

My understanding of what people are saying is, intrinsic to making demonetisation a success, is to show that you have actually been able to go after people who have hoarded cash.

There is always a fine balance to draw, you always want to go after the ones who were involved in illicit activities but you also don’t want it to spill over to the compliant taxpayers. So the challenge here is if one can do a surgical strike on just the non-compliants.

So where should the line be drawn?

The way to draw the line here would be based on data analytics; the tax scrutiny and investigation requires analysis of big data. Then we can get a positive feedback, if the people know that transaction will be traced then voluntary compliances will go up. That’s the kind of dynamics that you need to build up.

You have said that the impact of demonetisation would be transitional but at the same time you have said we don’t know the full impact of demonetisation. Does that mean impact on GDP (gross domestic product) growth could be much higher than estimated?

See, there is a difference in timing, I think the cost or impact we’ll see soon, and so the GDP impact—once the GDP estimates come out then we’ll know. But it’s more the benefits, I think that over time we’ll have to wait and watch.

In fact, in the chapter on demonetisation, we have talked about what are the markers of success. One is the cash-to-GDP ratio, which should be lower. Both the number of taxpayers and the amount that they report as income should rise over time. We also say that real estate prices should decline. Indirect tax registration lots should also go up over time. So, all these things you should monitor. These are things you hope on a sustained basis it will be better and then of course there are challenges of staying long. Does the demonetisation law have other effects? But still there are clear markers you can lay out for measuring the success of demonetisation.

ALSO READ | What the Economic Survey reveals about Arvind Subramanian’s reading list

You have said that government should incentivize digital transactions. So, does that mean you are against the idea of banking cash transaction tax?

I think that in this business, there are both benefits and cost to cash and digital. There are both benefits and costs. But then it is also possible that today there are de-facto incentives favouring cash. So, all you want to create is a level playing field within the two. Not that we must tax this more, or incentivize this more. But that requires a little bit more sophisticated assessment of what the balance of benefits and costs are. Generally, I feel penalties and dictating outcomes should not take precedence over incentivizing and voluntary compliance.

The tenor of the survey it seems does not reflect the optimism you felt—say two surveys ago—even though the macroeconomic stability is definitely being acknowledged. Is the assessment right and if yes, why is it so?

I would leave you to interpret that; if you want to reflect it that way, it’s fine. Maybe my thought process has changed. If you read chapter 2 of the survey, I do think that there are some real meta challenges facing the economy. Three of them—inefficiency in distribution, and the ambivalence of private sector and property rights and state capacities—I think these are fundamental challenges. I just wonder, how deep these challenges are and what it would take to overcome them.

We keep saying ‘privatize Air India’; it’s been 45 years and no one has been able to do it. We have to ask ourselves why it is happening, it’s easy to say that this party has no political will. At one level it’s true but at another level, is that the problem? If that has happened, then there is something bigger going on and what will it take to overcome that and I think that’s what made me reflective.

What will it take ?

I think some sense of the broader societal narratives will have to change. I will urge you to read the conclusion in chapter 2 , it’s very interesting—the popular reaction to demonetisation in fact reinforces the broader set of ideas.

Demonetisation on the ground has been hugely popular from the feedback we are getting. So would it be right to say that politicians are fearing more of a backlash than is likely?

No. On the contrary, what it does say is that the people who are most affected adversely are supporting it the most. What you take away from that is it is not about narrow calculation of economic interest. To put it sparsely, Keynes said in the end of General Theory of Employment, Interest and Money that in the end it is ideas not vested interests.

All the time we think that you can’t can’t get rid of subsidies because the firms do not want it. But here is an action that is going against people’s narrow interests and yet it is still very popular. So here is a flip side in terms of what it will take to change other things. It’s not just about privatizing Air India, but people need to be convinced that it’s a good thing and all of us sitting in an echo chamber saying it’s a good thing is not enough.

In the last survey you had advocated against going for aggressive fiscal consolidation, but you seem to have changed your mind this time?

There is a clear distinction between saying that in the past fiscal indiscipline led to a crisis. From there to say that therefore there should be aggressive fiscal consolidation doesn’t follow. There is a huge range in between, where you say that we must not be fiscally indisciplined but there is scope for steady—as opposed to aggressive—fiscal consolidation.

So does the economy needs a stimulus ?

We will get the answer tomorrow.

Komal Gupta and Suranjana Roy contributed to this interview.

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Published: 01 Feb 2017, 12:36 AM IST
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