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NEW DELHI : Subsuming crude oil and fuels, which currently attract excise duty and value-added taxes, into the unified national indirect tax, the GST, sooner than later is desirable in terms of tax reform and will incidentally aid in inflation management as well, Bibek Debroy, chairman of Prime Minister Narendra Modi’s Economic Advisory Council (EAC-PM) said.

Debroy’s comments come at a time the tax on fuel has become a subject of intense debate between political leaders at the central and state levels, with little consensus on a synchronized reduction to cool retail prices amid fiscal pressures.

This contrasts with the collaborative manner in which GST-related decisions are taken at the federal tax body, the GST Council. The central government slashed excise duty levied on petrol and diesel sharply in May after an earlier round of reduction last November.

In an interview, Debroy said that unlike in the case of liquor, on which there never was a decision to bring the commodity into GST, the GST Council has the right to decide when to bring petroleum and products such as natural gas, jet fuel, petrol and diesel into GST. “Therefore, the sooner you bring in petroleum and related products into GST, the better it is. I personally believe everything should be in GST," said Debroy.

“Even if there is no issue of inflation management, from the point of view of just reforming GST, it is desirable that petroleum products are brought into GST. Incidentally, it will also help in inflation management," explained Debroy.

Debroy expects the surge in food inflation to be temporary. India’s retail inflation had accelerated to its highest in nearly eight years in April, led by a sharper than expected spike in the price of food and manufactured goods, according to official data. It remained over the Reserve Bank of India’s upper tolerance band of 6% for the fourth month in a row. Debroy said that once food inflation eases, there may still be higher inflation rates compared to what has been around earlier because it is primarily inflation of the imported variety.

He is optimistic that India’s economic recovery is unlikely to be affected in a big way due to external factors like China’s lockdown restrictions meant to fight back the pandemic and the conflict in eastern Europe. Debroy expects a real GDP growth of around 9% in the current fiscal, aided by the recovery in the services sector and a favourable base effect.

“The real question is about FY24. I am inclined to think that we will be somewhat lucky if we have a real growth rate of 7%. I have colleagues who believe we may do 7.5% and some who believe it could be 6.5%. I am inclined to think that, if we cross 7% next year, that is a kind of optimistic scenario," Debroy said.

Edited excerpts of the interview:

The government and RBI have taken fiscal and monetary steps to tame inflation. What more could be done?

It is not a question of monetary versus fiscal steps. There is temporary food inflation, and I am deliberately using the word ‘temporary’ because the food inflation will pass. Once it has passed, we are still in for higher rates of inflation compared to what has been around earlier since, let us say, May 2014. The reason for that is it is primarily inflation of the imported variety. Prices of various things have been going up. This is not inflation that is very amenable to monetary policy instruments. If I take the band of 4-6%, then we are in the upper end of the band, depending on what indicator I am using of inflation, which has to be a judicious mix of monetary policy, fiscal policy and actually exchange rate policy also. If there is a tendency for the rupee to depreciate, then it increases the cost of anything imported and imparts a cost-push element. This is fundamentally a cost-push kind of inflation which is intrinsically not that amenable to monetary policy instruments.

Are you in favour of a universal basic income scheme?

A lot of people irresponsibly use the word universal basic income without explaining what they mean and why it is necessary. The question to ask is, why should I subsidize everyone in the country? If there is the empowerment of people, if they are given physical and social infrastructure, financial products, transport and connectivity, then automatically, lives will improve, poverty level will come down, employment will go up, and there will be growth. This does not negate the possibility that some segment of the people will require subsidies, which is why benefits are given in a targeted way. The adjective ‘universal’ itself is a misnomer. Even for argument’s sake, if I were to accept that something like UBI is needed, first, people who propounded it should explain how to identify the beneficiaries. If I am to suggest something like UBI, I have to explain where resources are to come from. Individual subsidies are already done through direct benefit transfer (DBT). What is the difference between DBT and UBI?

So there is no case for UBI?

There is not even a weak case. If we are speaking about the bottom of the pyramid, then the term ’universal’ is a misnomer. Besides, everyone in the working-age group, unless disabled, wants to earn. The best thing to do is to empower them and give them the physical and social infrastructure, financial products, access to technology, etc., so that they can better realize that goal. This does not mean there is no need for subsidies, but those are targeted subsidies, not universal.

What should be the government’s blueprint for reforms over 25 years?

Twenty-five years is a long period. If we just make a mechanical projection, in 2047, India’s per capita income will be in today’s dollars, around $10,000 ($20,000 in the best case scenario). The size of India’s GDP will be around $20 trillion. This requires a certain rate of growth. As economies grow, there is a tendency for growth to taper. That is, if we start with 7.5%, by the time we approach 2047, it will slow to perhaps 4.5%. If, as citizens, we look at the template for the next 25 years, we need to look beyond just Union and state governments, and we need to look at the Constitution; we need to look at the functioning of the judiciary; we need to look at the functioning of the legislature, and we need to look at the present structure of the Union and state relations. We need to ask from the point of governance—I am answering in the context of the next 25 years, not in the context of 2024—how many states do we need? Should we have a new state reorganization commission? I cannot aspire to have a $20,000 per capita income country if the legal system holds us back and if the legislature is not as productive as it should be. At a broad-brush level, we need to redefine the relationship between the Union and the states. We need to redefine it from the point of taxation. Which are the items on which government should be spending, what is the level of government which should be spending it because decentralization is not just about the Centre and states, it is also about decentralization within the state—all of these things have to be part of our discourse and debate.

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