Reforms will have winners and losers. We should remember that growth will compensate the losers, not doles, says Surjit Bhalla, economist, ex- PMEAC member and executive director for India at IMF
NEW DELHI :
A high-level panel appointed by the commerce ministry has recommended sweeping reforms including in manufacturing, the financial services sector, and agriculture. The panel led by Surjit Bhalla, economist and former member of the Economic Advisory Council to Prime Minister Narendra Modi, has argued for a new amnesty scheme to bring out previously undisclosed income that could fund India’s infrastructure investment needs. Bhalla, who was last month appointed as the executive director for India on the board of the International Monetary Fund (IMF), argues in an interview that the mindset of opposing reforms only because certain sections may lose out in the short-term should change as there are ways of compensating those who are left out. Excerpts:
The amnesty scheme proposed by the high-level advisory group recommends that people declaring undisclosed income should pay a 15% tax and will be bound to invest 40% of that for 20-30 years in bonds to help fund $500 billion worth of infrastructure projects. However, the success of amnesty schemes often depends on the willingness of people to disclose such income, something which is not in control of the government. Your comment?
The voluntary disclosure of income scheme (VDIS) announced in 1997 had exceeded all expectations. That is one example we have for an amnesty scheme. The pervasive idea in India’s tax and revenue policy has been that if revenue collection is to be increased, all that is to be done is to raise the tax rate. Black money is tax evaded income. Our principle has been that higher taxes and penalties encourage compliance. There is a very strong moral element to this approach practised by all governments. We have a complete set of practices that has prevented tax compliance from improving. Even in the US, 18% do not comply. First, we should get the fact right that 100% compliance is not possible. Second, we should make every effort to get 82% compliance. The Kelkar panel on direct taxes had shown that tax compliance in India was only 15% in 2002. We have found that tax compliance in 2015-16 was something like 25%. In the next three years, post-demonetization, tax compliance has gone up to 35-40%. We still have a long way to go. The point is about incentivising people to report previously undisclosed income.
So the objective is about unearthing the tax evaded income rather than penalising the evaders?
Indonesia, a much smaller economy, charged a small tax in a tax amnesty scheme and collected about $300 billion. We have to decide. We will never be able to catch everybody evading taxes and that should not be the goal. The goal of the government should be to incentivise people to come in and buy this bond (termed as elephant bond). If the response is not good enough, we will have to tweak it. I think the probability is high that this scheme will work. The report is of the view that our cost of capital is high. If this capital comes in, the cost of capital will come down.
The report recommends lowering the interest rate for small savings. This is politically difficult to implement, is it not?
The investment boom starting in 2003 was triggered by the successive reduction in the small savings rate from 12.5% to 8% in the years preceding it. Interest rates are a very important function of investment and growth. We need to reduce the cost of capital, very specifically on small savings. We are not saying interest rates on all government operated schemes should be equal to the market rate. We are saying it should be less than the market rate. When we cut small savings rate, it will go into investments, into government bonds and mutual funds. There is no evidence that higher investment incentivises savings.
While reforms could bring a positive long-term impact, it could have short-term pain. How should we address that?
The whole point of reform is that there will be winners and losers. It is not that some do not lose out during reforms, but there are ways to compensate them. That is what the report argues. Why are we emphasising on direct benefit transfer? We have technology as well as data about the needy and we can compensate them. We need to change the mindset of opposing reforms. When China joined the World Trade Organization, it cleaned up its house. We should also remember that growth will compensate the losers, not doles. Another area in which the report makes recommendations is agriculture policy. When mega reforms were done in 1991, agriculture was not touched. After that, the farm sector got worse. We de-reformed agriculture. Let us say, we join the proposed Regional Comprehensive Economic Partnership at the best of terms and do not do any of the other reforms. What will happen to the Indian economy? About 90% of our problems are of our own making, not on account of China or any other economy.
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