‘If you want to be a great economic power, you can’t be protectionist’
Vijay Kelkar, former finance secretary and chair, 13th Finance Commission, discusses the consensus-driven strategy for reforms
PremiumAn eminent economist and technocrat, Vijay Kelkar is a former finance secretary and was chairman of the 13th Finance Commission. Kelkar, who was an integral part of the country’s story, held key positions in successive governments, and is widely known as the architect of the goods and services tax(GST). Kelkar, the co-author of In Service of the Republic: The Art and Science of Economic Policy, discusses the consensus-driven strategy for reforms. Edited excerpts.
What was the thrust of the Vajpayee government reforms?
Vajpayee contributed to structural, macroeconomic, mesoeconomic, institutional and microeconomic reforms in his two innings as Prime Minister, and to what we now call cooperative federalism. The way he engaged with chief ministers was incredible. When the NDA came to power, global and domestic interest rates had declined sharply.
State governments were burdened with borrowings at high interest rates because of fixed-interest rate contracts. He saw the opportunity to reduce the burden. The government of India did a swap of states’ high-interest-low interest rates debt, and the entire fiscal cost was taken by the central government. This was done suo moto.
If you take the creation of fiscal responsibility and budget management (FRBM)—the idea that government ties its hands on fiscal (spending) is unusual in any democratic government. The other major macroeconomic move was tax reforms, which changed the cost of risk capital and created conditions for the investment boom.
He introduced reforms to promote competition, reduce cost of capital and unleash the animal spirits of investors. He changed the flavour of distributive justice, calling it antodaya. Fairness is how you lift the weakest. Vajpayee introduced a model of reforms that was not crisis-based but consensus-based.
Does that consensus still hold or is it weakening?
What is weakening is the willingness to create consensus. To reach out, the way he reached out to coalition partners. He was very collegiate in running the government. He understood that if you want to be a great economic power in the world, you cannot be protectionist. You have to engage with the world. He understood the link—if you want to become a great political power, you have to become a great economic power. Without trade and investment, you cannot do that.
This brutal attack on India by China is going to awaken us to speed up and build a new consensus. 1991 was a crisis; this is also crisis, a different one, but a crisis and a challenging one.
What’s the back story of tax reforms done in your tenure?
When Jaswant Singh asked me to work on tax reforms, we proposed two ideas: Reduce overall tax rate and eliminate tax relief and concessions. They accepted our argument that this was the way to reduce the cost of risk capital to industry.
Indirect tax reform, we were lucky. Constitution makers gave rights to tax agriculture to the states, and industry to the Centre. They didn’t mention services. Distributive powers came to the Centre. The services sector was expanding, so was the [potential] tax base. Till then services was taxed only by the central government. Jaswant Singh said amend the Constitution to get the Centre to tax services. We thought why not have a common tax for the Centre and states. A bargain we can make with the states: they get new areas of taxation. In exchange, let’s harmonize the tax—a single rate called GST. Share it equally. That’s how India would become a single market.
Because of our taxation structure, manufacturing and exports were overtaxed. Naturally, people shifted to the non-tax sector. That’s why services were booming and manufacturing was declining. GST, we said, will remove this bias. But the government fell. To his credit, the next FM Chidambaram announced that GST will be introduced by 2010. It took a long time, but all countries have taken a decade to implement GST. The mistake was that it was not simplified, as we proposed it.
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