Arvind Virmani, member-Niti Aayog and former chief economic adviser, feels that the Centre could trim non-essential expenditures to meet the fiscal deficit target for the current year, if the rising global commodity prices inflate subsidy expenditures.
In an interview with Priyansh Verma, he also pitched for a three-tier GST system, where 75% of goods would attract a standard rate and exemptions exist for a clutch of essential items like basic food and medicines. On India not being a net beneficiary from FTAs like the one with ASEAN, Virmani, who was also executive director at the IMF, said the key problem for the country is it isn’t fully integrated with the global supply chains yet.
Q. The household savings as a percentage of GDP was at a near 5-decade low in FY23. How will this impact consumption and growth?
A. As per the National Accounts Statistics, the gross household savings peaked in FY21 and then fell sharply in FY22. But it doesn’t seem to be a trend, rather it’s a cyclical problem created due to the pandemic. Moreover, my analysis of growth tells that it’s investment that drive growth and not savings. I would be more concerned about ensuring that investment rises.
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Q. Even though the government is pushing capital expenditure, investments by private corporate sector continue to be tepid….
A. According to national accounts data, in the last 10-11 years, the decline in overall investment rate is due to a fall in household investment in structures (real-estate). The rest of the investments are in a rising trend. A deeper analysis will show that, there is some decline in listed company investments, which has been offset by investments in private limited companies. Given all the reforms (being undertaken), I think listed corporate investments will pick up. Right now, the corporate investments are taking longer to recover, because the international environment is so uncertain. Corporates have to look at global demand too, not just local.
Q. The effective tax rate of companies has reduced considerably post the announcement of corporate tax cuts in 2019. Do you think this has affected corporate tax collections?
A. No, this is a wrong conclusion. Corporate tax collections are low because of disruptions – pandemic and the Ukraine war. This has affected economic activity. You can’t blame tax-cut reforms for low corporate tax collections.
Q. Given the recent spike in oil and other commodity prices, there is a chance expenditure on subsidies – food and fertilisers- to rise this fiscal year, and be above the respective Budget Estimates. In that backdrop, do you think the government will be able to meet its FY24 fiscal deficit target of 5.9% of GDP?
A. There are a lot of uncertainties. Traditionally, we have met the fiscal deficit targets by cutting inessential expenditures. We should do that this year too. Oil prices always create a problem. If some amount of new expenditures have to be incurred, less-essential expenditures should be cut.
Q. There are several slabs in GST. Should the slabs be reduced for simplicity and greater efficacy of the indirect tax reform?
A. There should be a three-tier system. A standard rate could cover 75% of products, particularly intermediate goods. There should be no surcharges in this segment. Secondly, a higher rate may be applied on some items, like automobiles. And thirdly, exemptions may be given for some essentials-basic food, drugs, health services, education.
Q. India has started reviewing the FTA (free-trade agreements) with ASEAN. Concerns have been expressed on Korea and Japan FTA too, as Indian companies/exports have not gained from these pacts, as much as r those from the partner countries have.
A. The key problem for India is that we are not part of the (global) supply chains. Most of our exports are random, micro exports. We have completely missed (the opportunity) in the past 20-30 years to join the supply chains. Our current focus should be on joining them.
FTAs with the European Union (EU), United Kingdom (UK) are important, and an arrangement could be possible with the USA too. Southeast Asia is already part of the Japanese, South Korean supply chains. That’s why when we clinched an FTA with them (ASEAN), they benefitted more as they were already part of supply chains. Vietnam has an FTA with the EU, which gives it an advantage on all electronic goods.