Arvind Virmani, India’s former chief economic adviser and India’s representative to the International Monetary Fund in 2009, says that the Union Budget
2014-15 will not create long-term growth. In an interview to Pawan S. Bali, he talks about how a simple tax system is more effective and why FDI is absolutely essential.
How do you view the maiden Budget of the Bharatiya Janata Party-led National Democratic Alliance government?
This is a new government. The presidential address outlined the broad approach of this government. So the Budget, first the Railway Budget and then the general Budget, is the first formal occasion to make this concrete. There are three aspect of the Budget — expenditure, taxation and financial. Finance minister Arun Jaitley used the Budget to indicate change in the priority of the new government in terms of programme.
What are these changes?
On the expenditure side, in the BJP’s manifesto there was an indication that they will move from excessive focus on handouts to encouraging economic development in general which benefits all — the poor, the lower middle class and the middle class. As part of that they had certain strategy which was outlined, like investment in infrastructure and what kind of infrastructure. So the expenditure allocation has been changed in that direction. The new programmes and increase in expenditure reflect this change. They had also said that one of the problems with the programmes was they did not produce the stated/desired results.
So they said we will focus on improving governance. So on the tax side you have greater emphasis on administrative reforms. Trying to make sure that the tax system functions to support economic development without being oppressive. You will recall that in their manifesto they had used the word “tax terrorism”. The Budget outlines some of the things that they are going to do, to ensure that this does not happen in future.
Do you think this Budget will be able to revive growth? The finance minister has announced tax sops for the manufacturing sector.
Most governments except a few in the Nineties, had this approach of giving incentives, deductions, exemptions. I am for simplification (of taxes). I think in the medium to long-term, the industry and business benefit if you have a simple system which doesn’t have exemptions and deductions. Unfortunately, that is not the approach which has been adopted in this Budget. There are all these incentives for various things — some of them are not very expensive or new, they are just an extension. But I don’t think they will create long-term growth. But there are reforms in the Budget in the financial sector, the foreign direct investment announcements, announcement on public sector banks. This Budget is sufficient to give a one per cent boost to growth.
But if the government wants to raise the growth rate further next year, say from 5.6-5.7 per cent to 6.5 per cent plus, they will need to act. They have appointed a committee (on expenditure management), but the committee is not going to raise growth. The committee has to come out with some proposal that will have to be implemented. And all those places where the government has postponed decisions, they have to be acted upon.
The FM raised FDI in defence to 49 per cent from 26 per cent. Do you think they should have raised it to 51 per cent, which would have given foreign companies management control?
It is unfortunate that some business associations, like the Confederation of Indian Industry, and others opposed 51 per cent. The reason is very simple: if you have high-technology which is in some sense controlled by a foreign government, then 51 per cent FDI is absolutely essential because a 51 per cent owned company is a subsidiary. Take an example: let’s say a US defence company sets up a 51 per cent owned company in India. It will be treated as a part of the parent company, and it’ll be much easier to transfer technology.
A 49 per cent (foreign) owned company is a different company. Then you are saying that you are giving technology to an Indian company. Then the whole process of approvals is different. I think there is already a leverage that 100 per cent FDI may be allowed on a case to case basis. But still, I think that small difference of two per cent would have been a much stronger signal.
Do you think that the government should continue with Aadhaar?
Absolutely. I was involved right from the beginning with Unique Identification (UID). When they started implementing it and called it Aadhaar many other things got added to it. In my view you can’t do anything without the UID, which is a unique identification number. But how the rest of the system operates, is something they can reconsider and re-evaluate.
In my view, there are a few mistakes in the Aadhaar administration. One was to link it so quickly to social programmes. Our idea was to first make sure that every body has a Unique ID. This means that there is no duplication. Make sure it’s all done before we start talking about how we are going to use it. So I think they were premature.
The second mistake in my view is to say that we will connect UID to bank accounts and give money only through that. We had suggested integrated smart cards which could be given directly. When you connect UID to bank accounts, it means that everybody has to have a bank account as well — a Unique Identification Number and a bank account. That is too ambitious.
Third issue which cropped up is privacy and fourth one is that of illegal immigrants getting UID. Well, we did consider this issue and had reached an agreement. We had said that if you have, for example, eight digit numbers, add another ninth digit which shows the citizenship. You can easily do that. We could have a digit along with the UID, which can be “01” or “0123”, if you want to distinguish between the non-resident Indian and so on.
What I am trying to say is that there were all these ideas but they were not adopted, and some of the decisions in my view were mistaken, but these can be corrected. So I hope that given what the home minister and the Prime Minister have said, they will go back more to the recommendations in our report.
Industry was expecting a more concrete announcement on retrospective amendment in the Budget.
Finance ministry had already given an indication few days back that they are not going to wipe out that old case (Vodafone tax dispute). But they were very clear that there will be no such thing in the future. Yes, I think that foreign investors who were expecting it will be disappointed. But what the government has said is that they will take a sympathetic view of that. But given that it is already a legal issue, those old problems have to be resolved through arbitration or some mutual agreement.
The finance minister has kept the fiscal deficit target at 4.1 per cent. Do you think that is achievable given slow growth in taxes?
Yes, I think by the end of the year they will come at 4.1 per cent. One of the reasons is that their growth forecast is now more realistic. Saying likely growth rate this year would be about 5.7 per cent means one per cent increase from last year.
