Structural reform can create temporary upheaval, but there are larger gains: Arun Jaitley
Arun Jaitley is convinced that Union Budget 2018 is just what was needed at this stage of the Indian economy – “to consolidate the gains” of the structural reforms the current government has undertaken.Updated: Feb 04, 2018 08:04 IST
Two days after presenting his Union budget, the last of the National Democratic Alliance government in its current term, finance minister Arun Jaitley spoke about the budget, his government’s political and economic concerns, and the road ahead for the economy in an interview with Shishir Gupta and R Sukumar. Edited excerpts:
There is a feeling that this budget is anti-salaried class because of the higher cess that means a higher tax outgo for most people?
I have consistently, in every budget, kept middle class interests in mind. Even in this budget, I’ve given a ₹8,000 crore relief to the salaried class, and a ₹4,000 crore relief to senior citizens. Taken together, this is the largest relief which within the limits of affordability of budget was possible.
Last year, I had brought down the lowest tax slab from 10% to 5%. Year before last, I had expanded the presumptive income scheme for traders up to Rs 2 crore, for professionals up to Rs 50 lakh. Before that — the first year I increased the exemption limit; subsequently, for the lower income group, I made the next Rs 50,000, tax exempt; I increased the 80CC limit by Rs 50,000. So systematically, anything in the range of Rs 10,000 crore plus-minus is the relief that I have given in each of my years to the lower and middle segments of the salaried classes, or the trading classes.
Now if you run such massive social security schemes such as this, a 1% cess — it is not a one percent tax; it’s one percent on the tax — is a small contribution that people with middle or higher incomes can afford to pay.
Thirdly, when you improve the infrastructure — whether it’s highways or the transport system or airways or railways, or the power situation, or the healthcare system —the middle class is also the beneficiary of that.
I think good quality services is what middle classes would prefer but I have balanced giving a relief to the middle class in every budget of mine.
Staying on tax, your numbers seem to indicate tax buoyancy in both direct and indirect taxes. If this goes on, when do you think you will be in a position to rationalise tax slabs and rates?
Normally, countries have taken a few years to rationalise GST. In India we started in the first few months itself. Today we are already thinning the 28% bracket.
The mood in the GST council is that as collections rise, this should be thinned to the extent that only non-merit and luxury items remain in it. But that will be contingent on an increase in the revenues itself. And I think this is already work in progress. There is hardly a GST council meeting where rationalisation of taxes on a few dozen items does not take place.
It is only at a later stage that you can think of converging the 12% and 18% slabs into the standard rate. Today if you had a single rate instead of these, it would have been inflationary in the case of certain commodities.
What about income tax rates?
We are getting to see the benefit of our actions. The number of returns is more, and the amount of tax collected is higher. In fact, against a budgeted tax estimate of 15%, at the moment we are at 18.75%. Therefore, it’s already happening. And as the base keeps expanding… Last year, I took a step towards restructuring the slabs. We are the only country in the world with a 5% slab. That’s created a difficult situation because from 5% when you jump to 20%, there is a resistance in people to move up.
Are you suggesting this is where we should expect the next change?
I am not suggesting that. The ability of any tax planner or policymaker depends on the quantum of collection. As compliance rises, the ability to rationalise structures rises. I believe that non-compliance is a curse on the compliant taxpayer because he not only pays his share but also pays the larger share of those who do not comply.
Stock market investors are also unhappy because of the introduction of the long-term capital gains tax. Can we expect to see the benefit of indexation introduced to address this?
I think it’s too soon to comment. One has to see how it works. But there is an erroneous impression that foreign institutional investors do not have the benefit of grandfathering. The benefit (of no tax on transactions till January 31) is available to them.
India is perhaps the only country in the world where equity investors pay a Securities Transaction Tax, LTCG, and dividend tax – would you consider rationalising this?
The ability of policymakers to consider rationalisation depends on the amount of tax and the amount of expenditure to be incurred.
Your tax revenue estimates for next year are very aggressive. Can revenue continue to grow at this rate?
I think so. Because next year, we certainly expect GDP to grow at 7.5% or so, and depending on what the inflation figures are, nominal GDP would (grow)... Tax collections should be high. In the case of personal income tax, I mentioned that the tax buoyancy which used to be 1.1% of the nominal GDP has moved up.
You have not increased the spending on defence. Aren’t you worried the Opposition will target you for compromising the country’s security?
In any area, whether it is the social sector, or infrastructure, or defence, we increase expenditure every year. We would have loved to increase more. Having been defence minister I know the requirements are more. But the fact is — it’s the size of the cake which has to be shared. Unless the cake enlarges, the only other option is to enlarge the fiscal deficit.
Are you beginning to see a formalisation of the Indian economy?
I think in micro, small and medium enterprises (MSMEs) across sectors, it is happening.
Did demonetisation and GST accelerate this?
Demonetisation had three impacts – it helped us reduce the quantum of cash; it increased the tax base and ended the anonymity of cash transactions; and it encouraged digitisation. GST is more of a voluntary compliance.
Yes, but if a Tier 3 or 4 vendor from the informal sector will be pushed by his customer to get into the GST regime so that the customer can avail Input Tax Credit…
Input Tax Credit is the best anti-evasion measure you have. Now with other anti-evasion measures that will slowly come into place, I think GST will start formalising the sector faster.
Structural reforms, such as demonetisation and GST, cause temporary disruptions. Doesn’t that erode your political capital?
A structural reform disturbs the status quo. It can create a temporary upheaval. But there are larger gains… Will demonetisation set back India’s GDP by 2%? Answer is no. At worst 7.1% will become 6.7%, and then move up to 7.5%.
You’ve guaranteed 50% returns for farmers in the budget. But you also said this is already being done for the current rabi (winter season). Does this mean the same principle of cost estimation will be used in the future?
See what formula they follow to calculate the cost is not given in the budget. That is now between the Committee for Agricultural Costs and Prices and the concerned ministry. Then it will come up before the cabinet. I can’t say how they work it out. It needs a clarification from the concerned ministry.
But what needs to be done for farmers? The production challenge is long gone. It’s more a market linkages challenge now.
There is a storage challenge, and the problem of market prices falling below the Minimum Support Prices because of a glut. We have overcome the shortage era. We also have to ensure more non-farm income. What is the capacity of the rest of the system to get people out of agriculture to other areas of the economy?
Jobs are another big problem. Where will job creation happen?
Job creation appears to be picking up and will continue to happen both in the formal and informal sector. Our schemes are oriented to aid that creation. We have offered incentives to companies in the apparel sector, footwear sector to boost job creation. We have also offered Rs 3 lakh crore more of MUDRA loans for MSMEs. We are looking at food processing (as a significant creator of jobs).
What will it take to revive private investment?
I think it has begun happening. Global growth has picked up. Food credit has picked up. And I think with the recapitalisation of banks, the ability of banks to lend will increase.
How closely are you watching the bankruptcy proceedings at the NCLT? We need an early closure in at least one big case.
We need early resolution in some cases. So far, the process is procedurally working out well. We have the laws and the amendments in place. Except that the NCLT infrastructure in some benches requires to be increased. There is also the unfinished task on what to do with MSMEs in the context of the bankruptcy code.
But MSMEs account for only 11-12% of bad loans?
It’s not much, but we need some system in place. The big ones are the steel ones. For which a lot of buyers have already lined up. I am expecting a lot of competition for them.
Are you also expecting a lot of legal challenges? Promoters may not want to let go?
The way the amendment has been drafted, the scope for legal challenge is limited. I’ve said please make your accounts serviceable and then come and bid. In order to bid, the promoter will say I have not paid, either the interest or the principal, but I want to bid. That’s a very difficult challenge to sustain.
But challenges could increase the time taken for resolution?
Obviously, when you have a new system in place… But once the law is laid down by the courts that will be followed in every case. But I think this is a pain that we have to go through.
There’s been criticism that the budget is populist.
It is not a populist budget. It may be popular because it blends both economy and politics.
What are the significant political issues you need to address economically?
This government has been effective. Leadership has been effective. It has provided an honest government. This government has brought about a lot of changes for the betterment of this country. I think we need to consolidate on all these gains. We also need to ensure that even though there is high acceptability of the central government and the PM, we don’t allow any anti-incumbency of any of our state governments.
What about the micro level? Would farm crisis be an issue?
Farm crisis is always a problem for any government. We must continue to assist the farmer.
And jobs are a political issue too...
Yes, but having gone through structural reforms I’m looking at the next year as a period of consolidation where both these areas get addressed.
The problem with structural reforms is that the benefits take time.
Yes, they are not immediate solutions. But they will work in the medium to long term…
But to enjoy the political benefits…
You won’t get political benefits by saying you want to recapitalise banks. You get it by saying I started a health scheme. The agenda is different.
Although bank recapitalisation could make the economy so much stronger in the future...
Will all central and state health insurance schemes get merged in the new health insurance scheme announced?
The Niti Aayog says the states and the Centre must coordinate their health schemes. Between the Centre and the states it will be manageable. Given the GST council experience, this will be the next area where the Centre and the states need to cooperate.