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Demonetisation likely to boost tax revenues, growth in future: Arvind Panagariya

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Demonetisation likely to boost tax revenues, growth in future: Arvind Panagariya

Economic Times:  December, 2016

New Delhi: NITI Aayog vice-chairperson Arvind Panagariya expects demonetisation to bring significant tax gains going ahead, and help the economy bounce back strongly in the years ahead. He listed tax reforms and election funding as key follow-up measures to build on demonetisation in an interview with ET. Edited excerpts:

There has been a debate about short-term loss versus long-term gain from demonetisation. What is your sense, when will the economy return to normal, at least the transaction part?

Eleven out of 13 analysts and commentators have said that the growth rate in 2016-17 will drop by 1% or less. Exceptions are Dr Manmohan Singh and Ambit Capital with the former predicting at least 2% decline and the latter expecting an even larger decline. Absent data, it is difficult to say with certainty which of the two sides is right. What I can say more confidently is that we will more than recover any decline in the growth rate this year in subsequent years. Besides, we must not forget that the demonetisation is truly the first major frontal assault on black money. It sends a loud and clear signal that the prime minister is serious about combating corruption and there is not going to be any compromise on this front hereon. This is unprecedented in our post-independence history.

While digitisation has been one of the follow-up strategies to build on demonetisation, what more can be done so that formal economy rises?

First of all we have to make digital transactions a habit instead of onetime affair. Right now the shortage of cash offers an obvious reason to individuals to transact digitally but it is important that this compulsion is turned into a choice and indeed habit. But we need to do more if we are to make a major dent in future accumulation of black income. There are two ways to achieve this objective. One, bring to justice those who accumulate black income and, two, make policy changes that would discourage future accumulation of black money. Demonetisation falls in the first category of actions. To achieve the second objective, we need tax simplification, elimination of exemptions and precise stipulation of rules of taxation, so that tax officials have minimal discretion.

If you look at personal income tax and corporate tax structures, both have incentives for investments and savings. Do you think there is a merit in doing away with these kinds of incentives?

If we do away with the exemptions, tax rates can be lowered, which would on balance create greater incentive to save and invest. It will also bring larger proportion of savings into the banking system, thereby increasing the productivity of our investments.

Should we look at some other incentive structure for people to invest/save instead of tax exemptions?

If we have a simple tax system with low and stable tax rates, and continue to improve the ease of doing business to create an overall friendly, stable and credible business environment, much more investment will come. Many countries that have successfully industrialised, such as Singapore, South Korea and Taiwan, have done so by being credible investment destinations. We still have multiple layers of regulation that need to be removed to make it easier to start and conduct business.

Is political funding a big elephant in the room?

To discourage the creation of black money and curb corruption, we will also need to tackle election funding. The Election Commission has just said that no anonymous donations beyond Rs 2,000 be permitted. This will be a step in the right direction and the prime minister has welcomed this suggestion. We must also move towards requiring election contributions to be made digital. There is also a proposal for state funding of elections, which may be considered.

Demonetisation has led to a kind of reset of the system. Do you think we need to rethink how we grow our economy in terms of a fiscal stimulus?

Some reset has already happened. Demonetisation will likely bring significant gains in tax revenues, which may allow the government to raise expenditure without violating any of its fiscal goals. We have enormous need to build roads, railways, and waterways speedily.

Do you see a need for redrawing the fiscal road map in the wake of demonetisation?

We have a committee under Mr NK Singh looking into the matter, which would be making its recommendations soon. So this is an open question at the moment.

There is a talk that if any black money comes in, it should flow to the poor through Jan Dhan accounts. If that idea is on, do you think we should move to universal cash transfer?

There are two separate issues. One is that of targeted cash transfers versus universal cash transfer. My personal view is in favour of targeted instead of universal transfers. With the Socio-Economic Caste Census (SECC), we have a pretty good idea of who the poor are. So we can use the limited fiscal resources more effectively to combat poverty. As an example, if half of the population is poor, by targeting, we can give twice the cash to the poor than we would be able to do if the transfers are universal. I lean in favour of a strategy that places larger volume of cash in the pockets of the poor than the one that gives cash to everyone in smaller amounts.

The other issue concerns replacing some of the existing social expenditure programmes by direct cash transfers. I personally go for cash transfers since they allow us to plug the leakages more effectively and at a lower cost. I also believe that we must trust the beneficiaries to spend what they receive judiciously. May be 5% of the beneficiaries will spend the receipts injudiciously but as Bihar chief minister Nitish Kumar says this is not a good enough reason to penalise the 95% who do spend the receipts judiciously. Besides, few advocates of in-kind transfers question the payment of NREGA wages in cash.

Do you think there will be a change in cash-to-GDP ratio post demonetisation?

Cash-to-GDP ratio in India stood at 10.6% at the end of March 2016. This compares with a cash-to-GDP ratio of 9% in China and Russia, and 3% or less in Brazil and South Africa. If you really manage to reduce black money, which was not in circulation for legitimate transactions, the ratio can clearly be lowered. If we are able to achieve a significant rise in digitisation, there will be further scope for reduction in cash.