It’s time we realised our full potential to 10 per cent growth: Arvind Panagariya

It’s time we realised our full potential to 10 per cent growth: Arvind Panagariya

Dr Arvind Panagariya, the Chairman of the 16th Finance Commission, speaks to Harikishan Sharma on the economy and the reform agenda he would like to see implemented by the new government. Excerpts:

As Chairman of 16th Finance Commission, what is the most pressing economic challenge India is facing today?

Overall, I think we are in a good spot. In some ways when we think of challenges, we think of these challenges as coming from external factors. But, on those fronts, I think we are well placed…The impact of the US interest rates rising, leading to the outflow of capital is now behind us. From that front, we are in good shape. There are some issues related to our own trade policy, labour law implementation, long standing, very long-term issue of the land markets. Going forward, I think after the elections, perhaps those are the areas that will require the government’s attention.

As an economist, what are the top reforms you would like to see in the next five years?

We certainly need to do our own liberalisation. Many of the tariffs are still, by the global standards, high… That’s number one. Particularly, we need to pay attention to tariffs that impede the building up of the supply chains. There’s always this temptation that you protect everything and therefore, hope that every component and all value added will be produced within the country. But then (in) these days of specialisation, I think it’s unrealistic expectation, so we should really think in those terms, but more importantly, we really must build the free-trade agreements that we’ve been negotiating…The one with the UK… That needs to be completed so that we can then move on to the European Union, which is the most important.

Labour laws, the four labour codes, they really have to be implemented. Then, there is a whole commitment of the government on privatisation, both the PSUs and the banks, and I now think even some of our forward-looking states should begin to look into this subject to privatisation. There are some states also which have public sector enterprises, which could actually, more or less follow the kind of policy that central government has put in place. There was a commitment of privatisation of banks. And I think, after the elections, that process should also begin…We can also continue to make India a friendlier place to do business. I think this is something that continues to be a pain point for investors that both domestic as well as foreign and one particular thing that you hear a lot about is this whole, unexpected tax assessments, tax notices… We have to continue moving in that direction because now we are entering into an era where we will be emerging as truly an economic powerhouse. The economy’s basic size, now about $3.6-$3.7 trillion, is solid base. It’s a substantial size of the economy already and when that sized economy can grow, I mean, the difference between 7% growth and 10% growth of this size economy is huge… I think, we ought to really now target a 10% growth, (as) 7% we have shown for almost 20 years now. It’s time we also realised our full potential to 10%.

The government tried to implement agriculture reforms but it could not move forward. Should the next government try to move in that direction? What is the way out?

To me, the way out seems to be that as far as the reforms that had to be withdrawn are concerned, you should try to get back to taking them at the level of the state. At the national level, they cannot be implemented now. Politically, we have seen that. But we also know that the opposition was really limited. It was very vocal opposition, very strong opposition, no doubt, but it was at the same time also limited to two or three states. Other states had not joined in that opposition. Also, remember that traditionally agriculture is a state subject and the reform that the Central government had mooted through those three laws, actually, related to APMC (Agricultural Produce Marketing Committee), a state legislation. As far as those reforms are concerned that is the way forward. However, my kind on the long-term transformation or long-term solution has always been that the answer to the kind of pain points that exist, lies in industry and services. That’s where we need to create jobs, well-paid attractive jobs, to which then at least a good chunk of the current workforce that is in agriculture can move…We are aspiring to now be a developed country by 2047… 45% of our workforce is in agriculture…We need to move the workforce or some part of the workforce in at least 10 to 15 percentage point, bring it down to at least 30% minimally over 10 to 15 years.

One of the big issues which states raise today is that cess and surcharges reduce their divisible pool. How do you look at the issue?

It is obviously an issue for the devolution because cess and surcharges are out of the divisible pool. So, there’s clearly an issue which the Finance Commission will need to grapple (with) as it goes, but also in some ways, you can say that from the viewpoint of the design of tax systems, generally you know, public finance experts lean against cess and surcharges particularly when they are are imposed, they are to be temporary for specific purposes. Once the purpose is done, they should be withdrawn. That is how economists see the role of taxes and surcharges.

The 14th Finance Commission raised the devolution 41% (1% for J&K). Given that the Centre has to spend so much money on key national schemes, do you think that was a wise decision at that time?

These are the issues with which the Finance Commission will have to grapple with and we will be having discussions…Until we make some progress on these issues, it’s not appropriate for me to comment on anything.

Looking ahead, what are your top priorities and recommendations for India’s economic policy agenda?

We also need, now, the states to start taking action…I feel that one aspect of it is that no nation can really become a developed nation without significantly more urbanisation that currently exists.

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