BS Awards: Debroy bats for GST Council-like body for expenditure reforms

Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister (EAC-PM), on Tuesday proposed a forum along the lines of the Goods and Services Tax (GST) Council to initiate expenditure reforms at all levels – Union, states and local bodies.

On a day when India’s wholesale inflation hit a 12-year high, he said the revival of economic growth was a much bigger issue than the rate of price rise. 

“In consultation with the states, I think it is high time that, just like the GST Council, we have some forum to have discussions on expenditure,” Debroy said while delivering the keynote address at Business Standard Awards.

As the Union Budget is round the corner, there are demands that the government should spend 10 per cent of the gross domestic product (GDP) on infrastructure, 6 per cent on education, 4 per cent on health, and 3 per cent on defence, which make up 23 per cent of GDP, he said. In comparison, he added, the tax-to-GDP ratio of both the Union government and the states is less than 15 per cent today. “As much as 15 per cent of GDP is garnered as tax revenues, while the demand has been for expenditure at 23 per cent of GDP.”

Debroy said every economist would say on the Budget that the government should spend more on capex and that there should be a countercyclical fiscal policy, but the important point was at what level there should be these policies.

He said one should be clear as to what was important for the Union government and what was important for the state governments. The Union government should be spending on areas that are in the Union List under the seventh schedule of the Constitution, and not in areas that are in the State List, he said.

Suppose there is another pandemic tomorrow, he said. One should note that reactions to a pandemic are determined by the Epidemic Diseases Act, 1897. Now, the Union government has no powers, except at the border, under this Act; powers are at the state level, he said. “The power to declare lockdowns in case the need arises is not even at the state level, but at the local administration level,” Debroy pointed out.

He said the State Finance Commission’s recommendations were not given much attention even as two-thirds of the public expenditure occurred at the state level.

On the revival of private capex, Debroy said there were some sectors where investments had picked up. Excess capacity eases as demand improves, and then capex will also pick up, he said. However, capex at the state government level is lagging due to Covid, he said, while reminding that investments by both the Union and state governments are a necessary trigger to ensure private investments.

Debroy also called for the overhaul of direct taxes to do away with all exemptions. “But the normal tendency of every individual and every enterprise is to say -- retain the exemptions for me but remove the exemptions for others. You do not have genuine reforms like that.”  

Pointing out that growth revival was happening, he pegged GDP expansion at 10 per cent during the current financial year and around 7 per cent next year. He did not think that the economic impact of the so-called third wave was going to be much.  

He also said there was a problem of skills not being correlated with education. However, as construction, trade and transport sectors are revived, he expected the urban labour market would also begin to perform better.

Debroy said the country had lost two years, but beyond these two years, the underlying economic growth trajectory would not be affected much. “I don't think the underlying growth trajectory would have been affected much. I see no reason to believe why the growth trajectory after the two years, perhaps three years, should be different from what it was pre-pandemic,” he said.

On inflation, he said, “I do not think the inflation numbers, despite WPI print, are that worrying today.”

He said there was no evidence to suggest that Covid had worsened inequality and poverty levels in India. Pointing out the figures floating around that at least 200 million people have been pushed into poverty because of Covid, he said he did not know where these numbers had come from. “Poverty is an issue, but I don't think we should be alarmist,” he said.