Government underestimated twin-balancesheet problem faced by banks, corporates: CEA Arvind Subramanian

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Subramanian said that the goods and services tax (GST) rates must be as low as possible, while the new tax must have a broad base and a simple structure. (Reuters)

The government and its advisers may have initially underestimated the so-called twin balance sheet (TBS) problem faced by the banks and Corporate India, chief economic adviser Arvind Subramanian said on Wednesday. Speaking at the Express Adda in New Delhi, he said even though the TBS problem found mention in the December 2014 mid-year economic review, even it did not fully gauge the seriousness of the issue or call for its urgent tackling. “We were a little behind the curve,” he said, adding that “there is a perhaps an in-built incentive in the system to not reveal the true extent of a problem”. Also, he said, the belief that once growth picked up, the TBS issue could also get addressed to an extent automatically, weighed on everyone’s mind.

Referring to the RBI-initiated debt-resolution schemes like 5/25 and SDR, he said these also lulled everyone to think that the twin balance sheet problem would get resolved on its own. The latest Economic Survey has advocated the creation of a public sector asset reconstruction agency, given that private-sector ARCs haven’t been very successful. The government is, however, treading cautiously on this advice.

Subramanian said that the goods and services tax (GST) rates must be as low as possible, while the new tax must have a broad base and a simple structure. The GST Council had earlier decided that the proposed comprehensive indirect tax will have a four-rate (5%, 12%, 18% and 28%) structure. A panel headed by the CEA had estimated the revenue-neutral rate for GST — on a tax base it assumed — would be 15-15.5%.

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Pushing the levers of low-skill manufacturing — on which India has missed the boat and reclaiming the ground is rather difficult — was still one of the ways to create decent jobs. He, however, cautioned that “reclaiming (the missed low-skill manufacturing opportunity) will be very very difficult”.

The government is implementing an incentive scheme for textile/made-ups and leather industries, drawing from Subramanian’s suggestions. He said that given India’s situation, a universal basic income scheme could help protect (poor) people against down-slides.

The CEA said India’s ability to do good public-sector projects was rather limited, although he added that the government had indeed tried to step up public investment to pull in private funds and reverse the economic cycle. The latest Budget has estimated fiscal deficit for 2017-18 at 3.2% of the GDP as against 3% targeted previously.

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