Four per cent farm growth in short term will be the biggest challenge while a mild double dip in growth globally may not impact India. Economic meltdown in Greece is bound to have its impact on developing economies like India. This is what chief economic advisor to finance ministry Kaushik Basu feels. in a freewheeling post-budget interview to Mandakini Raina and KA Badarinath, Basu explains the government stand on GST, DTC as well as financial stability and development council apart from challenges on fiscal front.. Excerpts:

Do you think goods and services tax (GST) and the direct tax code (DTC) will be rolled out next financial year?

The GST that is being planned is a deep and far reaching reform that can yield large benefits for India. This new system will not only bring the entire country under a common indirect tax system and virtually all goods and services under one umbrella; it is also an administrative reform. It will improve governance and reduce transaction cost of filing returns. I really don’t think there is going to be any further delay beyond 2011; it should be in place by next April. As you know, there are some contention issues as it is going to be one rate for all states and the centre. It means that some states will lose out because of this. This means that the ones that aren’t going to do better in the immediate run will tend to resist. This is not politics, just plain simple economics and human nature. But, we now have mechanisms in place for compensating those states for a couple of years. With that, objections have diminished. Still, it’s a major reform that you don’t want to jump into quickly, and then stumble. In the long run, all states and individuals will benefit from this change. I expect the GST to be in place by April next year.

n Will the service sector lose out in case GST is pegged at 12 per cent or more?

Service sector in India has been taxed very lightly. This was a good move and has helped us develop into a global powerhouse as far as this sector goes. As we gradually move to a uniform taxation system, it is to be expected that this sector will pay taxes the same way as others. But, as our tax base increases, the rates can be kept low. Actually, administrative slowness and bureaucratic delays is a larger hurdle for business success than tax rates. If you have a clean system, whereby by people are able to do things quickly and efficiently, this can be a boon for services and all sectors. What is good about GST and DTC is that they are moves towards administrative reform as well.

DTC could have been conveniently postponed. Is there resistance within finance ministry and outside against it?

No, there is no resistance within the ministry. I’ve been here for only three months and I am impressed by how much cooperation there is in key decision-making group. Of course there are differences of opinion on matters of detail, as would happen with any group of intelligent human beings—in fact, you should not trust a government in which everybody has exactly the same opinion. But the broad vision is shared by all of us. Our ministry also sought public comments on the DTC and we’ve got huge amount of response, these are being considered and many ideas are being taken into account. Right now, our plan is to do both the GST and DTC together next year.

What is the thought process behind Financial Stability and Development Council?

The main aim is coordination. There are many different authorities, the world of finance is getting so complex that between these different authorities and cracks develop. And, there are problems that can arise that neither belongs to authority X nor to Y. And, you want to have a system of co-ordination. As has been said in the Budget speech, this is not meant to be something that will encroach on the authority or autonomy of the organisations, but will help co-ordinate decisions and policies. But the structure that it will take, we have to see. All we know is that we are heading towards that.

Is GDP growth target of 8.5 per cent for 2010-11 tenable?

The 8.5 per cent projection is very realistic. What we economists tend to do is look at savings rate and capital-output ratio, which is an indicator of how good we are at converting capital into an output flow. The latter lies primarily in the Planning Commission’s domain. The savings rate took a slight dip in 2008-09, dropping down to 32.5 per cent. Still, that is a very handsome savings rate, which places India among the super-performing economies of the world. Our calculation is that as calibrated rollback of fiscal stimulus takes place, the savings rate will rise a little. That may take more than one year but even with the existing savings and investment rates, it is quite realistic to expect India to achieve 8.5 per cent growth in 2010-11. In fact, my calculation is that we will achieve this rate in the current quarter itself.

As with everything in economics and life, things can go wrong. The two things that can jeopardise this are another big drought, and a severe global downturn.

There’s talk of a double dip in the global economy. Do you subscribe to the view?

I think it is unlikely but not impossible. If this dip is mild, India’s fine. But, if it is a major second dip that industrialised countries like the US, Europe and Japan are going to witness, then of course we are going to be affected adversely. Every country in the world will be.

How should the Indian economy read the crisis in Greece, and what are its implications?

In today’s inter-connected world any crisis anywhere are blown all over the world by the winds of trade and capital flows. If Greece goes into a meltdown, we will all feel the heat. But India’s deficit is much lower than that of Greece and several other European nations. Our growth rate is higher by a wide margin. So I don’t think we have any serious worries on this score.

Have you played down the impact of fuel price hike on inflation at a modest 0.43 per cent?

Between 0.41 and 0.43 per cent is our calculation, and that is also one-time inflation. In fact, the data that has just come in shows that wholesale price index of primary goods has risen by 0.4 as a consequence of the fuel price hike. I don’t deny that this will have some more secondary and tertiary effect. But, all this will die down quickly as the benefits of a lower deficit caused by this same policy outweighs this effect. Our calculation is that six months down the road, as a consequence of this policy, we will have lower inflation rather than higher inflation.

There’s also an indirect impact of an additional 0.4 per cent?

By its very nature, the indirect effects are very difficult to predict. All I can say is that there will be indirect or secondary effects and tertiary ones. But, like waves caused by a pebble thrown in water these will die down and more than compensated by the advantages that we will reap through lowering of the deficit.

And, 4 per cent agriculture growth is realistic?

This particular year was of course a very bad year for agriculture. Grain production was down by a remarkable 8 per cent. Next year a 4 per cent growth is not an unrealistic target. The base effect is going to play a big role, as this year has been bad; so even if we can go back to business as usual with agriculture we will be virtually there. It’s the years after the next, when the base effect is gone that it is going to be harder to achieve the 4% target, which for agriculture is very high. Fortunately, there are lots of initiatives suggested in the budget for greater agriculture production and preservation of what is produced.

Why was there no mention of disinvestment in the Economic Survey, when it is such an ambitious source of revenue for the government?

No sinister reason I can assure you. It’s not as if each document from the ministry fully mirrors the other—we would then not need so many documents. If you look at the Economic Survey of last year, it took 3-4 major themes and pushed those. I took 3-4 major themes and all senior advisers discussed these. And, we wanted to make sure that between the survey and the budget, all important ideas and policies are touched upon. There was no reason to duplicate everything.

If you’ve followed the NMDC FPO, there aren’t too many takers for PSU paper. Has the government been too ambitious about Rs 40,000 crore target?

No, I don’t think we’ve been too ambitious. The figure is for the full year. And, stock markets go through different phases. I expect that the figure will be achieved.

Is there a fallback plan if the disinvestments target cannot be met?

On the whole, we are expecting to do better than the 13th Finance Commission’s recommendations of 5.7 per cent fiscal deficit. We are targeting 5.5 per cent. As with all such large policy plans there will be over-achievement under some heads and under-achievement under some others. But, the overall figure is realistic.

What are the three basic things we need to work on for achieving double-digit growth in four years?

Reform our system of social welfare and subsidy by targeting them better. And, as the Economic Survey argues this is possible. Improve governance, and create an enabling government that takes quick decisions. Gradually roll back on the fiscal, revenue deficits and direct more attention on infrastructure. The ordinary people of India will take care of the rest.

You’ve proposed that the nation should measure its progress by growth in per capita income of the bottom 20 per cent of population. Won’t that paint a grim picture of the Indian economy? Like skewflation, isn’t the growth skewed too?

For me, growth is extremely important. It is not an end in itself but as an instrument for helping worst-off sections of the population. Hence, the suggestion of focussing on the bottom 20 per cent has been made. If we do this for all nations, there is no reason why India will look particularly grim. And if it does, instead of covering that up, we should face up to it and try to do better. Transparency is always a good idea.