GST A Huge Step Towards A Federal Tax Structure In India, Says Kenneth Rogoff
U.S. Fed unwinding a non-event, as QE was “smoke and mirrors”, says Kenneth Rogoff.
The Goods and Services Tax (GST) regime is a huge step towards getting rid of some chronic problems between the states and the central government, Harvard professor and American economist Kenneth Rogoff told BloombergQuint in an interview.
The new indirect tax regime will also be a milestone for creating a more federal tax structure in India, he said on the sidelines of the Delhi Economic Conclave on Saturday. He, however, said that he would not advocate for a project like Aadhaar in the U.S., where privacy concerns are huge.
He also went ahead and dismissed the very rationale of quantitative easing by the U.S. Federal Reserve.
On the process of the U.S. Fed normalising its balance sheet, he said it was a pretty easy thing to do, because quantitative easing was “smoke and mirrors” in the first place. It really didn’t do that much for the U.S. economy, so undoing QE won’t either.
While adding that the Fed needs to undertake this process very slowly, he went on to say that it was “pretty clear that its effects were marginal.”
Rogoff also spoke about his new book, The Curse of Cash.
Here are the edited excerpts from the interview:
Inflation is trending below expectations in a number of key economies, including the U.S. and the Eurozone. Why is this happening?
It’s a big mystery to economists as to why inflation is still low, particularly in the U.S., because labour markets are tied. The best idea that I have heard is that there is still downward pressure on the share of labour and the economy. The wage pressures are downwards mostly from technology and globalisation. If wages aren’t pressuring up, then you are not going to get pressure on prices. So, I think it might not go on. It could reverse because it still seems to be happening. It’s even mentioned in the latest labour market report in the U.S. that despite a very tight labour market, wages are still very weak. I think that should give central banks (reason to) pause about raising interest rates.
Will lower-than-expected inflation delay a normalisation of monetary policy in the U.S. and Eurozone?
I think it leads to a reconsideration of what normal means. In my book (The Curse of Cash), I have mentioned that there is a need to develop the infrastructure, do the homework and have effective negative interest rate policy if its possible. We will have very low equilibrium interest rates. Eventually, we are going to get a deep recession, may be not the next one. Policymakers will be scrambling for ideas about how to respond.
In the U.S., the Fed is hoping to move towards normalising its balance sheet. Do you expect the process to begin smoothly?
I think the process of normalising the balance sheet in the U.S. is a pretty easy thing to do because the balance sheet was smoke and mirrors, it really did not do that much, so-called quantitative easing. So undoing QE won’t be much either. They still need to do it very slowly because it still has some mystique. Some people do think it is important I think its pretty clear that its effects are fairly marginal. Europe is another matter because their the balance sheet represents transfers from the northern countries to the other countries. They have to move very cautiously on that.
Years of easy liquidity have meant asset prices, including in the emerging world, are inflated. Do you see that as a risk at a time when central banks are talking about rolling back their easy money policies?
They are talking about rolling back easy money policies very slowly. So, at the moment it’s not a permanent risk. However, if you ask what is the biggest risk to macro-economic stability, its something that significantly raises the equilibrium real inflation-adjusted interest rates around the world that will force everyone to respond. Then these very high asset prices and some high debt levels can be very problematic. Olivier Blanchard, the former chief economist at the IMF (International Monetary Fund) has said if productivity goes up, that would be good for the country where it is going up, but it might make world interest rates go up and that may cause a lot of problems. But on the other hand, most projections show interest rates will be very low for a long time and that rationalises higher debt level and higher asset prices.
You were critical of India’s decision to demonetise high value currency. Since then, economic data shows that the hit to the Indian economy was lower than what people would have expected. Does that surprise you?
I wouldn’t regard myself as the vanguard of critics of demonetisation. What I said is ‘this isn’t how I’d said to do it in my book’. I had been very careful in my book to say that for emerging economies and developing countries, this is something to wait for much longer till advanced economies have done it. I think, the negative effects and output have been less than the sharpest critics have said it would be. They didn’t initially capture much of the black money, although the government still hopes to see where the bank accounts are and make some profit off that. The big question going forward is what is the long-term effect, how will it interact with the GST, what will be the effect. For example, what will be the use of cash in the future for natural inclusion. Will more people use debit cards in the long-run? There are a lot of studies going on about the short-term impact, it’s really over many years that we will better understand the full impact.
What is your view on GST? Will it be beneficial for the economy?
GST is a huge step for India in terms of creating a more federal tax structure and getting rid of some chronic problems between state and federal governments, having the the Indian economy work as a single market, so there is tremendous promise. On the other hand, due to political compromise, the GST is way more complicated than the central government would have liked. There is hope that states will see it’s working and that it could redo something simpler. I think its big positive development, that seems very clear.
You praised the Aadhaar project. In India, there are huge privacy concerns being raised around it. How do you balance those two?
Every country is going to end up doing this. Even in the U.S., when privacy concerns are huge, I wouldn’t advocate for doing it there. But I think eventually having cyber security is going to require biometric identification. Everything else will be defeated and biometric identification can be central, and people are going to demand it and not just complain about it. I also would guess, unfortunately that at some point, we may have a dramatic terrorist incident which pushes the country for biometric identification. Europeans are already moving in this direction. When you take an air ticket in Europe, you are giving passive assent to them scanning you and getting knowledge of your facial structure and putting it into a database. Similarly, India is keeping a database. But this isn’t something that we could do in the U.S., nor I would advocate it, as people won’t permit it.