Temasek-like sovereign AMC could help boost divestment income: Subhash Chandra Garg


Subhash Chandra Garg, author of The $10 Trillion Dream: The State of the Indian Economy and the Policy Reforms Agenda

Subhash Chandra Garg, the former finance secretary, believes that the government needs to get its act together quickly on cryptocurrencies and blockchain technology and must strive to put in place a global strategy around it. The budget’s decision to tax crypto income will put some order in the situation, but the proposed 1% TDS on payments made on the transfer of digital assets will be difficult to administer, he says. Garg talks to Banikinkar Pattanayak (FE) ahead of the launch of his book, The $10 Trillion Dream, in which he offered a series of policy prescriptions on a wide range of topics – from expenditure management and taxation to factor reforms – to catapult India on a strong growth trajectory. Edited excerpts:

On cryptocurrencies

When I led an interdepartmental panel on virtual currencies in 2019, our understanding was largely limited to the monetary aspect of crypto and the potential of blockchain technology. (The panel had argued for a ban on private cryptocurrencies like Bitcoin) Things are much clearer now.

There are three distinct use cases for crypto blockchain technology: currency; business services like decentralized finance, etc. ; and active. The case of currency is reflected in two ways: general currency and “stablecoins” used for international transactions.

There are unique environments and ways in which crypto and blockchain businesses operate. First of all, all activities take place in what are called decentralized autonomous organizations. There is no identifiable owner of these companies (like who owns Bitcoin) although someone may have created a particular technology. This makes it difficult for authorities to identify which entities or persons to tax, regulate or register, etc. So we have to find a way to handle that.

The second aspect is what we call smart contracts, which are usually self-executing contracts that don’t require anyone’s intervention. But our current contract laws contain no provision for self-executing contracts.

I think the government needs to identify the big three use cases and related technology and put in place appropriate legislative frameworks. It is highly likely that the government would claim that these currencies operate in virtual space and do not respect the territorial integrity of any nation. Therefore, a broader set of consultations and agreements across the world on cryptocurrencies might be needed.

The budget provision to tax cryptocurrency income brings some kind of order to the situation, but it is limited to the use of assets. However, the proposed 1% withholding tax (TDS) on payments made on the transfer of digital assets would be very difficult to administer.

On the feasibility of treating crypto as a currency

The currency must be that of the sovereign; no private entity should be allowed to do this, except, perhaps, for the internal use of a platform.

For example, if you transact on Ethereum (an open-source blockchain), you might be allowed to transact in Ether (the native cryptocurrency of the Ethereum platform). It is like in many clubs or malls in the country, where we make transactions in tokens that they offer. This is because it would be very difficult in the crypto environment to transact in rupee.

“Stablecoins” will find favor with some until the US Federal Reserve comes up with its digital dollar. If the dollar is available digitally and traded as easily as “stablecoins”, this would do the trick.

The role of the RBI should be limited to the monetary sphere. It is not suitable for (regulating) crypto businesses or assets.

On land reforms

We use 75 to 80% of available land for agriculture and less than 2% for industrialization and urban planning. The acute scarcity translates into excessive land prices. Land prices in Mumbai are among the highest in the world, even though we are a developing economy. So the biggest reform we need is to increase the supply of land. I argued in the book that today we have about 140 million hectares of land dedicated to agriculture. If we limit agricultural use to 125 million hectares, since we are more than self-sufficient in most agricultural products, and free up 15 million hectares for industry, housing and other urban developments, it will bring about a transformation.

On labor reforms

Simply consolidating labor laws is not credible reform (the government has consolidated 29 labor laws into four codes). Consolidation actually solves the problems of the 20th century. Times have changed, factories too. My suggestion is to have only two laws. One should be to regulate hazardous workplaces. The other could be for wages where some type of business cost structure can be considered but does not regulate it.

On the Three Controversial and Now Repealed Farm Bills

Of the three laws, only one (the Farmers’ Produce Trade and Commerce) was truly revolutionary, as it could have struck at the root of the monopoly of the Agricultural Commodity Market Committees (APMC) on the wholesale trade of agricultural products. He would also have abolished the mandi fee system. Both have been hurting farmers for a long time. Although he did not propose to dismantle the APMC system, he could have touched their root by attracting farmers. The new law gave freedom to farmers to sell to APMC-regulated mandis or outside. This would have allowed electronic mandis to be set up in a big way.

However, the second act – Farmers (Empowerment and Protection) Act, 2020 – which focuses on contract farming, was unnecessarily provocative. Simply centralizing contract farming, which is mostly with the states, wouldn’t have made much difference.

The third law – the Essential Commodities (Amendment) Act – would have made sense had it repealed the Essential Commodities Act. Why should we have control over the storage, price or transport of agricultural products? Today we have huge surpluses in many commodities. And where we see a shortage (of edible oils and pulses, etc.), imports should be allowed.

Thus, the first law was a great bill, the second was redundant, and the reform needed in the third was not proposed. Moreover, the way the laws were introduced was disruptive and the states were not consulted.

The way forward is to create an enabling farm bill and leave it up to the states to decide how to implement it, as was done in the case of foreign direct investment in multi-brand retail.

On the divestment strategy

Given that the state holds just over 50-60% in most profitable central public enterprises (CPSEs), outright privatization with transfer of management control, rather than sale of minority stake, is necessary to increase divestment revenue.

Commercially viable and profitable CPSEs today suffer from administrative control by the relevant ministries and are not professionally managed. Many of these CPSEs, including IOC, NTPC, Power Grid, SBI, and LIC, belong to the energy and financial services sectors.

Government stakes in these companies should be transferred to what I am proposing, a sovereign asset management company (AMC), modeled on Temasek or Singapore’s GIC. This sovereign AMC can create a lot of value for the assets it manages and the government can obtain revenue by selling the share of the sovereign AMC.

Profitable companies can stay with the government (in the AMC) as long as needed. And whenever the assets need to be sold, the AMC can do it very professionally and the proceeds can go back to the government.

The 10 trillion dollar dream: the state of the Indian economy and the political reform agenda
Subhash Chandra Garg
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