In the two years and a bit that Finance Minister Arun Jaitley has been in office, he has managed to push through a few key economic reform measures, but the issues on which he is constantly being questioned by the global investor community are the fate of the Goods & Services Tax (GST) and the health of India’s banking sector.
“Despite a series of reform measures that have gone on over the last two years, GST has become symbolic of a key reform. So India’s ability to reform is being observed. In addition to the obvious advantage to the domestic trade that will take place, India’s credibility will be greatly helped with the enactment of the GST,” Jaitley said.
In conversation with BusinessLine , Jaitley shared his thoughts on the challenges facing the domestic and the global economies as well as the political challenges he faces as he manoeuvres the world’s fastest-growing major economy.
“Political parties in India have to realise that this is a great opportunity for India. When I travel internationally, key observers recognise that when the world has slowed down, the Indian economy is growing. They watch us, but they watch us with cautious optimism because we also have a track record of spilling the advantage. It is extremely important that we keep the advantage on our side,” he said. Excerpts:
You said the world is watching us with ‘cautious optimism’. But on the domestic front, you have a challenge: inflation. How much of a concern is it?
There are two aspects to inflation: Oil prices and food prices. There is a marginal impact of the increase of oil prices; I think vegetable prices are seasonal.
Onion prices, for example, have hit rock bottom. Tomato and potato prices have increased. These are the pre-monsoon and the post-monsoon seasonal impacts of the demand-supply mismatch. Hopefully, if the monsoon is good, domestic production will take care of all these areas.
The larger challenge for India is the problem of the pulses. We consume about 22 million tonnes of pulses annually and grow about 17 million tonnes: so there is a short supply of five million tonnes. We tackle it in two ways: procurement price of pulses and imports.
In the last two years, we have raised the procurement price of pulses, so as to incentivise people to cultivate it. But that’s a slow process.
The second is import. But, the import markets are limited to Myanmar, Malawi, Mozambique, Canada, etc. Last year, we had created a buffer stock, which we can utilise. I just convened a meeting, where we decided to go in for large-scale procurement through imports.
But there are issues with imports, such as sugar and wheat…
We have excess supply of wheat and sugar, so we don’t need it. But the same argument doesn’t apply to pulses, as globally also, pulses are in short supply. It is agro-climatically limited. So even if we pick it up from wherever it is available in the world, this five million tonne mismatch eventually can only be made up by discouraging farmers to grow other crops and encouraging them to grow this. There has been a disproportionate emphasis over the years on other crops such as sugar, wheat and rice –– where we have a surplus stock; –– than on pulses.
Going by the May data, has the decline in exports bottomed out?
You have to look at the export situation in totality. A very large part of the dip was both in exports and imports. This was attributable to decline in values. If oil becomes cheaper, the cost of import becomes cheaper: 18 per cent of the import basket is oil.
Similarly, commodities and metals had become cheaper. Therefore, those values will also get reflected in the shrinkage. But the analysis goes a little deeper. In many cases, there was also shrinkage in volumes. This is because the buyer-markets have less money in their pockets and their economies have not grown.
Since you are targeting overseas markets, if the world is slowing down, obviously the volumes of exports would have slowed down.
The figures for May indicate that it has bottomed out. In labour-intensive sectors, there is a pick-up. This is a good sign. Also, we must bear in mind that while our wages may not be comparable to, say, Bangladesh or Pakistan (theirs is lower than ours), we have become far more competitive vis-à-vis other competitors, including Vietnam and China. Therefore, I am still keeping my fingers crossed that this has bottomed out and the curve will now swing upwards.
With oil prices rising, will the excise duty on fuel continue?
Let us see how prices move. Ultimately, why should those who buy petrol and drive cars not pay for the roads that they drive the cars on? The money is not being used for paying salaries; it is being used to build highways. Which other country is building 10,000 km of highways for car drivers every year?
The number of cesses people pay keeps growing. The latest is on airfares…
( Smiles ) What they have done in civil aviation is a great policy. Coupled with highways, rural roads and railway station modernisation and regional connectivity, regional travel will be at par with most developed countries.
When you took office, one of the challenges you faced was expenditure management. Even your critics acknowledge you have succeeded there. What is your take?
This has been one of the strengths of the government. There are only two ways of managing the fiscal deficit: you spend less or earn more. The UPA managed it by spending less. When you spend less, you compromise on growth. But we have spent more and yet maintained the fiscal deficit figures. To be fair, even oil prices helped us.
There is also a growing perception that the overall tax incidence on the tax-paying part of the population is getting very high.
I don’t agree with this. Look at what’s happening in the world. Forget the tax havens or jurisdictions such as the Gulf or Singapore. India today is one of fastest-growing emerging economies. Over the next several years, we aspire to get into a developed economy mode.
Compare individual taxation with what it is in the developed world. India has far lower rates than them. We are trying to rationalise corporate tax, but it will take time as the exemptions get phased out. I think tax administration has to be citizen-friendly and easy. It doesn’t have to be intrusive. But at the same time people should not grudge the payment of taxes. It is a contribution to national development. No nation-state survives without taxes.
And if you look at the number of people who pay taxes, I think there is a large section that evades.
How will you expand the tax base?
There are two kinds of situations in tax base evasion. One is that existing taxpayers avoiding paying tax. Second, those who should be paying are keeping themselves out of the tax base.
We will have to keep in mind that on agriculture, there won’t be a tax. There is a large section with income below the taxation limit, and they won’t be taxed. But the others who are above the limit, there is a large section that doesn’t pay tax. So there is a two-fold area of expansion in that segment. And we should not be grudging it: at the end of the day, why should there be resentment about a PAN Card being produced and why should there be a discussion on how to evade a PAN Card? Ultimately, we will have to take steps that the base increases, the collections increase. Hopefully, in an economy like India, when the collections increase, we can rationalise the rates and incentivise savings even more.
How will the Seventh Pay Commission affect Central finances?
There will be pressure on government revenues but we will try and manage.
You said global investors ask you two questions: one on GST and the other on banks. It’s evident that you are pushing for GST, but what is the progress on the banking reforms front?
A frequently raised question is how do I deal with the banks? It is a legitimate concern. Growth has to be supported by bank lending and we can’t allow ourselves to be obsessed with the problem of non-performing assets (NPAs).
If too many agencies start creating a panic-like situation, the banks’ ability to deal with the issue will get constrained.
The media is less concerned about NPAs and more concerned about one particular account; some Members of Parliament feel that banks must recall all loans….there is no better way to collapse the economy than if banks recall all loans.
And then the Supreme Court wants to know whether there are judicial solutions to the NPA problem. I think we must leave it to the banks. The situation is eminently remediable.
Even last year, the provisioning cost ₹18,000 crore loss in all the PSU banks taken together. Independently, they showed an operational profit of ₹1,40,000 crore. Once provisioning peaks at the NPA limit, the decline will begin. A series of steps have been taken to boost the economy. For instance, in several sectors –– steel, sugar, highways –– the balance sheets are now turning. Hopefully, power will get resolved.
The second problem with banks is that at the operational level, there is a freeze on decision-making and lending. How will you fix that?
This is probably the biggest challenge to the economy today. Banks have to lend for growth.
Business grows on the strength of that lending. There are two assurances that banks need today, in terms of support.
First, that the government will support the banks at all costs, which is something I have repeatedly said. Second, banks must take prudent decisions based on commercial banking considerations. If haircuts have to be taken in order to get out of the impasse, so be it. How do we assure the banks that these bona fide decisions will be protected? Provisioning is not waiver; it is change of a column.
Secondly, at the meeting I had with bankers, the Indian Banks’ Association suggested the establishment of an oversight mechanism so that transactions above a certain threshold will have to be cleared by that mechanism. I feel it is a good idea.
Talking of banks, the merger of SBI and associate banks is under way. There was earlier an idea to create two mega entities: one of SBI and one of associate banks. What changed it? Will we see more such mergers?
A proposal to merge SBI’s associates banks into one separate entity was under consideration; the merged subsidiaries would have been 70 per cent of the size of SBI.
But today we will have probably one of the world’s largest banks working out of India and that will be SBI. I have indicated that in due course, once the health of these banks revives, after this merger, I am willing to consider further amalgamations. Do you need so many banks in the public sector? Even while they remain in the public sector, you can consolidate and have fewer and more efficient public sector banks.
To revive banks and to revive lending are the two biggest challenges today. We have no control over oil prices and the global situation. But we do have control over policy, so we must continue with reforms and GST, etc… We must also expedite spending on infrastructure and the rural sector, where the growth potential is far more. So, strengthening banks and reviving them to support growth through lending is the real challenge.
What is happening in the area of disinvestments and strategic sales in public sector undertakings?
The world has changed. The markets have become unpredictable. So earlier you had only the strategic disinvestment model or the disinvestment model. The options have expanded. There are four options now: disinvestment, privatisation, buyback and asset recycling. At the end of the day, the opponents of disinvestment made it appear that you are squandering the government’s assets.
The idea is that the government owns these assets in the larger public interest. The government is entitled to decide on whether to own 80 per cent shares or 70 per cent shares in a PSU and in lieu of these 10 per cent shares, should it build two more AIIMS or more highways. These are all government assets for public interest. The government is entitled to decide on its own assets.