New Delhi: As finance minister, Arun Jaitley found himself in the hot seat after the Bharatiya Janata Party’s (BJP’s) victory in the 16th general election. Economic growth had sagged in the past two years and inflation was yet to be contained when he took the post. Due to a combination of favourable circumstances and policy manoeuvres, the government has succeeded in reviving investor and consumer sentiment on the economy.

With less than six months to go before he presents his second budget, Jaitley spoke on a range of issues in an interview with Mint. Although he remains optimistic about economic prospects, he shied away from making any forecasts. At the same time he reiterated the government’s commitment to reforms, including reduction of subsidies. Edited excerpts:

When you inherited the economy you had to a lot of firefighting to do. Today things have improved fundamentally in many ways. Is it safe, then, to assume that the Indian economy is on the road to recovery?

I would certainly say it is on the road to recovery.

But at the same time, given the setback of the last few years, it will take some time to be repaired. India had fallen off the global radar. Decision making had come to a standstill. A large number of decisions (by the previous government) had negative impact on the economy. And it is not that those who were taking these decisions did not realize the implication of the decisions. If you impose taxes retrospectively, the world will be reluctant to invest because predictability in tax planning goes down. Even your domestic investors will not feel safe.

I see considerable merit in the fact that India needed to increase compensation paid to the farmers (for land acquisition). But to make the procedure almost impossible, if not very, very difficult...from an infrastructure project to a dam to highway to rural infrastructure, for national security, for defence, for affordable housing...In a country where 65% of the people don’t own a habitable house, you have to provide housing, you have a long distance to cover; you bring a land law in which from land required for national defence to building a toilet, there is no land available for anything. As a defence minister I can tell you, cases are coming to me, even defence is not an exempted purpose.

Therefore, when you take steps like these, you get an impression that these are meant for winning elections, eventually they don’t win you (the UPA) election. But in the process, it will still take some more time to take all the steps so that the recovery process can be accelerated. A lot of what we are doing is undoing the damage. Some taxation reforms if we have to carry on, it is to rebuild the confidence of the investors. Our coal ordinance is essentially intended to clean up the mess we had inherited.

So when will the BJP leave its own mark?

If you see collectively, the net effect of all the steps we are taking, the collective impact is a big bang one. The atmospherics, the mood has changed. The way of looking at India has changed. India is a safe destination for investment. But how will all the steps that we are taking, from budget to the (increase in foreign direct investment limit in) defence impact manufacturing? Now this is not a surgical exercise that things will change in one quarter itself. These will sink in, take some time, that’s how the economy functions. Therefore, surely, and doggedly, the direction of the movement we have undertaken is in one direction and there is nothing contrary in any other direction.

What are the downside risks to the economy that you see?

The risks are diminishing. Coal (shortage) was hurting the power sector. Now we seem to have found a solution to it. But the eventual solution before the ordinance can be translated into actual power, it will still take some time. So time is a risk factor.

I think interest rates now need to be moderated. That is one important factor. Inflation has been helped by both moderation of food prices in India and also the global oil prices. And I do hope the RBI (Reserve Bank of India) bears this in mind.

The manufacturing sector growth, which was negative in the last two years, is still patchy. There is no consistent framework of growth. Therefore that has to pick up. The fears of a bad monsoon are over. It has been a patchy monsoon but not a bad monsoon. So there has been a lot of recovery on the agricultural front. The services sector, particularly, has been doing well. In terms of revenue, because of overall mood and revival, the indications on direct tax seem to be quite optimistic. But unless I pick up on the manufacturing, the indirect taxes will still be a daunting task.

The economy seems to be in a rebuilding phase now.

I would say so. But there is still a long journey we have to cover. For example, rationalization of subsidies, interest rate rationalization. What do we do about the non-availability of land because of this law? What will the states do? How will you build smart cities without land?

How do you propose to tackle both of this? Land, as well as rationalization of subsidies, both have strong political overtones to it. So the politics will dominate the economics of it.

That is why I always call reforms the art of the possible.

One of the bold reforms that the government undertook is diesel price decontrol. Does the government have the political will to stick to this path as and when the oil prices go up?

Once we have taken a decision, we will stick to it. Reform is not that as long as the going is good, you are reforming and not reforming when the situation is challenging.

Fortunately, the situation is good at the moment and the government has brought down the price of petrol and diesel innumerable number of times. But there can be a contrary market signal at a later date. One of the essential features of any reforms process is that users must pay. You can’t say I will use diesel, I will use electricity, but I won’t pay.

A few days ago, you had said the domestic sectors where black money is being generated should be focused on. So what new steps are being contemplated in this direction?

I said this on this context that while chasing the black money stashed outside the country, don’t lose track of domestic black money because there are sectors every taxman should know where it is operating—in mining, in land, jewellery, in luxury items, in real estate.

You have said that because of the tax treaty with Germany, there was difficulty in disclosing the names in the black money case.

It’s not only about Germany, tax treaties all over the world have confidentiality clauses.

Will the government renegotiate these tax treaties?

If you want to renegotiate and the other party does not agree, what will you do? You have to follow what is in practice worldwide. Can I reveal to the world your legitimate tax returns? But if you commit a crime, you can be investigated and I can present the evidence in the court of law, then only your name should come to public knowledge. If you pay your taxes honestly, then why should the world come to know about your returns? That is why I wrote (on Facebook) that the choice is not between disclosure and non-disclosure, choice is when do you disclose. Do you disclose without substance and evidence or do you disclose with evidence in a court of law?

How will you balance the concerns of the taxpayers and the needs of the tax department to garner revenue, especially in a case like GAAR (General Anti-Avoidance Rules)?

I had an initial meeting on GAAR, but I am yet to take a final view. Originally, the conventional legal position was that tax evasion was prohibited, avoidance through tax planning was permissible, because the principle of fiscal laws is one of strict interpretation. If there was a way of avoidance, then you can avoid. Now globally all the developed countries have changed the rules of interpretation and they have prohibited avoidance also.

So GAAR in substance seeks to rewrite these rules in India. Now, whether this is the right atmosphere when you are on a recovery path to rewrite or you have to wait and have a larger discussion—I am examining it from this viewpoint.

But let it be borne in mind that a very large section of the industry, particularly the multinational industry, which has accepted these new rules in Europe and America, is objecting to it because they know that India needs investment and therefore they can follow a different yardstick for India. But I will take a decision depending on the health of my own economy.

What is the consensus that the government has managed with states on the goods and services tax (GST), given their concerns on autonomy and the inclusion of petroleum in GST under the constitution amendment Bill?

We have heard all the states. I have discussed it with several chief ministers and will discuss it with some in the run-up to the Parliament session. The draft Bill is ready. There are a few states with whom I have to speak. I hope to introduce it in this session (winter session) of Parliament.

What about the Direct Taxes Code Bill?

We are examining the direct taxes code Bill but I have not taken a final view on it.

By when will the disinvestment roadmap be released?

You will very shortly hear from the disinvestment department as to the steps they are taking on the companies that are lined up for divesting. Something is at a very advanced stage. But I am not making a disclosure of the norms because I don’t want people to speculate in the market.

You have restructured the process of appointments of bank chiefs.

The banking sector administratively needed a relook. The appointment process has to be a very mature process, there has to be an institutional correction and there has to be far greater transparency. I had constituted a committee with three very credible people and they had submitted a report to me which I sent to the Prime Minister along with my recommendations that the PM has accepted.

We had scrapped some of the appointments of bank chairpersons and executive directors which were pending consideration. We are expeditiously in accordance with the new norms making the fresh set of appointments.

Implicitly, it is a severe indictment of the process followed previously.

I am not using the word indictment.

What is the government’s approach to the banking sector on the whole, given the rising non-performing assets and the recent scams?

The banking support that the manufacturing sector needs, they are not getting. Projects have to be funded by the banking sector. If the confidence of the banks comes down due to increased bad debts, and there are questions raised on the credibility of the banking system, then how will the manufacturing sector revive?

We have revamped the appointment process due to this. The next step we are taking is that banks must start resupporting these projects. One of the proposals is that all the chairpersons must have a meeting where the Prime Minister and I will be present along with the RBI governor so that we can give a renewed vigour to the banks to support these projects. The idea is to put manufacturing sector back on the growth trail. We inherited a negative manufacturing sector growth.

But on the other hand, banks have to meet high restructuring requirements by RBI?

Therefore we have taken a position to abide by the Basel III norms. I am allowing banks to expand capital and bring down the government equity to 52%.

This year’s budget signalled a clear shift to a rules-based regime and the desire to create an enabling environment for businesses. As the finance minister, what is the direction you will project in the next budget?

Our real potential is, if with modest or below modest quality of governance we can grow at 8 or 9%, then with effective governance, why can’t we go back to those figures? And therefore the whole idea is to go back to 8-9% for a certain number of years. As the base of the economy becomes larger, higher growth rates become more challenging. But still we can afford to go back to those growth rates.

When do you see that happening? Any medium-term horizon?

Let’s see. Predicting is the job of the specific agencies. Let them predict. My job is to keep taking those steps.

And the battle against inflation?

At the moment, the situation is much happier.

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