In Conversation with Mr Arun Jaitley – Q&A highlights

Here are the highlights from Mr Jaitley's Q&A at a joint UKIBC-CBI-FICCI session on 27 February 2017 in London

Q: There have been some extraordinary changes in India during your tenure as Finance Minister. India used to be considered a member of the ‘fragile five’ economies, but you are now the world’s fastest growing large economy, with an exciting programme of reforms. There are a huge number of British companies interested in investing in India. When you look forward to the next election, what are your priorities?

A: It’s a challenge for an economy like India to be able to address a series of problems. The first obvious challenge was to restore the credibility of the Indian economy. As you mentioned, India was considered a part of the ‘fragile five,’ many commentators felt that the ‘I’ would drop out of the ‘BRICS’. And suddenly within 2-3 years the situation has reversed, with India becoming the fastest growing major economy of the world. There is potential for an even higher growth rate but there are a series of actions that are required. For instance, we need to reduce the level of poverty in India, and we need to concentrate on rural India. We have proposed several plans for investment into rural India. We need to address the problem of jobs, and on creating a world-class infrastructure, while improving the investment environment. We need to open-up the economy considerably – and we now have the support of a large number of people who constitute what is the new aspirational class of India to do it.

Q: Could you talk a little bit about GST, what’s the schedule looking like?

A: Under the GST, we first required a constitution amendment. We have the Union government who can levy income tax, customs duty, which is outside purview of GST. Within India you have a manufacturing tax, which the central government levies, a sales tax, which is levied by the states. Each tax is different. Therefore, this impedes the free flow of goods and services across the country. Both houses have approved our amendment, which passed on the 16^th of September 2016. This means that we have one year for the transition to take place. The GST council which comprises all state Finance Ministers, and we have resolved most of the critical issues. Legislations have been drafted, and are being put forward for approval. Three more drafts will be approved on 4/5 March which will complete the legislative process. By next week we will have the draft legislations, and in March we will see them before Parliament (9 March – 10 April). 1 July is the proposed date for implementation, but 15 September is the ultimatum date.

Q: Is there any scenario where it won’t happen?

A: It looks unlikely, as to undo a constitutional amendment would be difficult.

Q: Is this the economic priority?

This would be the single biggest taxation reform in India. The whole country becomes a common market. It will lead to the free flow of goods and services, which will become slightly cheaper. Businesses will now only have one assessment (for tax).

Q: Are you concerned that the IT, and the personnel involved might not be functioning properly?

The IT network has been prepared. There could be some teething problems but we will have to learn to live with it. Once implemented this will be a far more efficient tax system. One of our big problems is tax evasion, a more efficient system will ensure that evasion doesn’t take place. Therefore, the quantum of taxes will go up.

Q: In the Budget you mentioned corporate tax could be cut. Is there any intention to reduce the dividend?

A: As far as Corporate Tax is concerned, minus surcharges it was 30%. We allowed exemptions, both geographical and sectoral, and the effective rate was 25% or less. Most tax litigation was centred around this. Big corporates ended up paying less 25% and smaller businesses were playing 30% +. We want to make it globally competitive, brining it down to 25% and removing all exemptions. Once we are able to expand the tax base, my ability to rationalise taxes will increase. The compliant taxpayer not only pays for himself, but also for the non-compliant. Once I get the non-compliant into the net my ability will increase. There are three steps to this – GST, demonetisation, which will squeeze the quantum of currency, and cash expenditure – we will put ceilings on this. All three taken together will change the expenditure habits.

Q: Is your plan to create a groundswell of economic growth at the bottom of the pyramid in India – almost as a bottom up approach?

A: This is certainly one of the approaches. But we want to do this by not discouraging the growth of larger companies. We are introducing special programmes for smaller companies.

Q: Concerning the issue of retrospective taxation, there are a number of UK investors who want the 2012 legislation repealed. What’s your sense on that?

A: From the first day we took office, we have been clear that ordinarily, we would discourage retrospective taxation and not resort to it. We have stuck by this. It upsets the planning itself. To resolve pending issues, this can be resolved either by a process of settlement, or by judicial process.

Q: Let’s move onto the quality of Indian growth. India is certainly a stellar performer in the global economy. In terms of sustainability, one thing that worries people is the banks – particularly nonperforming loans in state banks – which supposedly sits around $130bn. Could you take us through your thoughts on that?

A: During the global boom period 2003-2008/9, some of the sectors in India expanded their capacities, and when the slowdown took place they had surplus capacities. This is concentrated in a few large companies – in steel, or infrastructure. We have to address the sectoral problems. We have taken steps to recapitalise some of these banks.

Audience questions

Q: Rolls Royce has been present in India for 50 years, making in India and exporting from India. How would you advise us best to make progress in future with existing Indian partnerships, but also new partnerships?

A: One of India’s strengths currently, and something that will increase in years to come, is going to be research and development. India has shown a tendency to be technology friendly. The best is still to come – investing in education, and reaping the benefits of that in manufacturing.

Q: How are you going to address deficits, infrastructure/rural areas etc.?

The Eastern part of the country has to do much better. If you look at nature of investment, we are targeting every village to be electrified by 2019. Every village to have a regular road by 2019. Good rural housing. Sanitation in rural areas is a top priority. Expenditure on irrigation, and on alternative modes of earning – poultry, milk, dairy farming. And improving agricultural potential in the Eastern regions. We are friendly to businesses, encouraging higher growth rates at the bottom, and the top of the pyramid.

Q: On Brexit, and FTA. There are hurdles for a prospective future FTA on immigration, which was a contributing factor in Brexit. How easy and quick will an FTA be?

A: Since 1991 India has had a huge mindset change. There was a fear of the unknown when it came to liberalisation – but as we’ve seen it has created a better India, and those fears have receded. Therefore, today there is greater support for reform activity. The idea of a protectionist economy is no longer an issue in India. Trade deal with UK – in terms of timing, because until Brexit formally takes place, the legal entitlement isn’t there. Formal discussions can take place then. You can get a feel for what the governments feel. My discussions with my counterparts in the UK government clearly have convinced me that Brexit should not be confused with protectionism. There is a keenness to expand trade with India which is reciprocated In India. On people of Indian origin coming here – they have made an immense contribution in the UK. And I’m sure the experience has been positive for both countries. How the UK will decide on visas will depend on their policy.

Q: Why is India still not allowing foreign universities to open up in India?

A: There is a growing desire in Indian higher education to be among the world’s best. I wouldn’t indicate any time for it [opening up to foreign universities]. But India has its own dynamism in terms of its decision-making process. Nothing in India is ever ruled out!