In an exclusive interview with Bodhisatva Ganguli, Executive Editor, The Economic Times at the Economic Times Global Business Summit (ETGBS ), Finance Minister Arun Jaitley discusses lack of ethical practices of a section of the business community, the electoral bonds, simultaneous election and what to do with PSU banks.
On the ethics issue, in one of your earlier comments you talked about the lack of ethical practices at the section of the business community. How widespread do you think the problem is? Is it a remnant of the licence permit raj which is still lingering over or is this something which is much more widespread?
When I speak in terms of the ethical practices, I think it is a significant problem in India and I will be too glad if rather than always having a close look at what the governments are doing, Indian businesses and industries looked inward and this has a wide range. After all, this was the Indian model that you create — the shell companies and round tripping money through them. This was a standard operating procedure that any practising chartered accountant would advise you about and this has gone on for decades.
Now, if you claim to be the fastest-growing global economy and aspire to turn into a developed economy, where is the place for practices of this kind? When they look at government policy, are the investors going to look at their Indian partners and competitors also? The whole business of NPAs, how much of it is due to business failures and how much in case of some companies, due to divergence of funds? These are the cases of willful default which is something much more than merely a business failure. The bank frauds have now come to surface but if you periodically have incidences of this kind, the entire effort of ease-of-doing business itself goes into the background and it is these cards on the economy which take the front seat.
When you say ease of doing business go into the background, are you referring to the fact that these episodes might call for more regulation?
They call for every person in position with whatever responsibility to undertake to perform his job and where regulation is lacking, it needs to be strengthened. Ultimately, if fraud is taking place in multiple branches of banking system and you do not have a single employee raising the red flag, is that not worrisome for the country as a whole?
Similarly, if you had the top managements who were indifferent to what was going on or either unaware of what was going on, you had at least multiple layers of auditing system which chose to either look the other way or did a causal job and you had an inadequate supervision from supervisory agencies. I think who did what will eventually be discovered only in the course of inquiries but it does create a worrisome situation.
Is there scope for introspection or is there need for introspection on the part of regulators also?
We must always remember that regulators have a very important function. They ultimately decide the rules of the game and they have to have a third eye kept perpetually open and turned towards the sector. But unfortunately, in Indian system, we politicians are accountable, the regulators are not.
You said electoral bonds are going to be launched soon. This is something with which you have been personally associated, you have advocated it. Would you like to address one of the criticisms, which is the anonymity point in terms of electoral bonds.
There is a 100% anonymity in the present system. Who gave a donation, nobody knows. How did he create the money, nobody knows! Who did he give it to, nobody knows! How was it spent, nobody knows! The critics of the electoral bond system are those who want the present system of 100% anonymity coupled with unclean money to continue. Let us be the first to clear the present system of total anonymity and unclean money.
The electoral bond system is that you buy bond from the State Bank of India only through a banking instrument. So, it is clean money. Your balance sheet will reflect how many bonds you have bought. The political parties’ balance sheet will reflect it and the returns will reflect what is the sum total of the bonds that it has got. So, the entire money in the hands of a political party — in the hands of the donor and the donee — will be clean money. This way, 100% unclean money will be replaced by 100% clean money, that is the first change.
The second change is that there is substantial improvement in transparency. We will all know how much a political party has received. The companies or the individuals’ balance sheet will also declare how much he has bought, how much he has distributed and it is only limited anonymity. The critics want 100% unclean money and 100% anonymity to continue but if there is a 100% clean money with substantial transparency, they have serious objection to it.
One aspect which has made doing business somewhat difficult are decisions made by the judiciary. For example, at different points in time, widespread bans have been imposed on large parts of the country on mining, on what type of passenger vehicles can be sold, etc. What are your thoughts on this issue?
Well I do not think I am the best suited to answer that question today but I do hope some legal scholars who also understand the impact of the judicialisation of the economy, at least undertake this as a research subject and in case of some of the judgments, find out what is the negative impact on India’s GDP at the end of the year and how many jobs were lost on account of those judgments. I do hope some legal scholar initiates a debate, so that even as a part of a self improvement exercise the institution concern itself undertakes a study of this.
So, coming to another issue which you addressed — the health scheme which is obviously very much the focus of public interest. You referred to the possibility of some kind of federal structure. Could you elaborate a little more than that because as you said, the GST Council has worked very well, but what exactly do you have in mind?
The GST Council model is statutory. It is prescribed by the constitution that it will have all the finance ministers of every state, of the central government as well as the officials assisting them. They collectively take all decisions and therefore we are able to bring about a consensus. At the end of the day, even political parties and spokesman and their leaders take a particular position. The ministers within the council at least are able to work out and thresh out a reasonable consensus because that is really required for governance.
In areas like agriculture, the health scheme and the social sector schemes, let us say we give pensions to economically deprived people. Now in each of these schemes, the pooling in of the resource of the Centre and the states and how to best utilise that resource so that there is no duplication and one can top the other and come out with something which is extremely cogent as far as the state is concerned. I do not think there would be a single state which will say that I want a health insurance for the economically weaker section in my state for a lesser amount than my neighbouring state.
So, everybody would want the same amount and therefore depending on the resources of a state, the fact that they are able to collaborate with each other and add to the resource of each other is an area on which an arrangement between the Centre and the state could be possible. The NITI Aayog is an ideal institution which can actually coordinate this
One more area which you did not try to touch in your speeches is disinvestment. Obviously your take from disinvestment in the last fiscal was more than the target and this year also, there is a decent target. But these have mostly been sales to the stock market either through the ETF route of 5% sale and so on in many of the profit-making PSUs. What has not happened so far are the strategic divestments.
You see, the NIIT Aayog did prepare a list of a number of such companies which are meant for strategic disinvestment. The schedule is there, Air India, of course, is the big one which seems to be progressing quite well.
If I could ask you another question on something which the prime minister referred to last time. This goes back to the ethics issue. He in fact, referred to the shrinkage of exports in the first of couple of year and said this could possibly be due to over invoicing. He did not say that it was the reason but it could be one of the reasons. Do you have any thoughts on this subject now that the exports have started reviving?
It could be. There could be multiple factors but to my mind, there were two reasons; one was of course the fact that the global economy was not doing well and if your buyers across the world have less money to spend, obviously they will buy less and therefore global trade itself the world over had suffered.
Secondly, in the shrinkage of exports also, remember the fact that the fall of oil prices had a very important role and therefore a very large amount of crude came into the country, got refined and went out. Therefore, when the crude prices fall in volume terms, the trade maybe the same but in dollar terms the quantum of both imports and exports itself would optically be lesser because the crude price itself had fallen so the refined oil which is going back was costing much less.
Therefore, these two factors also did contribute to what we call shrinkage. If the crude prices skyrocketed again – though I hope that does not happen — but at least that would not mean that the international trade has gone up. The volume would still be the same but the quantum would have gone up.
On the corporate tax rate, the target of 25% has been done for obviously the smaller companies but some of the larger companies would still look forward to when it will happen for them as well. Could you give any sort of timeline?
I had clearly said that I will couple it with the phasing out of the exemptions. Now, once it comes to phasing out of the exemptions, each exemption has a sunset date and therefore if we advance that sunset date, we would be actually guilty of doing something retrospective because a large number of companies would have planned their businesses according to the sunset date itself and therefore I have not tinkered with any sunset date.
Within the limits of the affordability of the budget, I started moving up from the manufacturing companies in the first instance and then went up to Rs 50 crore and this time I went up to Rs 250 crore. Today, out of the 700,000 companies, 99% of the companies in India come into the 25% bracket. There are 7000 companies above this and these are the large, high tax-paying companies. Probably I had liked it with the phasing out of the exemptions.
And the actual tax they are paying could well be lower?
The actual tax they are paying is about 22% or 23%. So, I do not think these 7,000 are in a hurry for 25% rate themselves with the exemptions gone because they will all end up eventually paying 2% more.
A couple of political questions. The Prime Minister again has referred to the need for simultaneous elections or at least a debate on this. What are your thoughts on this issue?
This was the original intention that we must have simultaneous elections.
By original, you mean at the start of the constitution?
At the start but then because of Article 356 or early dissolution of state assemblies – there were two aberrations in the Lok Sabha. People may have forgotten; the 1971 election was called in the fourth year and for the 1977 election, Mrs Gandhi extended a five-year term of parliament by changing the constitution to six years. She, initially did it for seven years and then made it six years so that whole timetable got altered itself.
Today, frankly speaking, both from expenditure and from governance point of view, having two or three elections every year is a serious challenge. Every time you want to take a policy decision, you are constrained by the fact that it will have impact on elections and you have to think of the political consequences and so on. At least, if elections are held once in five years. India will see four and a half years of comfortable governance in the Centre and the state and policy formulation, besides lesser expenditure. So, I think a simultaneous election overall for the country is a much better situation.
But even if you were to do it, let us say you somehow come back to power in 2024 but again you could go out of power and some assembly could fall somewhere?
There was if you remember a suggestion made once that you must have a fixed tenure of five years and if within that fixed tenure a government falls, then the alternative government must be in place for the residuary term. You do not advance the elections.
So you do not allow the Assembly to be dissolved essentially? I think 2019 is in everyone’s mind. The BJP obviously won a majority in the last elections. Now, it could be argued that however the performance of the government may have been in many states it had won, 73 out of 80 in UP, all the seats in Gujarat, all the seats in Rajasthan, 38 out of 40 in Madhya Pradesh. Regardless of the fact that even if there is widespread support for PM Modi, the sheer electoral arithmetic would dictate that number of seats could come down because you are already at the maximum in many states in northern and western India. How does that equation work out?
Well today I will only tell you the analysis and the arithmetic that you make in Delhi has very little relationship with what is happening in the rest of the country. In 2014, we started by being told that you will probably end up getting 150 seats and then when things looked better, some people went up to 180. After the polling, nobody still was willing to give us more than 220 but I can tell you that the people in India are wiser than the analysts of New Delhi and therefore the kind of anarchic combinations which are perceived is something I do not think India can afford. India deserves better than that.
Do you think the time has come to have a look at public sector banks?
All I can say is that a lot of people have started expressing this view but this involves a very large political consensus because this will also involve an amendment to the law and the act itself and my impression is that Indian political opinion in parliament still may not find favour with this idea itself.
In fact, I saw some ripples of a positive debate because when I brought in the proposal for the recapitalisation by inducting Rs 2,12,000 crore, it was welcomed as a decision but when parliament was discussing it at the end of the day, somebody raised this issue and then the moral hazard of banks losing money to private sector individuals and the taxpayer paying for it.
For the first time, this is something that struck the MPs themselves that morally there is no alternative but it is a very challenging decision for us. This impression went through parliament.