A Conversation With Arun Jaitley

Monday, April 24, 2017
James Lawler Duggan/Reuters
Arun Jaitley

Finance, Defense, and Corporate Affairs Minister, Republic of India

Charles R. Kaye

Co-Chief Executive Officer, Warburg Pincus LLC

Arun Jaitley discusses the status of India’s economy, its relationship with the United States, and its place in the world economy.

KAYE: Good morning, everyone. Welcome to today’s Council on Foreign Relations C. Peter McColough Series on International Economics with Arun Jaitley.

I’m Chip Kaye, co-chief executive officer of Warburg Pincus, and will be presiding over today’s discussion.

We are delighted to have Minister Jaitley join us today. He’s had a truly remarkable career in law and politics. Having served as minister of finance and corporate affairs since May of 2014 in the Modi administration, he’s now added minister of defense to his portfolio as of just about six weeks ago. More importantly, Minister Jaitley’s really been one of the key architects of India’s continuing political and economic transformation under Prime Minister Modi, which has captivated all of us.

Minister Jaitley, delighted to have you. Welcome.

I thought we’d maybe start with some comments you might like to make, in particular maybe around the economy, which is increasingly recognized—some would say maybe the next $10 trillion economy, if you will. Lots of commentary these days around important initiatives, around GST and financial inclusion around Jan Dhan Yojana and Aadhaar, de-monetization, bankruptcy code. How do you see India broadly? And what do you think is sort of most important in light of India recognizing its ultimate full potential?

JAITLEY: Well, I think before we touch the specifics that you’ve mentioned just now with regard to these issues, a few broad points as to what appears to be happening.

KAYE: Sure.

JAITLEY: I think that political democracy in India has, almost after three decades, thrown up a government that has a single-party majority even though it’s a coalition government. So it becomes a much larger majority. And that’s given a lot of political stability, which is required to support important decision-making. I think the second important factor is that in the prime minister you have a political leadership which is decisive, and which has shown that it has the courage and the capacity to take decisions, even difficult decisions.

As far as the economy is concerned, the decisions have been consistently in one direction. Commentators will say, is it only incremental? Are they big decisions, or a lot of decisions? And finally, that debate also faded, that this government is capable of taking big decisions also. And all of them are in one direction.

Two important factors on the political environment. Broadly, the aspirational class in India has become very large. And therefore, to the decision-making of the government there is a popular support. Election results have indicated that. The nature of discussion and public discourse in media indicates that.

Most important decisions, as a result of this pressure of public opinion also, are finally resulting in decisions with larger political support. And to just highlight that question, you mentioned insolvency, the GST. Now, both of these got a unanimous vote in both houses of parliament. And so far, even in the GST Council—we have done bulk of the work—almost every decision has been unanimous; which means every state government, irrespective of the political complexion, finally comes around that consensus. And therefore, there is a greater realization that this could be on account of pressure of public opinion, this could be on account of a genuine desire that this is a correct road map.

And I think what’s also important, seeing the trends globally going on, is that you don’t hear, even when the opening out takes place of the economy—and we’ve taken a large number of steps—you don’t find too many voices of protectionism. That’s not an issue. The idea seems to be to open out, to get larger investment, because there’s also a realization that we’ve experimented in the past the more conservative model and we’ve seen the consequences of that, and we’ve seen the enormous amount of difference which more opening out—greater domestic liberalization and also opening out has brought about. And even today, one of the measures of success of any government is what is your credibility with international investors and how much is the foreign investment that you are able to attract into the economy. So that’s become an important touchstone.

And therefore, my own impression of the Indian economy today is that under the current global environment, certainly the 7 to 8 percent range is the absolute normal that we have. All our economic parameters in terms of fiscal prudence or fiscal deficit, current account deficits, inflation control, I think the figures have been quite encouraging. They’ve never been so good as far as India is concerned.

And given the impact of several decisions which we are taking, and of one or two challenges that we have on the banking sector particularly—if we are able to overcome them—then I think the net effect of a large number of these changes, including the GST—and if growth starts returning to the world, where there are some initial indications now—I think in those situations, we ae quite capable of improving on our present normal and then creating a new normal. I do believe that at least for the next two decades, India needs this high level of growth if we are to reduce poverty and then cover up a lot of gap that still remains.

KAYE: So you sort of talked about that fundamental sense of macroeconomic stability that India’s achieved, and that ability to take off on that decade or two-decade-long 7 or 8 percent growth rate, and that transformational dynamic. Longer run, what, to you, are the two or three most important issues India has to address for that to be real?

JAITLEY: I’ll come to now of—in the last three years, we’ve taken some decisions which were the low-hanging fruit, which were the obvious ones. And they were easily achievable. You see, to open up the economy more, you needed essentially executive decision. So that was more easily achievable. But there are series of these very obvious decisions taking which was not a great challenge. Then we had to—and some of them had a fundamental impact. For instance, completely eliminating government discretion in resource allocation, going by the market mechanism. Now, this has eliminated corruption altogether. These were quite obvious decisions which I thought were coming.

Then there were decisions which have—certainly which required a lot of political deft handling, even political courage. And I would say—I would put three very important decisions in that category: the de-monetization, the GST, and now completely with each decision we are now increasing the scope of the unique identity number, the Aadhaar as we call it. And I think there is always questions whether there was a political cost involved in this. I think you needed a government with these kind of numbers and leadership in order to implement them.

If I look ahead, I see one very big challenge, and that’s our—going to be our top priority at the moment: I think the resolution of the NPAs in the banking sector, which directly gets linked to private-sector investment. And I think—I do see, as a combined impact of the GST and the de-monetization and several other steps we’ve taken, revenues in India are increasing quite rapidly. In fact, in the last three years, despite global slowdown, India has consistently seen 15 to 18 percent annual revenue growth, which is quite significant. And therefore, I do see over the next several years this revenue growth, particularly as the result of GST and the anti-evasion measures we’ve been taking, rapidly increasing.

And I would say, along with the resolution of these NPAs, how do we channelize the expenditure where the two top priorities in the expenditure are going to be, one, infrastructure—there’s a huge infrastructure creation program which is on; it’s the largest-ever expenditures that we are making in that sector—and I think, secondly, spending on rural India, because future growth is going to come from there. That’s where poverty is. That’s where inequalities are. And I think to continue to retain the popular support both to the government as also to this entire economic program, it is essential for us that the benefits of this growth and additional revenue are translated into greater expenditure into rural India. And that’s something which we have been doing.

KAYE: You sort of mentioned briefly the issues within the banking system and sort of the obvious ties to the investment cycle. I mean, if many people looked at India’s economy today, one of the observation(s) would be there hasn’t yet been that turn in the business investment cycle. True globally as well, which we can—which we could talk about. But in an India context, do you see the issues within the banking system as being the core issue behind that?

JAITLEY: I think it’s an important issue.

KAYE: What’s your diagnosis? And what’s your view about what to do about it?

JAITLEY: You see, I quite—I certainly think this is an important issue. You see, it’s also important to analyze what happened to and what’s the magnitude of this problem. You see, Indian banks, particularly public-sector banks, have conventionally lent for both infrastructure and industry, rather than just retail lending. And they’ve been a part of the growth story itself.

Now, during the boom period and thereafter, there was lending in several sectors. And because of the global downturn and those sectors being impacted, you found an adverse impact on some of those sectors. What’s the magnitude of the problem? The magnitude is that essentially it is about 20 to 30 big accounts. It’s not—it’s not something—a problem spread over hundreds of thousands of accounts. And therefore, if the banking system is to resolve these 20 to 30, which is not an impossibility, therefore we’ve tried various measures.

There’s one constraint which we have. It’s not a constraint on the leadership quality in the bank, but it’s a constraint on the environment in which the bank bureaucracy functions. I have seen that the banks are not bold enough to take their decisions because Indian law—our anti-corruption law is still a pre-liberalization law. It dates back to 1988. Liberalization started in 1991. And one of the fundamental flaws in that law has been that erroneous decision-making, which may be taking haircuts in order to settle, gets identified as an act of corruption. So you find that the banking bureaucracy is a little defensive in trying to resolve this.

So about two years ago I had first flagged this issue in public discourse, and I’m glad as a result of it the political discourse went on. And now the parliamentary committee has unanimously recommended that this be corrected. And this is at the final stage now. The recommendation of a larger consensus parliamentary committee has come. Hopefully, in the next session we will take this up. The bank bureaucracy is going to be—or, for that matter, any bureaucracy or a public servant dealing with economic decisions, then they can decide on commercial considerations rather than be constrained as to the future consequences of their action itself. So the decision between a possible commercial decision being treated as an act of corruption, I think that the law has to eliminate that possibility.

The reserve bank itself has come out with several guidelines and schemes under which the banks have been empowered. We have an insolvency law in place now. And there is some other action which we have in the pipeline now in order to resolve this.

Essentially, it would also mean that the defaulting companies will have to find partners, will have to go in for either change of managements, they’ll have to get investors. And some precipitative action will be taken. This may also involve some haircuts by the banks, which would be a bona fide commercial consideration. And it’s not impossible for a large economy like India to resolve 20 to 30 accounts.

So it’s not an insurmountable problem. I think it’s just persisted too long, but it’s certainly adversely impacting us.

So if you were to ask me, there are a series of reforms/changes which we’ve successfully made. This is one hurdle which we are now required to jump, and that’s where our current focus is.

KAYE: You also, obviously, talk about de-monetization. It was sort of much-debated and -discussed last fall. What sort of is your view of kind of what’s the final scorecard? How do you think about it?

JAITLEY: You see, the final scorecard will take a long time because, unlike in any other developed economy where you think in terms of replacement of currency, in the Indian context, besides issues like terror funding and counterfeit currency, I think one big reason was tax noncompliance. Now, I said this earlier in India, so I don’t mind repeating this: the Indian normal was that a lot of informal businesses—you can leave the large companies out of it—the others would maintain two sets of accounts, the declared ones and the—and the undeclared ones. It was impossible to buy real estate in India without giving some money which is unaccounted and some money which is—this was the normal, and this was never considered very improper. That was almost a way of life. And for 70 years we’ve existed with this whole system where paper currency was the rule. For instance, bulk of political funding in India, world’s largest democracy, was also through this unaccounted mechanism itself.

Now, you need to go cracking—you could not allow this normal to go on indefinitely. And I think the prime minister did well. It required a lot of courage. This was one area which people have conventionally ignored, and we had an ostrich-like approach to the problem. It didn’t exist.

And I think the impact of this action is that the entire currency, 86 percent of it landed up in the banks. The anonymity around the ownership of the currency disappeared. In transaction after transaction where cash was or substantial cash was the rule, that component is either disappearing or has rapidly come down. Keeping cash is now considered a risk proposition, because there are several other curbs. The GST will make the generation of cash in businesses quite difficult. We have put some expenditure curbs also, that beyond a certain amount you can’t pay in—you can’t transact in cash. And this is now going to result in greater digitization of the economy, more transactions through the banking system, higher tax collections, more revenue, hopefully more money that the banks—low-cost deposits for the banks, which improves their own ability to lend. And I think it will take a long time before people realize the final trust, but a greater emphasis towards digitization.

And squeezing of the integration of the informal with the formal economy. I think this is the—this is—if we aspire to be—to move from a developing into a developed economy, if we are one of the fastest-growing major economies in the world, then this is the least step which was required to be taken. So far, India had ignored it in 70 years. And it required a lot of political courage to take because it was a risky step, and I am glad it found a lot of popular support.

KAYE: Maybe to turn to a few sectors that people would have some interest in. Telecom is certainly one where we’ve seen significant investment, as well as some stresses and strains. A lot happening in the space—combinations, liquidations. Clearly, as part of Digital India, a vibrant, healthy, stable mobile sector is critical. How do you see what’s happened? What, if any, issues do you sort of see? And what, if any, role for government is there in it?

JAITLEY: You see, I think telecom is the big success story. If we were to start marketing the change of life which has come about post-liberalization and deregulating the economy, and we were to talk of several success stories, telecom certainly would be one of the top success stories in India. And therefore, it’s extremely important for India to preserve and strengthen this success story.

You will find in the—in the free marketplace various kinds of competitive and anticompetitive practices taking place. And I think the regulatory mechanism is strong enough. At times it may take some time in reactions. But I think the role of the regulatory mechanism, and also the government, is to make sure that there is a fair competition and a huge scope for growth.

KAYE: I’m curious, with the Vodafone merger, there I guess, despite the sector being 100 percent open to FDI, won’t be a foreign telecom operator in India. What do you think? Does that—how do you think about that? Just the competitive dynamic is harder for them? What do you make of it? Anything?

JAITLEY: I think there is—in the telecom sector, there is space for multiple players, and you have to have space. At the same time, mergers and consolidations will take place. You can’t have a sector where you have too many multiple players, but you certainly have a space for four or five players. And that’s where the Indian market seems to be converging into.

KAYE: Energy is another sort of interesting sector. Always been a little bit of, in some ways, India’s Achilles heel, in some ways now in the unusual spot of, to some degree, its own success creating the problem—i.e., India’s now become the largest sort of on the margin incremental source of energy demand in the world. Conventional hydrocarbons, many would argue, still remains an unexploited sector opportunity in India. Still rather coal-dependent and lots of issues around the power space. Clearly a lot of activity around alternatives, but lack of clarity as to whether ultimately it can truly meet India’s demands—energy demands at scale. If the growth we’ve talked about occurs over the next decade or two, it’s transformational in terms of—or, it’s quite sizable in terms of what that implies for India’s energy needs. How do you think about that space?

JAITLEY: You see, I think our conventional problem was something different. It was inadequate energy. And suddenly now, you have capacities which have grown. You have surplus. In fact, it’s a surplus at a time where there’s a—there was a global slowdown. And the demand had to increase for the companies to do well. At the same times, we were undertaking a series of reforms. That also—I think the reforms were well-intended. Some of them would have disrupted what was the irregular market in that sense. For instance, the manner of the coal block allocations and the capacities being built up around that, and the supreme court intervening and saying this is arbitrary, we cancel it. And then, the government switching over the policy and saying: How there will be a more nondiscriminatory manner of allocation.

So I think the sector is growing. It has a growth potential to keep pace with India’s requirement. As of today, their ability to deliver more power—we have surplus, so. At the same time, I think we were also started exploiting the alternative, because we are conscious of environmental consideration, and we are one of the largest programs of solar and other alternatives which has been planned. And experience has shown that the costs have been radically coming down, making it more and more competitive now.

KAYE: You know, defense is a relatively new portfolio for you—as if there wasn’t enough on your plate. (Laughter.) That sector is one that especially after the Indian civil nuclear deal was seen as one of great promise, especially for U.S.-India collaboration. Some would argue it hasn’t quite lived up to that expectation. How do you think about that as a—that industry as an opportunity for—

JAITLEY: I think there’s a great opportunity. The great opportunity being that defense—the actual results to appear on the ground will always take more time. And it will take more time for the reason that our first decision was to open out global investment in defense. We did it in stages. And we, merely by opening out you don’t get an industry established in India, because this changed emphasis is to—from just being a buyer globally, to make sure that we also have domestic manufacture in India. Now, that wouldn’t happen because government is the sole purchaser. So unless an industry has a reasonable assurance of a future prospect of orders, he’s not going to establish an industry and make a plant in India.

So I think we’ve opened out. The second major step has taken place that a large number of international majors have now started having tie ups with large Indian companies. Many of them have set up manufacturing facilities where there are some orders. And now we’ve been working on a policy that is tailored in the direction of ensuring that there is a reasonable stability of those who set up establishments in India of their getting some orders. But then we have to be very careful. We have to balance it with the requirements of fairness.

You have to go through a market mechanism, select who the people are, then get the right pricing, because we don’t want to end up in a situation where arbitrary fixation of pricing has had—you see, India—Indian economy, though it suffered and then improved for the better, our experience of spectrum, our experience of coal block allocations, other resources, where arbitrary fixation of pricing had taken place, I think even the investors suffered. And therefore, we have to, learning from those experiences in defense, how do we balance the factor of their setting up establishments in India, having a reasonable assurance of getting the manufacturing orders of India—it’s only then that the plants will come up—at the same time, ensuring that there is fair play in both the selection, in the orders, and in the price fixation. But that’s a very difficult balance to come out with.

Currently, we are trying to work out a policy on that. And the kind of response we’ve been getting from major manufacturers, including the U.S. companies, I think has been extremely encouraging. I do see India transforming from a mere buyer also into a manufacturer, where large international majors, with the Indian companies, will set up establishments in India.

KAYE: Turning a little bit to kind of—or continuing, maybe, with the theme of kind of U.S.-India, clearly U.S. has had an increased sort of protectionist sentiment. And while issues like H-1B may not be aimed at India, it clearly has meaningful impact at it. And more broadly, with sort of the—with the demise of TPP—more broadly, how do you think of India’s approach to trade? And kind of what points of view you might have about other regional initiatives—more Asia-based initiatives, like RECP, that may—

JAITLEY: You see three—several issues—

KAYE: Both sides—both the kind of U.S.-India side—

JAITLEY: Several issues rolled into one. I think India’s gone through an experience of a highly-protected economy. And then we’ve transformed with domestic liberalization and then gradually gone in for a global integration. We’ve seen the advantages of opening up, form very moderate 2 to 3 percent growth levels to moving to a higher growth rate, it happened only when we adopted the—and this has not only happened to India. It’s happened to almost all emerging market economies.

On Indo-U.S., I think we’ve had over the last two, two and a half decades, a great relationship between the two countries which has built up. It’s not merely companies investing in each other. The government there has been a very large interaction at the highest level. And not too many unresolved issues. It’s a mature relationship, which has defied elections in India. It’s defied elections in the U.S. itself. And I’m sure that, even under the new administration, that relationship is going to continue, and continue to improve.

What we see in the rest of the world, you see, depends on the politics of those countries and what we think is most appropriate. But I don’t see the strain lasting beyond the initial desire, for the reason that for economies to say that my companies must buy costlier material or my companies must hire costlier services, even when better alternatives are available eventually is not going to help the economy itself. And therefore, the very force of the economy and the market economy itself, well, is capable of pulling in the other direction.

KAYE: Maybe last question and then I’ll turn to our members for some questions. Prime Minister Modi is one of those transformational leaders—charismatic, changing the Indian political dynamic, strong, forceful sort of economic agenda. You know the—you know him well, have been collaborators in this great transformation. Give us all a sense of him as an individual. What is it that we maybe least appreciate or least understand about him?

JAITLEY: I think, if you ask me his—he has a great strength to stand by his conviction. If you look back at the last seven decades of India’s political history after independence, there was a stage where, I think, there was a huge personal campaign against him, and he had the courage to just stand by his own views, and eventually get over the heads of all forms of intermediaries in communication and reach the people directly. And therefore, he earned this place for himself. Having come up that way, I think, needless to say, extremely hardworking, goes into details—has a great eye for details, learns with almost every day.

And I think he’s struck, as far as the economy is concerned, the right note. The economy must grow. And all steps required for the economy to grow he is willing to take, irrespective of the cost involved. He has the courage to take those decisions.

At the same time, he blends it with a desire that the benefits of the growth must also endure to the weaker sections of the society. And I think this is a very powerful economic-political combination, in which most of the moves that he’s taken will enable the economy to grow and the benefits to pass on, and including—so the conventional criticism that only a few benefit from the reform process, I think he’s been able to balance that effectively.

KAYE: At this point we’d like to ask our members to maybe join the conversation. Just a reminder for everybody, this meeting is on the record. If you would, please wait for the microphone. Talk directly into it so we can hear your question. If you would, then, just stand, state your name and affiliation. And, if you would, kind of limit yourself to one question so we can include as many people as possible.

Why don’t we start right here?

Q: William Haseltine, ACCESS Health International.

To follow up on your last point, what are the measures, that you discussed briefly, which will strengthen the rural economy that the Indian government is now planning?

JAITLEY: You see, the—in terms of the real economy, if you look at the record of the last few years, I think opening up the economy was an important step. Easing the system of doing business in India, making it much easier and decision-making faster, was an important step. Eliminating all forms of corruption and other collateral problems in decision-making—I think it’s universally recognized that India’s become far cleaner than what it used to be. Eliminating governmental discretions was an important step. We’ve strengthened the states through—where a lot of expenditure takes place—through the revised architecture, but of the financial relationship between the center and the states. And trying to do business is easier, exit has become much easier.

And I think the taxation rationalization, eventually trying to bring the direct taxes down. The GST itself is going to be—it’s almost a mother of all reforms. It’s going to be very large in its impact, and hopefully we’ll be able to implement it over the next couple of months. The 1st of July is the tentative date.

And I think these are all steps which have restored the credibility of the Indian economy itself. And the direction of expenditure—and we witnessed this, for instance, in the recent regional elections. You had some homes in every village which said, well, I’ve got a toilet, everybody’s got a bank account. And therefore, the benefits of this translating to the conventionally more-deprived sections, I think that’s the change which has taken place.

KAYE: In the back.

Q: Thank you. I’m Bill Abrams with Trickle Up. Thank you for your comments correcting growth to the elimination of rural poverty.

My question is, India is doing a lot to open up to foreign investment, but in the NGO sector the opposite seems to be happening through the FCRA and other mechanisms, increasing pressure on NGOs and large foundations. What is the message that the Indian government is sending to the aid community?

JAITLEY: Well, I think the FCRA has a requirement, and the requirement has to be, where you get the funding through a particular mechanism, you have to use the funds that you get for that particular purpose, and you have to file annual returns. Now, data has been released as to the extent of how many organizations didn’t follow that process. And therefore, the fact that you are doing good work as a civil society organization doesn’t give you any immunity to work outside the law. That procedure under the law will still have to be followed because, don’t forget, India has the advantage of a lot of investment in business or in civil society coming in for a good purpose. We have also suffered on account of some forms of funds coming into India for activities which we don’t appreciate.

KAYE: Over here.

Q: John Watts, World Policy—

KAYE: If you could wait for the mic so we can all hear you. Thanks.

Q: John Watts, World Policy Institute.

I wonder, you didn’t mention education, which has been one of the stronger points, I think, in the economy all along. But has—what is the role it’s played? And is there still a hint of cache in the availability of education?

JAITLEY: Well, I think the situation today, in the last two, two-and-a-half decades, is much better than what it conventionally used to be. We could still do better with higher resources, spending more into education. And therefore, I would say over the years we have to target greater expenditure. But the fact that there is now a facility available for state-supported education for those who want to go to school, I think that’s universally now available. Nobody can be deprived of that. The quality needs to improve as far as the government institutions are concerned.

There’s also a very large expansion of quality institutions taking place. I think in the last two to three decades a lot of private-sector investment in that area also has helped. But then I do concede that with more resources in future, this is one area, along with health, where expenditure will have to increase.

KAYE: Just to follow up a little bit, you sort of talked about private-sector investment in education. That sometimes has been politically fraught. How do you—how do you think about the opportunity for private investment in education?

JAITLEY: Well, I think in one sense, when there were limitations on the amount the governments could spend—the central government would spend something, the regional governments would spend on education—therefore, the number of universities which had come up, the schools which had come up—the private sector started supplementing. And over the last two to three decades, that figure has increased.

So, in terms of school education, for instance, the quality has actually improved as far as the private sector is concerned. Government institutions, some of them run by the government, also have done exceedingly well. Some in the rural area still have to pick up, the quality of teachers and so on. And I think surplus capacities have been created even in higher education with private-sector investment. Qualities, in some areas, would be lacking, as happening elsewhere in the world. And I think, ultimately, it’s survival of the fittest. Some of them may close down.

KAYE: Right here in the middle.

Q: Ted Pulling, Centre Island Asset Management.

Minister Jaitley, regarding the NPAs you discussed earlier, can you tell us, what’s the workout program for the state electricity boards? Because I think they are the largest single NPA within—

JAITLEY: You see, the electricity boards—I’m glad you raise this question. The problem was partly political. Electricity boards are run by the state governments. And there has been an impression—in my view, erroneously—that if the state governments distributed electricity at a cost—at a price lesser than the cost, it’ll be a very popular step. And experience has shown that those who did it, they not necessarily win the elections. In fact, one of the states, Rajasthan, where the debt was the highest—so you sold electricity much below the cost—the party which did it got the least number of seats in history. So the two were not related to each other.

Now, we’ve sent a message loud and clear to all state governments, including of my own party, that this kind of politics can’t go on. 2003, we amended the Electricity Act that if you want to subsidize it, please pay it out of your budget. And therefore, we came out two years ago with a scheme, in which the states have been asked to take over the debt of the electricity boards, issue the bonds will which be a part of the state debt itself, so that to that extent the electricity boards—the unsustainable debt goes away. So in the cost of electricity, the interest burden itself comes down, and then gradually the boards increase the cost of electricity and bring it to the—to the market rate, the cost rate itself. Now, some of the states are successfully implementing it. And I’m still keeping my fingers crossed to see what happens over the next two or three years as to whether those boards now become financially sustainable.

Q: But if I could just follow up.

KAYE: Sure.

Q: If the debt is transferred from the bank balance sheet to the bond market, and the banks buy these state bonds, doesn’t the problem persist, but just in a different form?

JAITLEY: No, the electricity boards itself then become financially more sustainable. That is to say, the cost of electricity is the actual which the consumers will have to pay. The state government from its own budget will then have to discharge that debt over a period of 20 years or so.

KAYE: In the back, if you would.

Q: Minister, I’d like to speak about targeted tax. India seems to be the last large country to do a VAT. The U.S. may be next. So maybe do you have any advice about other countries who may go down the route of doing a VAT?

JAITLEY: No, I didn’t get that. Would you just repeat it?

Q: Do you have any advice for countries who are sitting to do a VAT? Any obstacles you encountered? And how did you convince stakeholders to do a VAT?

KAYE: He’s asking about VAT, which is, I guess we could argue, a version of GST. And what lessons have been learned in India in conjunction with this implementation that might be relevant to the U.S. maybe.

JAITLEY: OK. You see, I think India would be—the whole structure was different. Because even we designed our constitution in order to give financial power, decentralized, to the regional governments. We distributed the tax power between the center and the states. And therefore, even in the field of indirect taxation, tax on manufacture at the center will charge, tax on services the center will charge, tax on sales, on consumption, on purchases, on entertainment, on luxury, the states will charge. And therefore, there’s multiple taxes. I think—and there was a regional imbalance. Some states would charge more, some states would charge less. So we were not a unified market.

Each assesse had to face multiple taxation authorities. That led not only to inconvenience, that led to corruption also. And therefore, I think the Indian experience was entirely different, where both of the center and the states then got together and said we both surrender our sovereignty in taxation matters. We don’t surrender to each other, but we pull it together and create a new federal institution. That’s the Indian experience. Now, it’ll depend on the kind of legal and constitutional structures in other jurisdictions whether that happens.

So under the GST today, the center has surrounded its sovereignty in taxation matters to the GST council. The states have surrendered it. So it’s pooled sovereignty between the two. A new federal institution has come up where the states have a two-thirds vote and the center has a one-third vote. And they jointly decide how much tax and how it is to be administered, and how is the tax to be shared then between the center and the states. I think that’s something unique to the Indian constitutional order which has happened.

If you asked me 20 years ago, this was unthinkable. The fact is today, it’s happened in the reality. And therefore, each assesse will now have to face only one assessing authority. Ninety-five percent of them, their assessments will be online. So the whole taxation system really no longer becomes a source of harassment to businesses itself.

KAYE: I think I might make—beyond the tax reform elements of it, I think the point you made is important to emphasize, which is that the rigidities that it had created in the flow of commerce within the country, the movement of goods across borders created—you know, that opportunity is meaningful beyond even just the tax reform now.

JAITLEY: I think—I think—so you have a very large—17 percent of the global population. That’s the consumers. And there’s one single market created amongst them, the same rate of taxation. And I think what’s the second aspect, which is more important, along with the movement of—free flow of commodities, would be that a more efficient system will bring a higher compliance level.

KAYE: In the middle here.

Q: Sandeep Kishore, the Arnhold Institute for Global Health.

India in many ways has been known as the pharmacy of the world, starting with HIV/AIDS. And the generic drug industry has been central to that success. Now, India’s home to the most number of diabetic patients in the world. And how do you see the changing health realities in India and sub-Saharan Africa, and some of the trade stipulations changing and impacting the generic drug industry in India?

JAITLEY: Well, I think two factors, which you must be conscious of. I think on pharmaceuticals, we’ve done as well as far as the generics are concerned. And we’ve developed a very strong generics industry. We need to equally keep pace with our R&D also. Generics will never be a substitute for original research. And therefore, compared to the rest of the world, availability of medicines at reasonable cost in India, I think that’s one of the strengths of our health care system.

The problem: I think the health care institutions of India—some of them of very good quality—have suddenly improved in the last decade or two. But they are still concentrated around tier one and tier two cities. And therefore, if we went to a tier one or tier two city in any part of the country, you will find 10 good quality health care institutions. The geographical spread into rural India, a distance away from those cities, is not taking place. And therefore, I think that’s the area of challenge that the Indian health care system still has.

KAYE: Right here.

Q: Thank you, Minister. Nancy Yao Massbach, Museum of Chinese in America and the India Fund.

With so many domestic priorities—GST, de-monetization—but so many tectonic shifts in the global landscape, I’m wondering what role can India play to maintain peace and stability in the region, and if you can offer any specifics? And also, how are you watching the U.S., as far as things unfolding here after 100 days with Trump?

JAITLEY: Well, I think as far as the region is concerned, if you look at Southeast Asia, and South Asia in particular, I think India’s relationship with all our smaller neighbors has significantly improved. And today, whether it’s Bangladesh, Sri Lanka, Myanmar, we have an excellent relationship. We have been cooperating with them. We have been a part of their economic growth stories and so on. And I think we’ve made a conscious effort in that direction.

Obviously, our problem comes from our western neighbor. And it’s clear what’s happening, that tensions do persist. And we do expect the international community, and particularly because most acts of terrorism across the world will have some footprint on the other as far as their neighbor is concerned. And if you’ve seen all our efforts over the last few years to normalize the relationship have—we’ve seen a reaction. The prime minister went there, and it was immediately followed up by an attack in Pathankot Air Base in India, then an attack on our Uri military camp. And now we have this unprovoked gesture of a military court sentencing an India to death without—through a kangaroo court process. And I think that doesn’t help the cause of peace in the region at all.

KAYE: Last question.

Q: Nick Bratt with Lazard. Thank you for your comments.

Follow-up question: Could you describe a little bit the nature of the relationship with China, and also provide us the background to some of the border disputes?

JAITLEY: Well, India has, in terms of several areas, a very—a developing relationship with China. Our economic relationship has been strengthened significantly. And there’s a lot of trade between India and China which takes place. Now, that’s one area of strength which has picked up. The border is still an unsettled border. And therefore in 2003, our prime minister—he had gone to China. I had accompanied him. I was a part of the government at that time. And we had a mechanism set up in order to resolve the—and define the border itself. And since 2003, that mechanism has not been able to come out with an answer. We believe that it’s important the border get settled, because that’s in the interests of regional peace. And obviously, you’ll have occasionally some issues arising because of that unsettled situation.

KAYE: So, one last one, in the back.

Q: Thanks very much, Minister. Tony with AIG.

I’m just looking—interested in your views on the insurance sector in general, and maybe our comments or your thoughts on how far we’ve come in the last few years, with the increase in the FDI cap, and current policies and proposals, including, perhaps, the mandatory IPO of insurance companies, which I understand is now frozen, and just where you see the sector going in the future, in the next few years. Thanks.

JAITLEY: Well, I think—you see, we—the insurance sector liberalization had been held up for a very long time. And one of the first major decisions which our government took was that we were able to successfully pilot that change through parliament. Now, there’s a fundamental change, that whereas all other FDI decisions can be taken by an executive decision and won’t ever go through parliament, insurance because of the act of parliament the equity increase—the FDI increases had to go through parliament. And therefore, the parliament had been blocking it for a number of years. But we were able to successfully monitor it.

We are deeply committed to the liberalization of the insurance sector, because we do believe that India’s still far away from becoming an insured society. And therefore, we are deeply interested in the expansion of the sector itself. And that’s why we’ve allowed all our—in addition to our state sector insurance companies, the private sector wants to come up in large numbers. And I think, as I said, individual issues of IPOs, et cetera, can always be resolved, but our broad commitment to expand the sector is very clear.

KAYE: I want to thank everybody for joining us this morning. It’s been an illuminating conversation about India. A special thanks to Minister Jaitley for taking the time to join us for this. Your service to your country is beyond impressive and vital for fulfilling the potential we all know exits in India. So thank you so much for joining us. Thank you for joining. (Applause.)


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