Mood improving, new investments will happen: NITI's Debroy

"A lot of the negativity in the nature of sentiments particularly in taxation that you notice they tend to be transient meaning the moment something is clarified suddenly investments turn bullish," he says.

"But yes, I say in a transient kind of framework both of these retrospective part and MAT clarification which hopefully will now happen now that there is a panel these will be sorted out and it will allay some of the apprehensions," he says.

Below is verbatim transcript of Bibek Debroy's interview on CNBC-TV18.

Ridham: My assessment is I will just lay down my thought here before I go to you is growth in the country, the economy is about to pick up. A lot of work has been done on inflation, on reviving stalled projects. In fact more recently we are seeing some recovery in capital expenditure (capex), some recovery in M1 growth. What would your assessment be of the economy? Do you agree with that assessment or would you have a slightly different take on this?

A: I agree with the assessment certainly but I disagree with the statement that was made before that because media often gets things wrong including the institutional affiliation of people. I am no longer with the Centre of Policy Research, I am at Niti Aayog. The reason I am flagging that is that these high expectations they were created by media because the government that came to power is the government in Delhi. Much of the action happens at the level of state governments, much of the action requires legislative changes. I don’t think anyone in the government claims that in 365 days we are going to deliver everything.

But coming back to your point if one is going to talk about specific Gross Domestic Product (GDP) numbers I still find it a little bit more comfortable to talk with the old GDP numbers because they are a bit more robust than the new series. On the old series we are talking about a GDP growth rate of something like 6.5 percent this year and no one expected that it would go up to eight percent. That is going to be an incremental process and I entirely agree with your assessment that what happened so far is an unclogging of some investment project. Do we yet have clear robust evidence that new investments are happening, probably not, but there is every sign that sentiments were turning favourable and that new investments are going to happen.

Latha: Would you say that the government perhaps has put in the building blocks, for instance Jan Dhan and Aadhaar and the Mobile. Do you think that this piece is enough to bring a large number of people into the economy? Would you count that as one of the enduring contributions of the first one year?

A: As I said I need to point out factually inaccuracies whether they concern the government or whether they concern me as an individual. Now so far as this government is concerned much of the action was supposed to be executive because the legislative process is a legislative process and we cannot do away with the legislative process and no one in his right mind or her right mind should have expected that overnight suddenly we would reform the land legislation or the labour legislation.

Coming back to the executive part, yes indeed. One important element which is of coming together because it is not yet complete. It is just that the building block which is what the economic survey referred to JAM namely the Jan Dhan Yojana, Aadhaar database the M of course for Mobile in economic survey but in addition the beneficiary database. Now do realise that that beneficiary database is contingent on the state governments completing the surveys for rural sector which are long overdue.

Today what has happened is if you leave out things like pensions and scholarships the beneficiary database has begun to be integrated primarily for Liquefied Petroleum Gas (LPG) but those are early days, but yes this is a significant part, yet another significant part is the urbanisation bit. So those two on the executive domain I would say are the single most important elements plus there is a third one which I want to flag which is the devolution of funds that is happening to the state governments.

Sonia: One of the things that has disgruntled the investors in the last couple of months is the government not being able to simplify the tax rules whether it is with respect to the retrospective taxation on FIIs etc. Do you think that this government has missed the opportunity to perhaps undo the legacy of tax terrorism that the previous government left or has the government done enough to allay those concerns?

A: There are sort of three kinds of responses I have to that question. The first is that if one is going to reduce the compliance costs of taxation of whatever variety I don’t think you can really do that until you completely eliminate the exemptions and eliminate the discretion. This is both on the direct side and as well as the indirect side and that elimination of exemptions through the Goods and Services Tax (GST) eventually and through the DTC eventually will take some time.

So far as some taxation issues that you have mentioned are concerned yes, the retrospective part was an irritant. Yes, the Minimum Alternate Tax (MAT) issue was a bit of an irritant but hopefully these are going to be sorted out.

The third point that I would like to make is a lot of the negativity in the nature of sentiments particularly in taxation that you notice they tend to be transient meaning the moment something is clarified suddenly investments turn bullish but yes, I say in a transient kind of framework both of these retrospective part and MAT clarification which hopefully will now happen now that there is a panel these will be sorted out and it will allay some of the apprehensions.

Ridham: I am sensing over the past four or five months or maybe six months greater engagement between the centre and the states and you made the point on the states earlier and of course the fact that more devolution helps and this is a question pertaining to your membership of the Niti Aayog and how do you see this because from what we understood on the creation of Niti Aayog it is really about engaging the state and the centre together in developing India. So, do you think that we are getting there and could you shed some light on these developments?

A: Yes sure, but again one should not expect it to happen instantaneously and overnight and one of Niti Aayog’s mandate – one of the items on the mandate is that of an intermediary between the Union Government and the states. The fundamental question I would like to pose in the following fashion that after all part of the government is about delivering public goods and services and those public goods and services typically are not delivered by the Union Government in Delhi, they are delivered by the state governments, sometimes they are delivered by the local bodies.

Over the years we have had a plethora of schemes, sometimes Union Government, some state government and as you know perfectly well that there are some group of Chief Ministers which have been set up to review all of those schemes. There is another group of Chief Ministers to examine skills, to examine Swachh Bharat mission. So yes, the desired devolution is happening and what eventually is going to happen is one rationalisation of these schemes takes place then it is our job partly to monitor the implementation of these schemes and to see whether they lead to tangibles improvements and outcomes.

One additional thought I would like to mention is quite often a question is raised and that is a valid question to raise that now that some of the funds that are going to the states is in the nature of untied funds what is the guarantee that the state is necessarily going to devolve it downwards to the level of local bodies or the state is going to use it for productive purposes within courts. The only answer to that is eventually we have to live with the fact that the states are different and different states will react differently.

Ridham: There is one another matter that concerns me actually, if I look at the last 12 months there are several areas in which the government has done a stupendous job. I cited inflation, clearing stalled projects. there is one area where we have seen probably less than average improvement and that is concerning the state owned banks and this matter actually directly deals with the central government, they have been hesitant to recap, the finance ministry’s estimates for recapitalisation are of the order of USD 40 billion but cumulatively we have got less than USD 2.5 billion. We have also seen there are lot of SOE banks are without heads at running their banks. Do you think that this presents a risk going forward or do you think that we should see a greater pace of activity in this area in the next few months?

A: Again I have two kinds of responses to that. One response is an important response but it doesn’t follow your question. One, we as a country need to grapple with a problem that in the post reform era we thought there was no role for development finance institutions and that the banks would therefore perform that role. But many of these projects that we are talking about particularly in the infrastructure sector they have long duration period and banks are not equipped to handle that kind of lending and remember that most of the infrastructure projects are actually financed today not in the form of equity but in the form of debt, but let me sort of park that thought because that is a thought, an issue that we are going to be plagued with for some time.

So far as the banks are concerned I suspect, I can’t speak on the behalf of the finance ministry but I suspect the issue really was that you needed to have credible deficit numbers and the recapitalisation that would be required would have been a substantial amount. What I think has happened and correct me if I am wrong on that is some of the lending has been sort of rescheduled so that particularly public sector banks, most of this is public sector banks. So, the public sector banks today perhaps have lower Non Performing Assets (NPA) than they had earlier, but I accept the point that we are making is that the banks are in somewhat bad shape.

For more watch full interview..

Ridham: My assessment is I will just lay down my thought here before I go to you is growth in the country, the economy is about to pick up. A lot of work has been done on inflation, on reviving stalled projects. In fact more recently we are seeing some recovery in capital expenditure (capex), some recovery in M1 growth. What would your assessment be of the economy? Do you agree with that assessment or would you have a slightly different take on this?

A: I agree with the assessment certainly but I disagree with the statement that was made before that because media often gets things wrong including the institutional affiliation of people. I am no longer with the Centre of Policy Research, I am at Niti Aayog. The reason I am flagging that is that these high expectations they were created by media because the government that came to power is the government in Delhi. Much of the action happens at the level of state governments, much of the action requires legislative changes. I don’t think anyone in the government claims that in 365 days we are going to deliver everything.

But coming back to your point if one is going to talk about specific Gross Domestic Product (GDP) numbers I still find it a little bit more comfortable to talk with the old GDP numbers because they are a bit more robust than the new series. On the old series we are talking about a GDP growth rate of something like 6.5 percent this year and no one expected that it would go up to eight percent. That is going to be an incremental process and I entirely agree with your assessment that what happened so far is an unclogging of some investment project. Do we yet have clear robust evidence that new investments are happening, probably not, but there is every sign that sentiments were turning favourable and that new investments are going to happen.

Latha: Would you say that the government perhaps has put in the building blocks, for instance Jan Dhan and Aadhaar and the Mobile. Do you think that this piece is enough to bring a large number of people into the economy? Would you count that as one of the enduring contributions of the first one year?

A: As I said I need to point out factually inaccuracies whether they concern the government or whether they concern me as an individual. Now so far as this government is concerned much of the action was supposed to be executive because the legislative process is a legislative process and we cannot do away with the legislative process and no one in his right mind or her right mind should have expected that overnight suddenly we would reform the land legislation or the labour legislation.

Coming back to the executive part, yes indeed. One important element which is of coming together because it is not yet complete. It is just that the building block which is what the economic survey referred to JAM namely the Jan Dhan Yojana, Aadhaar database the M of course for Mobile in economic survey but in addition the beneficiary database. Now do realise that that beneficiary database is contingent on the state governments completing the surveys for rural sector which are long overdue.

Today what has happened is if you leave out things like pensions and scholarships the beneficiary database has begun to be integrated primarily for Liquefied Petroleum Gas (LPG) but those are early days, but yes this is a significant part, yet another significant part is the urbanisation bit. So those two on the executive domain I would say are the single most important elements plus there is a third one which I want to flag which is the devolution of funds that is happening to the state governments.

Sonia: One of the things that has disgruntled the investors in the last couple of months is the government not being able to simplify the tax rules whether it is with respect to the retrospective taxation on FIIs etc. Do you think that this government has missed the opportunity to perhaps undo the legacy of tax terrorism that the previous government left or has the government done enough to allay those concerns?

A: There are sort of three kinds of responses I have to that question. The first is that if one is going to reduce the compliance costs of taxation of whatever variety I don’t think you can really do that until you completely eliminate the exemptions and eliminate the discretion. This is both on the direct side and as well as the indirect side and that elimination of exemptions through the Goods and Services Tax (GST) eventually and through the DTC eventually will take some time.

So far as some taxation issues that you have mentioned are concerned yes, the retrospective part was an irritant. Yes, the Minimum Alternate Tax (MAT) issue was a bit of an irritant but hopefully these are going to be sorted out.

The third point that I would like to make is a lot of the negativity in the nature of sentiments particularly in taxation that you notice they tend to be transient meaning the moment something is clarified suddenly investments turn bullish but yes, I say in a transient kind of framework both of these retrospective part and MAT clarification which hopefully will now happen now that there is a panel these will be sorted out and it will allay some of the apprehensions.

Ridham: I am sensing over the past four or five months or maybe six months greater engagement between the centre and the states and you made the point on the states earlier and of course the fact that more devolution helps and this is a question pertaining to your membership of the Niti Aayog and how do you see this because from what we understood on the creation of Niti Aayog it is really about engaging the state and the centre together in developing India. So, do you think that we are getting there and could you shed some light on these developments?

A: Yes sure, but again one should not expect it to happen instantaneously and overnight and one of Niti Aayog’s mandate – one of the items on the mandate is that of an intermediary between the Union Government and the states. The fundamental question I would like to pose in the following fashion that after all part of the government is about delivering public goods and services and those public goods and services typically are not delivered by the Union Government in Delhi, they are delivered by the state governments, sometimes they are delivered by the local bodies.

Over the years we have had a plethora of schemes, sometimes Union Government, some state government and as you know perfectly well that there are some group of Chief Ministers which have been set up to review all of those schemes. There is another group of Chief Ministers to examine skills, to examine Swachh Bharat mission. So yes, the desired devolution is happening and what eventually is going to happen is one rationalisation of these schemes takes place then it is our job partly to monitor the implementation of these schemes and to see whether they lead to tangibles improvements and outcomes.

One additional thought I would like to mention is quite often a question is raised and that is a valid question to raise that now that some of the funds that are going to the states is in the nature of untied funds what is the guarantee that the state is necessarily going to devolve it downwards to the level of local bodies or the state is going to use it for productive purposes within courts. The only answer to that is eventually we have to live with the fact that the states are different and different states will react differently.

Ridham: There is one another matter that concerns me actually, if I look at the last 12 months there are several areas in which the government has done a stupendous job. I cited inflation, clearing stalled projects. there is one area where we have seen probably less than average improvement and that is concerning the state owned banks and this matter actually directly deals with the central government, they have been hesitant to recap, the finance ministry’s estimates for recapitalisation are of the order of USD 40 billion but cumulatively we have got less than USD 2.5 billion. We have also seen there are lot of SOE banks are without heads at running their banks. Do you think that this presents a risk going forward or do you think that we should see a greater pace of activity in this area in the next few months?

A: Again I have two kinds of responses to that. One response is an important response but it doesn’t follow your question. One, we as a country need to grapple with a problem that in the post reform era we thought there was no role for development finance institutions and that the banks would therefore perform that role. But many of these projects that we are talking about particularly in the infrastructure sector they have long duration period and banks are not equipped to handle that kind of lending and remember that most of the infrastructure projects are actually financed today not in the form of equity but in the form of debt, but let me sort of park that thought because that is a thought, an issue that we are going to be plagued with for some time.

So far as the banks are concerned I suspect, I can’t speak on the behalf of the finance ministry but I suspect the issue really was that you needed to have credible deficit numbers and the recapitalisation that would be required would have been a substantial amount. What I think has happened and correct me if I am wrong on that is some of the lending has been sort of rescheduled so that particularly public sector banks, most of this is public sector banks. So, the public sector banks today perhaps have lower Non Performing Assets (NPA) than they had earlier, but I accept the point that we are making is that the banks are in somewhat bad shape.