Finance Minister Arun Jaitley is confident that State Bank of India stands to gain a lot under the government's public sector consolidation framework. SBI will be a global player, controlling 25 percent of the Indian banking industry, after the merger with its associate and subsidiary units, Jaitley said in an exclusive interview to CNBC-TV18.In March 2016, SBI had announced its merger with its five associate or subsidiary banks and Bharatiya Mahila Bank (BMB) after the government gave its green light for the merger. On Friday in a post-earnings conference, SBI chief Arundhati Bhattacharya said: “We are quite ready and as soon as the government notifies the final order, we will be ready to kick it off. We were planning to do it by March but again because of demonetisaton it will probably mean a deferment of a quarter.” (Read here)There was a need to crack the original Indian normal and government achieved it through demonetisation, said Finance Minister Arun Jaitley in an exclusive interview to CNBC-TV18. Batting for a more formalised digital economy Jaitley said, a cash economy encourages tax evasion and a shadow economy.According to Finance Minister growth is always an underlying consideration of RBI and post demonetisation, banks have cut rates significantly. Speaking on RBI's decision to remain status quo on its interest rate, Jaitley said a finance minister would always love to see a rate cut. He added there is no concern about inflation at present.Responding to a question about Index of Industrial Production (IIP) numbers for December turning out to be negative Jaitley responded that November and December cannot be a representative for the whole year.December was much more challenging as old currency notes were banished completely in December as opposed to November when Rs 500 and Rs 1,000 notes could still be used for essential services, he said. December witnessed initial stages of remonetisation and saw an integration taking place between informal and formal economies, said the Finance Minister adding that he expects to see greater expansion of formal economy post-December.On the issue of Fiscal Responsibility and Budget Management (FRBM), Jaitley said there is no need for a contrarian approach towards fiscal deficit. He said fiscal deficit is slowly moving downwards and that the last 2-3 years have been very good as far as fiscal deficit is concerned. He said the quality of fiscal deficit is very good at present. He said FRBM report is being examined by the government and it would be inappropriate to rely on the report as the government has still not accepted it. He said Goods and Services Tax (GST) is a structural reform and the economy will achieve a fiscal target of 3.2 percent after taking GST as a factor.According to Jaitley asset reconstruction companies (ARCs) are coming up and they are only the first step towards public asset rehabilitation. He said there are a lot of vibrant ARCs coming up in the existing framework of ARC.“It is better to suggest realistic Budget estimates and then beat them, rather than cutting expenditure to beat my fiscal figures,” said Jaitley on being asked about the steep target set for disinvestment for FY18. He expects strategic divestments to start with hotel cosSpeaking on the changes made to the personal income tax rates, FM said the idea is to expand the tax base by making entry rates more reasonable. On being enquired about another possible tax rate cut Jaitley said exemption limits cannot be tinkered every year.Jaitley said there was a constitutional compulsion to implement GST before September and that he is certain to be able to resolve all issue regarding GST and be able to roll out GST by July 1.
Below is the transcript of Arun Jaitley’s interview to CNBC-TV18s Sapna Das.
Q: First on the macro side, the Reserve Bank of India’s (RBI’s) monetary policy is just over few days ago. The stance very clearly has changed from accommodative to neutral and they have maintained a status quo on interest rates. Do we understand probably that this is a signal towards the end of the rate cutting cycle?
A: We are always in a dynamic situation and therefore the RBI Monetary Policy Committee meets at regular intervals. It assesses the state of the economy, it has its priorities very well laid down. There is a certain amount of targeting of inflation that they have to do which is now a statutory requirement. Growth always is an underlying consideration and it is the collective wisdom of the Monetary Policy Committee that they come to a particular finding.
Four months ago you had some alteration in the rates, a downward movement. Then post demonetisation the banks took a suo moto action and brought about a very significant downward rate movement themselves. I am sure once the minutes of the Monetary Policy Committee are released in due course, we will come to know what really has been factored in.
However, when you have a responsible body like the RBI which has been entrusted with this responsibility, beyond that we don’t comment on that.
Q: You said two things, a) they also have to take care of the growth concerns and b) it is a dynamic situation. If you look at the banks right now, they are absolutely flushed with deposits post demonetisation drive. So, do you think there is some kind of scope on the lending rates especially on the retail side if not that much on the corporate side?
A: A Finance Minister would always like the lowering of the rates and the logic really being that if you have inflation below 4 percent and broadly within the targeted limits, you would always want more lending, more credit, more economic activity. However that is almost a wish list and that is a permanent wish list. Beyond, that I think once we have entrusted this to the wisdom of a particular group, we must accept their judgement because otherwise various institutions, the government being one, the RBI being another, will then have to co-exist within the domain of their jurisdictions.
Q: One more observation that they have raised is on core inflation being sticky. Is this a concern for you?
A: It is a factor which is monitored and we would like it to remain around that 4 percent figure, certainly within that large range that we have. I personally believe that it would remain in that. There is no current indication of any significant rise in either commodities, there is a self-correcting mechanism even in oil which is taking place. It is hovering around the same figure for the last few weeks. Therefore I don’t see that as a big challenge but then this one area where you always keep your fingers crossed.
Last year you saw the pulses prices went up and then some proper management by the government this year has brought the pulses prices down, which has also contributed to this inflation figure at present.
Q: The Index of Industrial Production (IIP), December numbers have just come out in the negative territory, -0.4 percent. In fact the April December IIP index was below 1 percent. Not a very good indication, any comments on that?
A: November and December can’t be the representative year period of this year. This is the demonetisation period and compared to November, December was more challenging for the reason that in many areas old currency was allowed to operate in November. In December that had gone away and therefore what was available in December was the remonetisation still at its initial stages. At the same time an integration of the informal taking place with formal and the formal had just begun to expand. I think in subsequent months, you probably would see a greater indication of an expansion of a formal economy.
Q: The other issue of Fiscal Responsibility and Budget Management (FRBM), for example in the Budget speech two wonderful paragraphs on fiscal prudence, the fiscal management. The NK Singh panel recommendations broadly you have accepted moving to the debt GDP ratio – macroeconomic benchmark which they have suggested for coming to the fiscal deficit number. A whole new act has been suggested to the government, what is your take on this? Can we expect a complete overhaul of the FRBM mechanism down the line?
A: I don’t think we were expecting an overhaul. Overhaul means that you take a contrarian approach. I don’t think a contrarian approach is necessary except for a period when a stimulus was sort to be given some 6-7 years ago and you had the fiscal deficit moving up to 6.5 percent and then gradually being brought down. I think the last 2-3 years have been fairly good as far as the fiscal deficit is concerned. From 4.6 percent it started moving down and in a period of two and half years we are now looking at 3.2 percent. Hopefully next year it will be 3 percent. Now both the views which have emerged out of the FRBM panel have indicated a downward movement. What the trajectory should be there could be two views but the direction is broadly the same.
I think slowly we are moving downwards. What is more important is now the quality of our fiscal deficit is also good because it is not being achieved by cutting down on expenditure or by postponing certain refunds which used to be done. So, it is also the quality of the fisc that has radically improved.
Q: Still they have suggested a whole new FRBM Act, so can we expect some movement on this?
A: We are examining that report and once we take a full view on that report, we will place our views in the public domain.
Q: So, you will be also making the report public at some point in time?
A: Obviously. These documents are not secret documents, they will have to be made public. However they are made public after the government has considered that.
Q: One more thing that the panel has suggested as part of the new FRBM Act is the constitution of fiscal council which will report to the Finance Minister.
A: These are all matters under consideration and it is only after we have taken a full view, would I be in a position to appropriately comment on them.
Q: They have also suggested certain escape clauses and in your Budget speech also you mentioned that I am refraining from adopting that?
A: This year could well fit into the escape clauses because if there are major structural reforms, the goods and services (GST) is a structural reform, demonetisation was a structural reform, we could fit into it. However since we have not accepted the report as yet, we have not made it public, we have not announced our decision, I didn’t think it is appropriate to rely on it. Therefore I continued the downward trend of reducing fiscal deficit rather than fall to a temptation of just spending and not being concerned with the fiscal deficit itself.
Q: At some point in time could GST also qualify as one of the escape clauses, you just spoke about that?
A: GST certainly is a structural reform, whether we rely on it or not is a separate matter. This year we have factored in 3.2 percent keeping GST in mind. Within the course of the year GST certainly would come but we will still maintain 3.2 percent, that will be our endeavour because it is good for credibility, it is also good economics.
Q: The Acharya panel submitted its report to you before the Budget and they have recommended a status quo as far as the April-March financial year is concerned. Post these recommendations do we understand that probably the matter is closed for now or there could be a rethink?
A: These are all reports which are under consideration, which have not been made public, they eventually would be made public but which is under consideration it may not be proper for me at the consideration stage to comment.
Q: A lot has been spoken about non-performing assets (NPAs), a lot has been spoken about what are the structural changes that there can be. The RBI has made its own observations in terms of NPAs and bank recapitalisation and so on and so forth. A quick question in terms of the public sector banks consolidation framework. If any thought process has gone to it? SBI is the only example so far.
A: SBI is a very big example and therefore what will emerge out of the merger itself will be one big bank which controls 25 percent of India’s banking industry itself. It will be a global player. Therefore, what I announced last year in relation to IDBI, that decision stands. What is the appropriate methodology because of the structure and the kind of assets IDBI holds and what is the method, what is the timeline, these are all matters which is work in progress.
We haven’t made a very significant headway there but it is still very much on the agenda.
Q: My question was that would this still be the right time for the government to pursue this reform because lot of changes are happening?
A: A lot of things have to happen simultaneously. The resolution mechanisms have been put in place whether it is insolvency law or it is the National Company Law Tribunal (NCLT) or it is the Debt Recovery Tribunal (DRT) or it is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act) or for that matter we are now trying through various banking transactions for banks to resolve their problems. I am given to understand in some of the banks the results this time have been slightly better and therefore hopefully if this is the direction of the movement things can look brighter from this period of time. After the asset quality review we know where we stand. We haven’t concealed now anything. So, in order to treat a patient, you must know what the illness is. I think a movement should start in that direction. There are several suggestions which keep coming but we don’t want to kneejerk ourselves into accepting an idea just because it is an idea unless we have realised all factors of it.Q: A smaller question on this front. Last year you made an announcement indicating that some of the public sector companies probably will help in managing the bad assets of those companies.A: That decision stands and that is an option which has been given to some of the banks that if the banks are not finding a private sector buyer then some of the assets of the banks could be transferred itself to, after a takeover of the management which the banks are entitled to do and ask the public sector unit of that particular industry to manage it till they get a buyer.Q: But nothing has come.A: The banks are moving towards resolution in various issues. Some issues have been resolved, some are in the pipeline and therefore, I think that is an additional option which was given to the bank.Q: Also, the CEA, Dr Arvind Subramanian had spoken about the public asset rehabilitation agency (PARA), you have spoken at length on that. Do we understand that practically, possibly because they are already putting in an asset reconstruction company (ARC) framework.A: There is already an ARC framework and now you have a lot of vibrant ARCs which are coming up. Let us try that experiment a little bit. That has just taken its first step. It has to move forward and after we see how the private sector ARCs work, now that we have expanded foreign direct investment (FDI) and so on, attracted a lot of investment, let us add vibrancy to them. If it works, fair enough. If it does not then we will look at the alternative suggestions.Q: So, immediately, there is no rush.A: I do not intend on moving immediately in any direction.Q: Also in terms of disinvestment, a question that is doing rounds is, one of the highest targets set for FY18, Rs 72,500 odd crore.A: This year, in fact, we have achieved the highest ever, but if we close this year at Rs 45,000 crore of disinvestment, nobody ever thought we could disinvest, I always compare it. Mr Vajpayee’s government, five years where disinvestment and privatisation started, in five years it was totally Rs 28,000 crore. This year, in one year, it is Rs 45,000 crore.Q: Talking about FY18 target, one of the opinions that we are getting to hear is that the government has done a big demonetisation drive and a movement towards a tax compliant society, was it really necessarily to have such a steep target as far as disinvestment is concerned?A: It was, because I have, in the last two years demonstrated – and I want to continue with the next year – it is better to suggest realistic Budget estimates and then beat them. I do not want to end the year with cutting expenditure and then trying to beat my fiscal figures and therefore, while we have fixed the figure of revenue growth at 12 percent this year compared to 17 percent in the last two years, I have not factored in what we may get from the RBI or what would be the additional revenue because of the demonetisation impact or even GST for that matter.Q: But GST of course, you have already indicated that is given that small 3.2 percent, that small space has already been created.A: I would rather err on the side of correctness than just cutting expenditure at the end of the year.Q: A corollary correction to that. If you look at most of the CPSE’s right now which may be good options for disinvestment taking it further, they are already down, the government shareholding is already down to around 60-70 percent and most of these companies are also based on those sectors which are not doing extremely well right now.A: Therefore, it may not be the right time to deal with the disinvestment of those shares. Disinvestment does not have to take place merely because it has to take place. There are many alternate options. This year, I have said, railway PSUs will be put into the market. Last year, we put GIC companies, a process which is on. And once this newer areas are put into the market under SEBI listing guidelines, the government equity has to come down to 74. So, we always have a 26 percent headspace in this very valuable organisations.Q: Coming back to the FY17, you have already said Rs 45,000 crore, here again you have kept Rs 5,500 crore for strategic disinvestment also. So far, we have not heard too much on that front. Are you confident in going forward?A: It should start. It should start with sectors which are not very strategic. It should start with the hotel companies which is work in progress. It is important to send the right signal and bring in some form of strategic disinvestment back. I do believe it is a good move and provided you can have the valuations done appropriately.Q: Moving on to the taxation side, after a long number of years, the government has gone ahead and changed tax rates for personal income tax especially, particularly on that front and it has not happened for a long time. Two things from here. A] you have not touched the exemption limit. So is it possibly a signal of how things will be and take tax rates as the indication?A: I will tell you. I have, in my Budget speech, indicated how narrow the tax base is. What is the point of making it narrower. Therefore, the idea is to expand the tax rate base. One of the ways you expand the tax base is by making your entry rates more reasonable. You tempt more people to pay tax. You attract more people to pay tax.Q: Also, now the gap is pretty long in terms of the tax rates, so is there scope for one more new rate probably coming in as people get more tax compliant?A: Whether the six figures can afford it or not or also a consideration that weighs with that. You alter the tax rate and your 3.2 then becomes 3.4 or 3.5, it will not help because it has an impact on the overall fiscal planning.Q: One more question. You have not touched the tax savings basket.A: You cannot do it every year. I increased the exemption limit from Rs 2-2.5 lakh. Now with this Rs 2,500 deduction, it is effectively Rs 3 lakh. I increased ATC by Rs 50,000, I increased the housing rent by Rs 50,000. I increased healthcare, I increased non-practicing allowance (NPA), I increased for transportation allowances last year and therefore, all these factors which can give you exemptions, I have already done a lot in that field. And therefore, effectively, if you declare an income of Rs 50,000-60,000 which is India’s new middle class in that sense, you can end the year virtually paying negligible tax and yet declare all white money.Q: A common criticism that is coming in and you are totally aware about that is in terms of the anti-abuse measures and some of the rationalisation measures also that have been introduced in the Budget of course with the spirit of making the country more tax complaint, but there are also people saying that this is leading to tax terrorism particularly the one regarding the searches and waged where you do not have to give it a rationale, people are saying maybe it will be misused for political vendetta.A: Anything can be used for vendetta. A news channel can also be used for vendetta. Therefore you do not stop the exercise, it is still a necessary part of Indian society. What is the change we have made? You get information about illegal or illicit assets, about money where taxes have not been paid. Once you get that information, a satisfaction is recorded by the appropriate authority that the particular assessee needs to be searched.Now this is in writing. This writing discloses the identity of our informers and how we get information. Now all that the effect of this amendment is that if a court tomorrow asks us to disclose it to them, in a sealed cover, you can show it to the court that there was good reasons the material that we had why a search could take place.But under the present dispensation, if every authority below the court is also shown and then the assesse also gets to see it, I can assure you there will not be any searches because there will not be any informers if their identities are disclosed. Now this is a measure which we have taken protect the identity of informers just as you protect the identity of your sources. If your sources dry up, you will not get news. And therefore if our informants dry up because of disclosure of identity, we will not get any information about non-compliance. And therefore, all it means is if a court asks us, we will show it to the court in a sealed cover and then take it back. But, these are not to be shown to such other authorities that they reach the hands of the assessees because that will be detrimental to the taxation policy in the country.Q: A quick follow up. In any case, any kind of a check-in balance or some administrative directions, will that be worked out for these kind of measures?A: The CBDT Chairman has already announced that this is the import of this law. I cannot understand why a tax fraud committed by a person should be columnists be made into a human rights issue? Nowhere else in the world, it happens.I had a recent visitor from the US who was part of the establishment of the government there and I asked him what is the level of non-compliance of the US? He says we are all scared of the IRS. So, everybody complies with it. Nowhere in the world is such a situation that you are expected to disclose the identity of your informers and that is what the satisfaction will record. Q: Lot of measures announced in the Budget but did we really need demonetisation drive and for all that money to come back in the banks for the government to really crack down on black money in this manner?A: Of course we needed it. Let us forget every other fact, we needed to crack what I call the original Indian normal. Can you buy a property in Delhi or anywhere around Delhi without paying a part of the consideration in cash? The narrow tax base that I have indicated, above Rs 5 lakh which is really the limit when people start paying some tax, you have 76 lakh tax payers in India of which 56 lakh are employees. Therefore voluntarily this whole body of businessmen, traders, lawyers, doctors, architects, professionals, property owners, this whole universe is only 20 lakh people out of 125 crore. Therefore as I have repeatedly said these are all vices that a cash economy throws up.A cash economy encourages evasion, a cash economy encourages a shadow economy, a cash economy facilitates crime. A cash economy facilitates all the vices that can come up in an economy. Therefore to push a society towards digitisation and a more banking transaction based economy I think is relevant and ethically a correct process of thinking.Q: How confident are we of July 1 or rather moving to even early September, would that really be a cause of concern?A: It is a constitutional compulsion that you have to do it before September 15. Therefore it is a take it or leave it situation. Either it is GST or it is no taxes, that is the situation. I am sure GST when most of the contentious issues have been sorted out, I am sure all the governments centre and states have been working hard to trash out a solution and I am quite certain we will be able to do that.Q: Service tax rate is 15 percent at the moment, how will you move towards GST rate of 18 percent as far as services are concerned?A: Eventually if it leads to larger compliance your standard rates can be reworked out. Since there has to be only one tax, the goods and services have to be taxed at the same figure. Since they have to be taxed at the same figure because the way when you pay your bills at a restaurant you are partly paying for what is manufactured material, there is a content of value added tax (VAT) because you are also buying some material and you are also being rendered service. When you get your house constructed, there is an excise duty component, there is a VAT component and there is the architects and the contractor’s service tax component. All taxes are therefore by the very nature of economy converging into one. Therefore the rates have to converge into one.Q: So, most of the service probably at 18 percent?A: Subject to the abatements.Q: Then the structuring could be either in the 6 percent bracket or 12 percent or 18 percent?A: That is the decision which the council will take.Q: Everybody at the markets are keenly awaiting the announcement of the new SEBI chief, are we somewhere close to that announcement?A: The process of appointment is there, it is at a fairly advanced stage. You should soon hear of it.Q: Two or three major concerns that have always been part of your decision making process in the last two and a half years, could you elaborate on that?A: As far as the decision making process is concerned, I think we don’t react immediately to situations. We work our decision out. The parent departments of the government are in a consultation process, the finance ministry is in the consultation of the process, the Prime Minister’s office (PMO) at times has a very active participation in this and we take our decisions.What is good about our decisions is that they are taken after adequate amount of consultation. There haven’t been any serious rollbacks as far as this government is concerned and tragically enough you don’t get to know of them till the decisions are taken.Q: Kind of a perception has gathered ground that probably lot of decisions are also being done at the PMOs level especially in terms of key big policy announcements?A: Obviously the consultation of the PMO in major decisions is an essential part of decision making and you have a very active Prime Minister who leads from the front and therefore he keeps himself informed about what is happening. There are routine decisions which are taken at the level of the ministries but important policy I am sure it is a collective responsibility and therefore the Prime Ministers nod at times is required.Q: UP elections, tomorrow is the voting day for lot of us. What is the expectation? What is the mood in the party like?A: UP needs a coherent government. UP is moving towards a change. I don’t think UP is going to repeat the kind of status quo because the status quo in UP was a very unfortunate one. The quality of politics, the kind of gangsterism, the law and order issues, almost a family rule dominating, I think that requires to be changed now.Q: Your prospects, are you fairly confident or it will be very fractured?A: I think we will do quite well. It is a triangular fight between an alliance, the BSP and the BJP. The past indications of recent elections in the state have shown us in quite good strength.
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