To focus on strengthening banks, discoms ahead: FM

To that end, the government has already announced various steps such as the Indradhanush and the UDAY scheme.

Jaitley also talked about Raghuram Rajan's last monetary policy meeting next Tuesday, saying that the outgoing RBI Governor is leaving a sound legacy, and outlined the next steps towards the formation of the monetary policy committee (MPC).Below is the verbatim transcript of Arun Jaitley's interview to Shereen Bhan on CNBC-TV18.Q: We were sitting in this room, ahead of the session that just concluded to pass the Constitutional Amendment Bill and you had told me that you will try and get the Congress to come on board, you will try and arrive at consensus but if that was not the case then enough was enough. What led to this conciliation, what finally led to the breakthrough with the Congress party?A: I can tell you my honest intention always was to do it with a consensus as large as possible and I explained the reasons for that in parliament. The goods and services tax (GST) is not a partisan proposal, every party in some way or the other has supported it. There are political issues which are holding it back and at the same time you have every party which is part of the governance structure, either at the center or the states. Therefore the onus of implementation will be on the entire political system through its state governments. The Congress has state governments, the Samajwadi party is there, the Left has state governments, you have the JDU, the Biju Janta Dal, the Telugu Desam Party (TDP), the Telangana Rashtra Samithi (TRS), the Trinamool and you can’t have a couple of state governments adopting a negative attitude and then it won’t work.So, even though these were positioning exercises that we have the numbers, etc because factually between the NDA and the regional parties which were supporting, we did have the numbers. However, still the intention and the priority was to do it with a larger consensus. We had a dialogue with the Congress party even earlier but then I think politics came between. I kept the dialogue on and they had raised some concerns, some of them were very difficult for us to accept, some we had no difficulty at all.For instance, the language of the dispute redressal mechanism, which we were all reconciled, which the manufacturing states had insisted. Then when the Congress realised that two of their issues were being substantially or partly addressed and on the third one, we had a series of meetings with the Congress and these meetings were also partly technical in character, not political. In one of them the Revenue Secretary explained to them the figures in detail, then the stand of the states was explained by the Revenue Secretary.In a subsequent meeting the Chief Economic Advisor explained to them his point of view that there are genuinely two different views and how we converge over the next few months on the rate between these two views, and therefore the guiding principle that the states had put in the empowered committee meeting, I also acquainted them and I am glad they also saw reason that this is not the stage of the Constituent Amendment, this is a stage which is an enabling provision is being made.So, at a subsequent stage, is there an intention to keep the rate modest? The intention is to keep the rate fair, not high, not low and that fair should be from the present levels it must come down at least as far as manufacturing is concerned and the states and the center must have enough to run the system.Q: But let me ask you specific question, you talked about the many meetings that you had with the Congress Party and of course you reached out to all regional parties as well, but where there any specific conversation that you personally perhaps had with the Congress Party leader Sonia Gandhi or with Vice President, Rahul Gandhi whether you involved in anyway?A: We had met Mrs Sonia Gandhi much earlier, particularly when the Prime Minister had invited her and Dr Manmohan Singh, I had explained to Mrs Gandhi, at that time they voiced those 3 concerns of their and said that you please discuss with our team of leaders and we then kept in regular touch. So as far as Mr Azad is concerned, Mr Anand Sharma is concerned, later Mr Chidambaram joined them and I think we kept in continuous touch with them, even in the Lok Sabha with some of their representatives I was in touch.Q: Let me now talk to you about the contentious issue and that has do with the rates, because I think the chief economic adviser was one of the most talked about people in the parliamentary debate that we saw in the Rajya Sabha. You were very clearly just mentioned that you want a fair rate and you also said that you want a reasonable rate. The revenue secretary yesterday in his press conference said that we would not like an obnoxious rate. What are all we given to understand that to mean?A: I don’t think, we can pinpoint the rate. The chief economic adviser after he made his calculation and that was a committee and that was not personal to him indicated that the standard rate could be 16.9 percent to 18.9 percent, which means approximately 17-19 percent and you add a little to it because these were based on the 2013-14 data and some cesses have been added thereafter.You will also have to add to it some quantum required for compensation to the states and therefore let assume that’s the range or a little more which the chief economic adviser felt. He made a detailed presentation to the state empowered committee, that’s a state finance ministers and I can tell you it’s an institution which has been built up very well.This is not an institution where you can just talk and everybody will accept what your suggestion is, so there was a continuous discussion and so on and then they realised that presently almost 80 percent plus of the item as far as the central government is concerned are on a standard rate of 12.5 percent excise duty. More than 60 percent item of states on a value added tax (VAT) of 14.5 percent, which takes you to 27 percent, then there are other small taxes in the states particularly, they are countervailing duties, there are other taxes. So some states said it moves today upwards of 30 percent. Now, how do we immediately cut down so radically and this was a concern of a states, that we are at the end of the day starved of revenue and to what extent will the centre be able to support us.We have developmental needs, we have the Pay Commission recommendations, we have the poverty alleviation schemes, we don’t want to be tied down in our governance merely because which switched over our taxation system. A good response was that the base of taxation will increase, the leakages will be plucked and there will be a more efficient system. That will lead to some gains. You won’t have the cascading impact of tax on tax that will be an advantage. There will be many commodities which are the low tax commodities, so this average will go down and collectively these three factors at least will bring down this rate from its present level. Then the state started throwing up their own back of the envelope calculations.Q: If I may throw some of those calculations because we have had a plethora of state finance ministers on the channel for instance Thomas Isaac the Kerala Finance Minister said very clearly that anything less than 24 percent will not be acceptable to him. What would be an appropriate or a fair rate given what the states have put forward?A: I am not an expert and I won’t hazard a guess. So there range was from 21-24 percent and so on. That’s the kind of range the states have. Arvind’s viewpoint was distinctively different. Now as I mentioned to you, the Congress Party and the government, we had serious discussions on this issue. It is not merely a political adjustment. Both these sets of figures were explained to them in detail. The presentations were shown to them and therefore perhaps it’s too early for us to reach a conclusion as to what the figure would be.Let the empowered committee once it get converted into the GST councils start doing its homework and that’s the time when we will come to the rate and then this question came up before the empowered committee, what are the principles which will guide you, so today we can only fix those principles. One thing is obvious that as far as manufacturing taxes are concerned the rates will come down significantly, all finance ministers were clear and I think that’s correct.Two, the rate that we eventually fix there will have to be slabs different bands should be adequate enough to meet the needs of governments. We can’t go to a revenue deficit situation from the present one and the trend of present revenue and its incremental increases will have to be maintained. This is what the finance ministers meant and I think once you sit with the parent paper and start working out the rates and council etc, a lot of these exercises will have to be done by experts and I am quite certain with the kind of attitude the states have adopted, which is quite positive so far things should move, there are challenges, there probably light at the end of the tunnel.Q: As far as the CEA panel recommendations are concerned, the CEA did say that he did not factor in some of the assumptions that you just spoke about, the cesses and so on and so forth. So, should we expect a reworking of his report?A: No. His report should be seen on its own merit. At that time when he was working the 2013-2014 data in detail was available, so he worked on it. How that translates on basis of the 2015-2016 data I think you will have to evolve. Secondly the idea of compensation was born thereafter.Q: In terms of compensation it is our understanding that again at the empowered state finance ministers meeting there was some sort of a broad decision on the way that compensation ought to be calculated. Has there been any agreement on the way the compensation will be calculated?A: Compensation has been one of the deal enablers. The 2011 bill did not have a compensation clause. In the very first meeting of the empowered committee that I attended, one of the two big questions that they raised to me was one relating to compensation, the other being that CST compensation had not been paid to them which we are now paying.The initial suggestion was to follow the standing committee recommendations and pay us a compensation which in a staggered manner comes down during the five year period. They said no, full compensation for 5 years, fair enough. The methodology will have to be calculated by the experts as the technical teams of the centre and the states meet.Q: I understand Nitish Kumar has called you, reports seem to suggest that and told you that they may call a special session. I believe that TMC is also inclined in terms of calling a special session. Have you got any assurance from states because you need 15 states out of the 31 to sign up on this?A: We have started getting in touch with a lot of states. There are 13 NDA states, then you have some non NDA states like Bihar, Orissa, West Bengal, Andhra Pradesh which are very active, Karnataka is very supportive. I am sure the hill states are all equally going to be supportive. The North East states are there, I don't see much of a difficulty in that.Q: By when do you expect the GST council to be operationalized?A: Once the bill hopefully is passed in the Lok Sabha, we will send it to the states. We will try and ensure that as many state assemblies which are currently in the monsoon session do it in the present session. Where sessions have been adjourned they call a special one day session and then do it in that one day session.Q: You are hopeful that you are going to be able to meet all of these timelines. I know you haven’t given a commitment on being able to roll out the GST on April 1 2017 but given where things stand and given your conversations with various parties, do you believe that that is a realistic timeline or do you believe it is a tough timeline to achieve?A: Getting it ratified by the states is not difficult, it will be done. There are three different kinds of exercises which will be on, one is the conclusion of the IT support that is required which they say is at a fairly advanced stage, people don't see much of a problem in that. Second is the drafting of the three laws, approval of the two laws by parliament and one law by each of the state assemblies and that is going to be a time consuming process. Thirdly, on the rate as also on some technical procedures as to overlapping jurisdictions and so on, how to resolve the issue of dual control.Q: Has there been any meeting of minds as far as the issue of dual control is concerned?A: It is converging towards the solution.Q: Are states willing to concede or is the centre willing to concede?A: It is not a question of conceding, both are clear that the same assessee cant be assessed twice over. Therefore to avoid that duplication and also avoid that whole process of each trying to snatch a particular assessee, there will have to be systems in place and clearly define jurisdictions, that is what the states have said and that is not unworkable.Q: One of the other challenges that is going to put pressure on the eventual rate as and when it is decided by the GST Council is what will be excluded from the ambit of the GST and what kind of exemptions you will be able to keep and what kind of exemptions will go. Just on the question of exclusion and you spoke in your speech in parliament that petroleum for instance currently zero rated but you believe and hope that it will be brought under the ambit of the GST. Alcohol most states as you said have said no as far as GST is concerned but stamp duty on property, electricity duties, are these likely to be continued to be kept out?A: I think let us begin the whole system. A lot will depend on the success of the system. Once it succeeds, the states also will have a changed approach and that changed approach will be extremely helpful in further strengthening the system. There was at least a legitimate fear of the unknown and that is why there was initially some reluctance which I think by now is over. Once the system starts functioning, these are to be discussed only at a very subsequent stage, when you tasted the success of the system.Q: In terms of what the impact is likely to be as far as the fiscal target is concerned, the fiscal deficit target specifically and all of this will depend on the rate structure, all of it will depend on the compensation calculation but what is your own sense at this point in time?A: I think we would like to keep the rate revenue neutral so that it doesn’t adversely impact on the fiscal target itself.Q: Will we see any kind of provision being made in the next Budget?A: Let us wait; we will assess it at that stage itself. It is too early, today we are in August. The Budget is end February.Q: Let me ask you now about where things stand as far as the economy is concerned. This is the big reform that everyone was waiting for, it continues to be a work in progress. What next now as far as the reform agenda is concerned?A: I will tell you, if you look at the last few months, they have been very difficult globally in terms of the economy. However, for India, they have been relatively satisfying in a sense that a larger consensus is being built up on several issues. Two of our most important laws, the GST -- and these are reform laws and the Bankruptcy, have not only been passed, they have been passed unanimously and that therefore exhibits the intention of the Indian political system including all parties in opposition to actually have a rethink as far as the reform process is concerned.Before that we had the Aadhaar Bill which of course the issue was Money Bill, not the whole concept of Aadhaar. On Aadhaar I think there was a reasonable amount of unanimity. So, the last three to four months have seen these major monumental changes which have been taken place. I think as we move forward, the legislative agenda is going to be slowly behind us. We have the Companies Act Amendment which is pending, there is one or two other laws in the pipeline but I think now is the time to look ahead in terms of several implementation issues.In terms of implementation issues, with the good monsoon, hopefully a better rural demand, adding to some industrial activity in the country, I think the areas of concern now would be one, banks which is work in progress.Q: Do you get any more comfort as far as the banks NPA situation is concerned today?A: I would say it is still a matter of concern. The banks are acting, they are trying to take steps but the NPAs in those sectors are huge and the provisioning process is continuing. However, a lot of banks have actually shown operational profits. Some of the banks this quarter have not only shown operational profits but even after provisioning have shown profits. So, there is some turnaround taking place.I think banks, ability of the banks to support growth and its corresponding impact on the private sector investment, these are the issues to concentrate on. Concentrating on the big projects, I think that is another important area. Some improvement has taken place as far as the discoms are concerned but then getting them to be economically viable.Q: If I may extend that point just on the discom because while the Ujwal Discom Assurance Yojana (UDAY) scheme has taken off and more state governments have come on board, yet we don’t really see a pickup in demand, we don’t see power purchase agreements (PPA) for instance being signed.A: That is related to the first two questions. We are ahead of the global situation but there is genuinely a global slowdown and that is impacting us also in terms of demand. Compared to what is happening in rest of the world and people have to resort to desperate measures like a negative interest rate or a 0.25 percent interest rate, currency devaluation, now these are all unconventional methods that the world is following. Fortunately we don’t have to go so far. We are on the contrary thinking of how do we interact with these two or three challenges and probably move our growth rates upwards.Q: We have got the credit policy and this is the last credit policy under Raghuram Rajan. In the context where things are globally as well as locally do you believe that there is room for rates to come down?A: I think the RBI is going to announce it in a couple of days and therefore it is not fair for me to really make a comment on it.Q: Let me ask you about what has been notified today which is the inflation target upto 2021, 4 percent plus/ minus 2 percent which is what the government has told parliament today. This in a sense is the government's attempt or commitment to continue with monetary reforms, when can we for instance see the MPC now being operationlized?A: As far as the MPC is concerned there is a procedure in the act for selecting the government nominees on the MPC and that procedure has already kicked in. So, the committee to select those members has already been appointed, it is working and once they are able to select the government nominees, since this is the first time that the government nominees are going to be there, what we do now will become a good precedent for the future. Therefore that process has already kicked off.Q: How challenging do you believe it is going to be for the government as well as the RBI to work together through the MPC to keep this 4 percent target. Should we assume then because we are nudging closer to the 6 percent level even today as far as inflation is concerned, is that going to really be the upper end where we see inflation?A: I hope so unless some extraordinary situations develop. Even this 5.7-5.8 percent has really been contributed by one or two particular factors - pulses and vegetables. I think with the kind of acreage of pulses growth, with the incentives which the government has provided, I think over the next couple of months the pulses prices from all available reports indicate are going to come down.Q: Do you expect 8 percent plus growth?A: If we can grow at 7.6 percent with two bad monsoons, with a good monsoon one should be a little optimistic.Q: You were talking about the big projects, any specific projects that have been identified?A: I don't have any specific project in mind but there are those railway projects. Just as the highways have picked up in a big way, the railway projects, the two new ports to be created, some of the old industrial projects which on account of financing etc are still lagging behind, I think some of those ideas have to be looked at.Q: You just met with Governor Rajan, he was here as part of his pre-policy meeting with you. It is the end of his tenure. How would you assess the legacy of Raghuram Rajan?A: I think he created an impact. He is leaving a good legacy behind and I wish him all the very best.Q: What would be the challenges for his successor you believe?A: I think the challenges for his successor would really be to be a part of this whole process of turning the economy around, because if inflation get controlled and the rates moderate a little more than some sectors, which are still slow real estate etc, for instance then have to start getting moving and I think obviously any governor now besides inflation will also have to have a closer look at the banks.Q: You often said and I remember you said this to me in previous interviews as well that reform is the art of the possible. How did you manage to do, what two previous finance ministers couldn’t?A: I think in a continuous process this is a learning curve. The constitution amendment bill became better with every revision. We accommodated views and nobody has said that you have done something which is unreasonable. For instance, you put a question on alcohol, now if you had insisted on putting alcohol it would be a deal breaker. On petroleum products you have to give the states a little comfort, but allow it to come in for a future reference in mind and I think one change which has taken place in India today and I think that’s where I see a silver lining. The popular desire to grow despite global adversities is very high and I think there was a lot of strong popular mood in favour of the GST. This was an idea that India has accepted and political parties and governments could not defy that public mood indefinitely.Q: Let me end by asking you about this business of bringing it in as a money bill or as a finance bill. You didn’t give a clear assurance in the house, because you said you don’t know what the bill is going to look like eventually when it comes to parliament, but will you be reaching out to the Congress Party in this process?A: I have absolutely no objection in continuing to discuss with them, what will be the nature of that bill will depend on what is the content of that bill. Once the content is finalised, I am sure we will act within the framework of the constitution.