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Speech of Mr Arun Jaitley, Finance Minister at American Enterprise Institute in Washington, DC on June 19, 2015

  1. Thank you very much. The subject I am asked to speak on is, how India targets the double-digit growth. I've been in the U.S. for the last few days and I've had a couple of engagements on somewhat similar subjects, but nothing as pointed as how do you cover this roadmap between our current 7 to 7.5 % growth rate and have that extra jump as far as the Indian economy is concerned.
  2. We did, in fact, reach 9 % a couple of years ago, and we sustained that 9 % growth for almost three to four years. And before I address the point, I think it may do us a little bit of good to realize as to what went wrong that from that 9 % growth rate in the last four or five years we've started declining downwards, till we reversed the curve last year.
  3. India traditionally got used to - in the age of controlled economy to a very, very modest rate of growth. In fact, global economists would virtually frown on the idea of India having a faster growth rate in view of the model that we had adopted. Probably in the first two decades after independence we had very few choices for the reason that the availability of capital in India and the availability of entrepreneurship were somewhat limited.
  4. But thereafter I thought there was a potential, but that potential because of some thinking on the part of the ruling groups didn't quite take off. And we had a series of decisions which were intended to keep the economy controlled and to grow at a very modest level. In fact, out of sheer sarcasm our 2 -2.5 % growth rates through that period used to be referred to as the Hindu rate of growth. And that was the comment which was popularly made and that became an accepted economic phrase.
  5. The '70s and the '80s were broadly wasted. I think it was time to switch over, but probably those in power thought otherwise till we were compelled upon by the crisis in the early '90s in order to go in for a change. And I think that change was much better. If I recollect my years as a young student or as an early professional, I remember in that controlled economy how we grew. Everything was short. There was - transportation was not available. School admissions were not available. College - number of colleges was small. Food grain was inadequate. If you wanted to buy a two-wheel vehicle, you had to wait for 20 years. If you wanted to get a telephone connection, the waiting list will be 15 to 25 years. That's the economy which we grew up in.
  6. And there were many people who had serious reservations when we switched over in 1991 and I fully give credit to the then prime minister, Mr. Narasimha Rao, who took a very bold decision because he belonged to a political party which otherwise had its great faith in the regulated economy. And over the next 10-15 years we hugely transformed. In each of the - when I first became a member of parliament, we used to be given an authority to allocate certain largesse because of shortage. So if somebody wanted a telephone connection, we had authority to give him a certain number of telephone connections every year, or cooking gas connections.
  7. And suddenly within years of my becoming a member of parliament, I suddenly realized that these were only wasted pieces of paper because nobody came to us. We switched over to a surplus - and that is the advantage India got.
  8. We had Governments of three different political complexions - we had the Congress Government, a United Front Government where the left parties were members. Then you had the NDA Government by Mr. Vajpayee. But they kept that target on. And the pace may have differed, but they didn't deviate from the roadmap.
  9. I think the deviation started in 2004- 2005. And the deviation cost us quite a lot. In the first few years, we continued to benefit still from the impetus of the past, but once we lost out on that impetus of the past because there was - the fresh set of reforms were not going on, power structures were outside the Government. I identified to myself as to what went wrong, and we - in this century to lose out on some valuable time.
  10. I think the first thing that went wrong was the prime minister of the world's largest democracy must be the natural leader of that country, or at least the party in power. If that is not so, then his authority to take decisions - itself doesn't exist. So decisions would be taken outside the Government, and outside the Government you had people with somewhat obsolete ideas who probably thought that by just that kind of populism without concentrating on increased productivity, without concentrating on growth rates, just by redistributing the existing resources you could do what happened in 1971 and you could repeat it in 2004- 2005. That probably was not to be.
  11. The second thing that went wrong was you made a policy shift and some of the ideas were certainly not conducive to the modern-day economy. It was more leftwards. You relished discretions, whereas the rule of law, the power of the Indian judiciary, would never accept those discretions. And therefore, investors who came and invested in India benefitted from some of those discretionary exercises of power which was abused, which was exercised for collateral reasons. And the spiral effect was that you had investments which were confiscated, you had contracts which were cancelled, you had licenses which were cancelled, and therefore people became scared of investing in India.
  12. As the leader of opposition, I recollect sometime in 2009 or 2010 getting up in parliament and saying that, forget people coming into India, the Indian industry's thinking of investing elsewhere. Our taxation rates were not conducive, our processes were becoming complicated, and we were moving backwards. Our discretions, which were not the - which were not acceptable in this time, in this century, were being abused. Our taxation policies were becoming retrograde. You had a situation where the Government honestly thought that retrospective taxation on issues could be accepted by the system. You had an ultra-aggressive tax policy which didn't bring us any revenue, but just scared people away from investing.
  13. Infrastructure slowed down. The banking system had 6 % NPAs and another 7 % stressed assets. So the capacity of banks to lend was going away. The public-private partnership model for infrastructure creation itself had suffered a setback. In fact, one of the most successful areas in infrastructure creation in India in the last one and a half decades has been the national highways. And suddenly you had dozens of tenders being floated for highways and not one person would respond because the institution of those who would build these highways itself were getting squeezed. Banks were not lending, people were not coming up.
  14. And I think it is at this stage that an aspirational India was becoming increasingly angry and frustrated. And this was evident in the last few years. So that angry and aspirational India defied the basic conventional rules of Indian politics. They voted out everyone who wanted to be elected on the strength of a family charisma. So a large number of political parties, not necessarily the Congress party itself, but even regional parties, which were controlled by political parties or families or individuals, they all got wiped out. Nobody got more than five seats in parliament. It was zero to five BSP, JDU, Samajwadi Party, so they almost got wiped out. Caste-based parties almost got wiped out.
  15. And I therefore consider 2014 to be an important defining moment because the election in Indian democracy instead of being on traditional alliances, caste alliances, political alliances, family charismas, became an election substantially on governance issues. And therefore, Indian governance, the management of Indian economy itself became a central stage issue. And that is the reason why the electorate gave a decisive verdict, and after 30 years voted almost a single party majority in power, something which even in our best estimates we didn't thought we could reach. So that was a kind of a surprise for us also. We thought we'd be somewhat short of the majority figure on our own. Along with our allies, we'll cross that majority figure. But we got a majority figure on our own. And with the alliance, we are much bigger than that.
  16. And I think having said so as to what went wrong, I think this new aspirational India expects early results. It expects decisive Government. And therefore, when the present Government started off, governance, as also management of the economy, always remained a primary challenge before the Government.
  17. There were few low-hanging fruits - decisions which are not very difficult. And therefore, those decisions were taken out - if these decisions had been taken five years and eight years ago, probably there would have been a controversy. But these were accepted in the natural course by Indian public opinion. For instance, our first decision was we must open out. So we looked at sectors which were erstwhile closed to investment, also international investment, and one by one we started opening out. Only one of them required a legislative intervention, that's insurance. And for 10 years, we were going up and down without being able to decide. And the others could be done easily by an executive action. Defense could be opened out, real estate could be opened out, investment in townships could be relaxed, medicinal equipment - medical equipment could be opened out. And we decided to open these out.
  18. We had to put up this argument and therefore at the very outset I put up this argument, when the first budget was presented that these conventional slogans will now have to be rejected. The choice between India is not between being pro-business or pro-poor. The two are interrelated, there's no contradiction between the two. So the Government wants to expand businesses. The Government wants to enable businesses. and the Government wants that part of the increased revenue or enrichment of the Government to be spent on infrastructure, spent on poverty alleviation schemes. So the priorities have been defined.
  19. We wanted to break off from the decision-making which was taking place for corrupt or collateral motives. So Government discretions had to be ended and wherever possible, an objective criterion had to be introduced. So we looked at areas, some of which required a legislative intervention, that henceforth, all natural resources, coal, mineral, these were separate legislations, Governments have no power to allocate. These are sovereign resources, and therefore they would be allocated by a market mechanism. Everybody has to bid.
  20. Now, normally, for last 10 years nothing had been done, but in a period of four months, from when the Supreme Court canceled these allotments, we had a policy in place. We had a legislation in place. In fact, to drive home the point, we allowed those emergency legislative powers, the ordinances, to come in. Some people criticized us that are you bypassing parliament? An ordinance doesn't bypass parliament for the simple reason an ordinance has to be subsequently approved by parliament. Therefore, it gets ex post-facto ratification. But the object behind the ordinance was the Government must show a sense of urgency and therefore must redefine that it wants to move in this direction. And I'm glad with regard to mineral, with regard to coal, with regard to spectrum, which created all the controversies, we had a huge success.
  21. There were clean, transparent mechanisms and people got their allocations within a matter of weeks, and so that they could now concentrate on their businesses itself. What do we do with all this resource which was coming in? Because we got a lot of financial resource. We had realized that the Indian federal model was too loaded in favor of the central Government, and therefore the central Governments conventionally allowed the regions of the states to always keep coming to the center for discretionary grants or allotments. Now, that age is over. That's over, therefore, every state or region now is entitled in terms of percentage to a certain amount from the central Government.
  22. I, as finance minister, have no discretionary funds available with me, so I can't favor one region or the other. And therefore, the entire income, even out of these natural resources we said, will go back to the regions where those resources are to be found. And earlier, the states didn't get anything out of these or got very petty little out of it. And most of these states where coal or mineral wealth of India is located are the poorest regions of India because the tribals of India live there. And if there is one segment which could be identified as having benefited the least out of the growth process it was the tribals. So the entire proceeds over the next 30 years from all these natural resources now are being given to the states. And because they've been earned by a market mechanism, the states now get it.
  23. I think there are two other important points. Foreign direct investment, which in the '90s and early part of the last century - last decade, we found there was some resistance, I think has been accepted as a very important additionality of resource in India. And therefore, the resistance against them even by left groups is very marginal and by trade unions is - I think it's just symbolic. And therefore, it's an important acceptability of this changed scenario which has taken place.
  24. We must now try to easen the processes of doing business in India. How do we reduce the number of permissions? How do we make sure that environmental permissions are not held pending for years together, so that they must be tiered? How do we ensure that the foreign investment proposals are either automatic or cleared at the earliest? Now, these are changes which have taken place. Some legislations which had been enacted earlier, we are scanning through each one of them, so that the complications arising out of those legislations we can do away with.
  25. So I would certainly say at this stage, when I look back the last 12 months, easening the processes, both at the center and the states - the states have also joined in because all states are now competing for that resource, and therefore they are in the process. I don't think we've achieved goal - gone all hog - but that's work in progress as far as that agenda is concerned.
  26. Our taxation structures. I think the taxation structures - some were obsolete and some were bringing India a bad name. So we had to take a very bold decision of saying the higher - the slab of corporate tax in India will now go down to 25 %. And the object was that we must give to the general body of both domestic and international investors a competitive taxation rate because in our neighborhood that's what the average taxation rates are. And therefore, if I'm going to tax people 10 to 15 % more than that, then obviously India loses its attraction as an investment destination.
  27. So we are now in the process, from the coming days onwards, every year for the next four years, we'll be gradually bringing down the direct taxation rates in India so as to make our rates competitive at least with the region and better than most parts of the world on this side. We've also offered various attractive investments in terms of alternative investment funds. But one of the major reforms we have now undertaken is the indirect taxation. Every state has its own indirect taxes. They have a large number of them. And therefore, transportation of goods, or services from one state to another is a problem.
  28. Building consensus between these states is highly challenging. And therefore, through the Goods and Services tax (GST) , I broadly succeeded in building a consensus and I think the most important aspect of the goods and services tax is that one-sixth of world's population will be one market. Therefore, for any investor in India, both domestic and international, he has a market at hand. There's a seamless transfer of goods and services which will take place. The rates of taxation eventually will come down because a tax on tax itself will not be possible if the GST is implemented.
  29. And I think the high point of the GST negotiations, in a short period, because for the last eight, nine years, it was eluding us, is that when I presented it in the Lok Sabha for approval, the Congress party decided to abstain. For some reason, though they had supported this idea of this bill at the earlier stages, they had introduced it. So their abstinence was for political reasons. But every other political party, including their allies, supported this legislation.
  30. Now, it's important that coal, mineral, GST - all regional parties, which are otherwise opposed to us have supported each one of these legislations because the GST will benefit the consuming states and most consuming states are the ones which are less developed. The coal and mineral resource will go to West Bengal. It'll go to Jharkhand. It'll go to Orissa. It'll go to partly Madhya Pradesh, Chhattisgarh, a little bit Karnataka and Maharashtra. Now, these are the states which all have the tribal pockets. And therefore, you are directly transferring your resources as far as these are concerned.
  31. There were huge number of decisions which have been pending. I won't go into all of them. And just the pendency itself had conveyed an image of indecisiveness. We could easily take the decision to fix up gas prices, linked to the actual cost. We were able to hugely cut down in our very first year something which was otherwise regarded as very sacrosanct and populist, the subsidies. Petrol is today linked to the market price. The declining prices have helped us. Diesel is linked to that.
  32. We've been able to implement some of the very radical programs about which we had doubts earlier on basis of the DBT (Direct benefits transfer). And therefore, more and more subsidies, we've experimented, are now going directly by way of cash transfer to the people, so the state support itself and the leakages are getting out of that.
  33. Now, all these have created a much - resulted in a much lesser pressure on the revenue itself. For example, I've been mentioning that a reform which could have actually led to a lot of protests has been so smoothly done that in year 2015-16, the current year, I'll be spending almost 30 percent of what was spent two years ago on oil subsidies. And that's a huge savings of the exchequer. And all this money is now being diverted into creation of infrastructure.
  34. We still have infrastructural challenges because the model itself had cracked, and therefore we've used the declining oil prices to partly pass the benefit on to the consumers, but kept a slice out of that and converted it into a cess for infrastructure. And therefore, the benefit of declining oil prices is now going into highway construction, rural roads construction, and for the railways. In fact, in these three sectors, which were starved of funds, this year, through various instruments, we've made such adequate funds available that if these three areas of infrastructure there are able to spend those funds, we'll actually see a movement in the direction of what the title of this discussion today is.
  35. We still have a lot of pending work at hand. The Land bill is an important challenge. It's still before a joint committee of both houses of the Parliament and I think we'll have to fight it out and explain the benefits of the Land bill because it is intended for development of India's rural areas. It's the infrastructure creation in rural areas which will suffer if this bill is not passed.
  36. The GST, I'm reasonably confident that we'll be able to get a positive recommendation from the committee of the upper house and will go through. We have several other reforms in the pipeline. The Bankruptcy code, reducing the kind of permissions required for setting up businesses in India, a public procurement law, a law on adjudication - expeditious adjudication of disputes relating to big projects. The social programs of the Government, whether it's the Clean India campaign, it's actually a health care program because it's preventive health care - have become mass movements and therefore, are producing greater results.
  37. Now, coming to the specifics of the subject, where do we stand today? Last year, with the final data out, these are provisional figures, India grew by 7.3 % in terms of GDP. In terms of fiscal deficit, from an all-time higher of 6 % plus, we've brought it down to 4 %. I could have brought it down lesser this year. But I've consciously given a pause here because we want to take a lot more money and spend it on infrastructure.
  38. Our current account deficit (CAD) , last quarter, was 0.2, which is quite an exciting figure for us. The 2014-15 year's average is 1.3. This year, we hope to try and do better than that. Capital formation has improved. Some trickling effect on these infrastructure areas has just about started. Power sector has performed quite well and with the coal and the renewable energy programs that we have - in fact, today, probably for the first time in history we have surplus power. And therefore, if industry or more townships need that power, it's available, provided there are takers for it.
  39. What is now the further roadmap to improve upon this? I cannot say as to what figure India's growth would achieve, but I'm certainly of the view that this 7.5 % that we are presently at is not India's optimum potential. We've reached this in the backdrop of a terrible monsoon last year, where you had a second round of crop destruction in the month of March, because there was a very bad hailstorm, which impacted on eight states. You had a manufacturing sector which was almost crawling. You had growth rates of sub-5 %. And when you take off from there, if you break up the Indian economy, our services have consistently been 9 -10 %. And therefore, that's not an area which Governments have much to worry about, unless Governments acts obstructions it's an area which is going to grow with the kind of huge manpower resource available in India and trained human minds, the quality of entrepreneurship, this sector is expanding. And it has a very significant impact on our GDP.
  40. Our manufacturing was almost flat at one time. Last year, the figures indicate it's around 7.1 %. And the first two months this year indicate, from the revenue figures, particularly of indirect taxation, that there is a significant improvement over last year. Now, with a lot more money being invested in infrastructure and Governments even conducting their fiscal policy in order to help the manufacturing sector, there is a significant growth possible as far as this area is concerned. And therefore, the "Make in India" program, plus concentration on manufacturing, the impact of all these coal mine auctions, mineral auctions - because these are all works in progress where the impact can be seen the ground as to how it functions, I think in the coming years is going to up India's manufacturing sector significantly.
  41. We've also come out with a huge program to help much smaller units. You see, large industry in India create jobs, but the real jobs are created by those small and micro units. We have almost 57 million of them ( 5.77 crore). And they create about 11 crore (110 million) jobs in India. And these are the unfunded segments of the Indian economy. So we've set up an agency called the MUDRA Agency, which will now transform into a bank, whose principal job will be to invest funds in this sector, so that jobs are created in this sector. And it adds, these are ancillary units, small units which come up. These are also trading units which come up.
  42. You then have agriculture, and I must confess that this is an area which is almost in near distress situation. In agriculture, you have amongst the land-owning people a lot of underemployment. Agriculture is not remunerative enough. And you have almost 300 million people who live in rural areas, who are the landless labor. So one of the great challenges is going to be how do you bring people out of the sector and create alternate jobs for them. This is exactly what our amendments to the Land Law intend to do. They promote irrigation projects. They promote rural electrification. They promote rural roads. They promote suburban centers, suburban townships, low-cost housing, affordable housing. And these are the areas which they promote. And these areas are almost - land is made unavailable from them under the 2013 law. And that's the amendment. One more significant part of this amendment is to allow industrial corridors to pass through rural areas. Once these industrial corridors pass through rural areas, and generate employment for the youth there, that is one way, over the next 10-20 years, of getting people out of these areas.
  43. Hopefully, with a better monsoon this year - at least that's the trend which has defied the predictions of the Meteorological Department so far, agriculture must do better. That not only increases the agricultural growth rate, but it also has an impact on the rest of the economy because the rural purchasing power goes up. At the moment, we are faced with a situation where traditional commodities, which agricultural economies purchase - for instance, the car sales are up, the truck sales are up, but the two-wheelers and the tractors are down, which means last year's distress in agriculture is impacting on them. Now, it'll have a spiral effect on other segments of the economy. It'll also improve the growth rates as far as next section is concerned.
  44. Two more factors, one relating to the GST. It has a potential to put up people - economists said 2 %, but I'll be quite happy if it pushes up with half that figure the GDP of India. And once we are able to bring that reform, and I am reasonably certain that this reform is now coming - it's only a matter of time as to when it's implemented - I think will have a positive impact.
  45. So agriculture, manufacturing, infrastructure, investment in irrigation - now, this is important and I've learnt a lesson from at least three states in India - Gujarat, Madhya Pradesh, and Andhra Pradesh - which invested in irrigation and almost produced instant results. Madhya Pradesh created a river grid and the impact of that river grid is, in the last three years, its agriculture has grown by 18 %, 20 %, and 22 %. That's the impact irrigation projects are having in these areas. Part of the Gujarat story in the rural areas was also because of the Narmada water and the check dams, the small irrigation projects which were created in that state. Similarly, in Andhra Pradesh, what YSR did was - his great political success - was through the irrigation programs that he implemented in the state.
  46. Therefore, with revenues now moving up, that's the area of investment which we are looking at. So besides these areas and the GST, two more last factors. Hopefully, the global winds will improve, and therefore its impact on international trade, our own exports and our trade, it aids the GDP. Today, we are reaching 7.5%. This year, even without these factors, we hope to touch about 8 %. And therefore, once the impact of all these changes and investments is felt, I think there could be a significant growth.
  47. Inflation in India, I think, has been under control. I would say to the - here to the credit of the Central Bank that faced with a 11.5 % inflation situation, a few years ago, they've consistently kept it below 5 %. The wholesale index is almost in the negative. And if inflation stays in the negative or if inflation stays at moderate levels, one should logically expect the interest rates to go down. And interest rates will directly impact on the efficiency of the Indian economy.
  48. They'll add - at present interest rates, manufacturing is a challenge. And therefore, once interest rates goes down, the manufacturing sector gains. One sector which has suffered adversely and which is a great driver of Indian economy is real estate. So an economy which has a plan to create 100 smart cities, we are almost at a stage where we are looking for each smart city for a joint venture partner. We are on the take off stage. Where suburban townships, around major towns have been coming up and people, in large numbers, from these rural areas, more aspirational people have been migrating into those houses. Today, because of high rates, thousands and thousands of those apartments have still not been purchased. So hopefully as we keep inflation under control, I think these drivers of the economy are going to pick up.
  49. And therefore, once the cumulative effect of all these, plus some favorable global winds, I think the journey between 8 % and 10 % is not an impossible journey. It's reasonably plausible. And I think that is where India's real potential is. But the last point I would like to mention that it's not - it's important that we reach that target, but it's more important that we sustain it for a couple of years. And it's only if we are able to sustain it for a couple of years that I think we'll be able to have the direct benefits of growth as far as India is concerned, more jobs, better economy, and hopefully, over the next 10 years or so, deplete the poverty levels in the segments which are most impacted by it.

Thank you.