Following is the transcript of an exclusive CNBC interview with Arun Jaitley, India's finance minister and minister of corporate affairs. The interview was broadcast on CNBC on 17 November 2017.
All references must be sourced to a "CNBC Interview'.
Interviewed by Sri Jegarajah, Senior Correspondent, CNBC.
Sri Jegarajah (SJ): High oil prices - is that going to squeeze finances?
Arun Jaitley: Well, if the oil prices are extraordinarily high, certainly that impacts us adversely. But up to the level that it has reached now, is something which we can bear the shock. If it rises extraordinarily, it'll be another thing.
SJ: How would you define that? At what price points does it come a cropper?
Arun Jaitley: I don't think we have a cut off. As it is, when the prices started rising, we had to shut off a part of our central taxes, and every part of the central taxes that you shut off means less revenue for the government, and therefore that has an adverse impact on us. Hopefully if it remains range bound within this range, we can live with it.
SJ: In other words, moves over $70, possibly $75 a barrel, would hurt Indian finances?
Arun Jaitley: Well certainly the higher it goes - it's not great news for us at all, and I hope it doesn't rise to that level again.
SJ: Demonetization, have we seen the worst of it, in terms of the impact on the Indian economy, and can growth recover in 2018?
Arun Jaitley: Well I think we've seen the worst of it. And, whatever adversity had to come, I think it's long over. Demonetization in India, in the first instance, we've been able to squeeze in the very first year, a large part of the high value currency. We've been able to put digitization of the economy as a center stage issue as far as the economy is concerned, which means more digital transactions, less cash-based transactions. We've been able to increase the tax base as far as the Indian economy is concerned. We've seen a very large number of deposits come into the banks and consequently, whether it's the stock market, or mutual funds, or insurance policies, we've seen a larger amount of funding available. Today, the banks have more funds to lend even to the SMEs, providing we are able to recapitalize the banks. We've also see a lot of squeezing of the terrorist funds taking place in Jammu, and Kashmir, and Chandigarh. A step like demonetization can temporarily have some impact on growth.
SJ: Especially on the informal economy?
Arun Jaitley: On the informal economy. But that's not a lasting impact because the remonetization took place within a matter of weeks, and therefore, that is an adversity which you can easily reverse.
SJ: Can we say then that we can see a return to seven percent plus growth rates for India?
Arun Jaitley: I think, I think it bottomed out with the demonetization, and then the GST coming back-to-back, because even in the short run, as far as the GST is concerned, manufacturing for some months stopped because people were de-stocking, and I think that phase is over. So the bottoming out is complete, and now we should see a curve for the better.
SJ: Well, what's your outlook for 2018?
Arun Jaitley: Well I see the economy picking up quite well. All indications do indicate that we will certainly improve, and whatever is the "Indian normal", other factors remaining the same, we should be able to grow between that seven to eight percent range.
SJ: And if we can talk about GST harmonization, and the move towards a common market, tell me about rollout, implementation, and what that's going to do for tax receipts and tax generation?
Arun Jaitley: I think it's early days for GST. There are a few positives I think which we've scored. The decision making process for the GST has matured itself. The Council is functioning very effectively. You have a common market which has been created. You have all the barriers which have been removed.
SJ: How well has business adjusted?
Arun Jaitley: I think the big businesses have adjusted quite well, the medium businesses have adjusted well. The smaller businesses, obviously will take some time, therefore, we are giving them time in terms of compliance burdens etc. The first few months, the tax receipts have been fairly okay. But I do see people will take time in adjusting to the new setup, and therefore we are moving slowly in implementing some of the eventual steps which are a part of the GST planning itself. The harmonization of rates race, in fact, has become much faster than what people expected, and therefore our first effort to harmonize the 28 percent rate and bring most of the items down to 18 percent is a step I think we have broadly accomplished, and that's a harmonization depending on how the revenue buoyancy takes place, which will probably continue.
SJ: And in terms of revenue positions for India, what targets do you have?
Arun Jaitley: Well I think as far as the central government has its budgetary targets. And therefore we want to keep up with those budgetary targets. As far as the states are concerned, we promised them a 14 percent increase every year under the GST for the first five years. I'm quite sure we'll be able to maintain that.
SJ: If we can talk about financial stability concerns in India Minister, have we seen the highwater mark in terms of NPAs or Non-Performing Assets that are held by the state-run lenders?
Arun Jaitley: Well I think it's a legacy problem which I'd inherited, and it's a problem which had continued for a very long time. Both the central bank and the government have attempted various solutions to it. Many of them turn out to be short-lived solutions, or band aid solutions, which really didn't resolve the problem. I think now the two major steps that we have taken: One is the IDC being put into action - the insolvency proceedings, and a number of cases being referred to it, some more to be referred to it in future, and therefore resolutions being reasonably in sight, I think is a good ray of hope. This, coupled with the fact that we decided to recapitalize the public sector banks. I think the two move, the two big moves are taken together, I think the vitality of the banks itself will get restored.
SJ: Do you think demand for credit will start coming back as well?
Arun Jaitley: I think as far as the large companies are concerned, they already have been borrowing from the bond market, from international markets and so on. It's the SMEs that were really impacted, and therefore, one of our emphases after the recapitalization is for the PSBs to have a special focus as far as the SMEs is concerned.
SJ: So more incentives, to try and get them to borrow?
Arun Jaitley: Borrow, because they are the ones who are creating the jobs, they are the ones who keep the real economy moving.
SJ: Why do you think demand for credit has been so subdued?
Arun Jaitley: Well I think demand for credit was subdued because in the post-boom period a larger number of companies, after indiscriminate lending have expanded themselves beyond a point, and there was no demand. So that unutilized capacity is now being filled up. Once that happens I think more demand will come up from that sector.
SJ: There have been some concerns raised about India's growth rate. You've made the point, Minister, that these are related to pre-GST issues and these are one offs et cetera. Some, however, feel that India needs a stimulus package. Does it?
Arun Jaitley: Well, I think it will be an overstatement to say that you need some form of a stimulus package. You need an adequate response to the challenges. And I think that the whole series of reform steps we've taken, coupled with the recapitalization, is a response under the circumstances. My own view is that slowly we've bottomed out that 5.7 percent in the last quarter and now I think we should start moving up some more. If you see some of the latest data, the PMI has been positive, the IIP has been positive, the coal sector growths have been positive, and therefore these are all positive indications coming from the market.
SJ: That being said, where does the priority lie from the finance minister's point, from the ministry's point of view? Is it on fiscal consolidation or pro-growth spending?
Arun Jaitley: I think you have to balance between the two. In an economy where public spending is extremely important, the governments must spend, they must spend more but at the same time you can't afford to be reckless and do away with all kinds of fiscal prudence. My own experience is that markets reward fiscal prudence and therefore we have maintained a reasonable amount of fiscal discipline. Well depending on the revenue available in a given year, your glide paths can be modulated. But to deviate from it completely is something which we don't intend doing.
SJ: Do you think you can hit your target for the budget deficit for current fiscal and next fiscal?
Arun Jaitley: My effort will be to aim in that direction.
SJ: That's for the current fiscal and what about the next fiscal year?
Arun Jaitley: Well the next fiscal is an easy target in the sense that it's started to go from 3.2 to three percent.
SJ: How worried are you about the risk of a downgrade by the ratings agencies if India doesn't get the fiscal house in order?
Arun Jaitley: Well I don't think that possibility arises. I think we were by and large over the last three years shown a considerable amount of fiscal prudence. It's never been as good in history as it has been in the last three years. And we try and maintain the glide path to the extent which is possible.
SJ: The other strategy is to privatize, is to sell stakes in state owned companies, and I want to talk about Air India which is widely seen as the company that is going to really set the tone. Are you finding buyers for the government stakes in Air India?
Arun Jaitley: We're on the verge of appointing a transaction advisor, who'll then analyze the entire market and see what is the universal buyers that are available. And once we have a clear idea about the universal buyers which is potentially available, we'll be announcing the terms of the privatization itself.
SJ: At this point, can you disclose any of the buyers, their identities, any of them who have come forward?
Arun Jaitley: I don't think it will be prudent to do that, there are a large number of people, some people who've made enquiries, who've shown an expression of interest...
SJ: Domestic or foreign, Sir?
Arun Jaitley: But, you see, it could be a combination of both. But I'd rather wait for them to make a specific offer once the field opens for that.
SJ: And if we could circle back to the taxation issue. There was a story of a wealth tax, of a tax being imposed on the rich and the super-rich, is that still an issue that you're still discussing?
Arun Jaitley: If you remember, wealth tax is a tax which I had abolished two years ago. And I don't see the possibility of it coming back. On the contrary, we had a post, some extra income tax on the super-rich which more than covered up for the revenue that we lost on that. We were getting about 900 calls on wealth tax, and we were running a complete department for that purposes. So rather than that, we had a surcharge on the super-rich which gave us more money without the accompanying harassment.
SJ: Is a tax amnesty part of the plan?
Arun Jaitley: Well, we've just had a year and a half ago, and IDF scheme. I don't think you can repeatedly have IDF schemes.
SJ: And the final question, Minister, is about monetary policy. RBI policy settings do you believe that they are appropriate?
Arun Jaitley: Well, I've always said that finance ministers normally like the rates to go down. But then, this is something which is in the domain of the Central Bank and the Central Bank is a responsible institution which balances the considerations for inflation, growth, they take every factor into consideration and come out with a considered opinion.
SJ: And in your considered opinion, do we need lower rates in India given the fundamentals?
Arun Jaitley: I certainly believe yes, but at the same time I will continue to respect the opinion of the Central Bank.
SJ: Minister, thank you very much indeed for your time.
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