Arun Jaitley: Reforms Must Serve India’s Needs

New Delhi, India, 5 November 2014 – India’s new government is committed to reforms across a range of sectors including labour laws, land acquisition and foreign investment, Minister of Finance Arun Jaitley told the opening plenary of the India Economic Summit, adding that reforms will be carefully calibrated for each sector so that they really serve India’s needs.

“We are quite satisfied with the beginning made, but there is a long journey ahead,” Jaitley said, referring to the slew of measures announced since the government assumed power five months ago. These measures range from allowing greater foreign investment in the defence sector to passing an ordinance (emergency law) to govern the coal sector critical to India’s energy needs, but log-jammed due to corruption allegations and small but important amendments to some labour laws.

At the same time, Jaitley, who also holds the Defence and Corporate Affairs portfolios, warned that the government is being careful not to espouse some “big bang ideas” but will consistently pursue its reforms agenda doggedly and surely. A lot of changes are possible within the present framework, and the government is careful not to send out a wrong message, he said. “One sensational idea can do a lot of damage,” he added, asserting that the last government’s decision to impose tax retrospectively was one such bad idea that had made India fall off investors’ radar.

The minister underlined how important it is to change the mindsets of administrators to clean up corruption. He said that every decision the government has taken over the last five months has been with the aim to take away discretion. As an example, he cited the coal ordinance, which has taken away discretion from the process of allocation of coal “blocks”, and said the same template would be followed for other natural resources.

Asked by Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, if the new government would attempt to instil responsibility and accountability by ensuring that every last government employee is promoted on the basis of performance, Jaitley said that, realistically, it is possible to improve the system but would be challenging and perhaps undesirable to shake it completely. Change is afoot, he assured, giving an example of the prime minister’s efforts to make himself approachable via mobile phone and email to the bureaucrats on his team. Prime Minister Narendra Modi recently wrote a personal letter that was sent to all bank employees in the country ahead of a nationwide financial inclusion drive, which worked so well that targets were crossed in the very first round.

Speaking of privatization and opening up more sectors such as insurance to foreign investors, Jaitley said that, the last time the Bharatiya Janata Party was in power, it followed a more liberal model. This time, there will be divestment as some important public undertakings are on the verge of closure. But on foreign investment, decisions will be made sector-wise, keeping in mind the requirements of Indian economy and the appetite of the political system for reform.

“Reform is the art of the possible,” Jaitley said, explaining that it is better to go with reforms that are palatable to a wide cross-section of people than trying to push through changes that will find no popular support. This is why the government is going gradually for labour reforms – it is mindful of the need to take everyone along, to create a flexible policy that creates jobs and is labour friendly, and is likely to need a much larger debate and legislative change for which prior preparation will be needed.

Jaitley added that there is a difference between reforms in developed societies and developing societies – in developed countries people have already tasted the fruits of reform but, in developing countries, doubts have to be cleared and people have to be engaged with. Also, the government has to keep in mind the limitations that apply in various sectors, which is why, for example, foreign investment in defence was opened up slowly in stages, first by allowing up to 26% foreign ownership and now 49%. In infrastructure, on the other hand, the government welcomes large participation even from abroad and segments previously closed to private or foreign investment, like the railways, have been opened up.

Land acquisition, on the other hand, is a difficult area. A law promulgated by the previous government but widely opposed by businesses across the country did have some good aspects, Jaitley said, particularly its emphasis on ensuring better compensation and long-term relief and rehabilitation of farmers whose land was acquired. However, that law made acquisition procedurally very complicated, making the exercise of eminent domain problematic and providing no exemptions for important sectors such as defence and urban infrastructure so that it is difficult to acquire land for industrial parks, affordable housing and private schools and hospitals. These provisions need to be amended, Jaitley said.

Asked to comment on India’s stance on trade facilitation, the minister said India is unfairly accused of intransigence on the issue, when the country itself wants to implement trade facilitation measures as much for foreign trade as domestic. What India is opposed to, he said, is the “unreasonable positioning” by some developed countries that seek to prevent India from stockholding food. Should food prices fall, the government will be unable to subsidize farmers, cheaper food will be imported and farmers will be pauperized, Jaitley said.

India is therefore demanding that, while negotiations proceed on food stockholding, a peace clause should stay in operation so that India may not be hauled before the WTO dispute settlement mechanism; but some developed countries want the peace clause to end in four years. This is why India is refusing to sign an agreement: “We have no ideological opposition to trade facilitation,” he said, “We just want to keep the peace clause alive while the dispute is on.”

On the question of subsidies, Jaitley said petrol and diesel prices have already been de-controlled, and an expenditure management commission has been appointed to look into rationalizing of subsidies. Nevertheless, he said, subsidies will not be eliminated completely as some sections of India’s economy and people will always need support.

Finally, on the question of promoting peace with Pakistan, Jaitley said the ball is, in fact, in Pakistan’s court and the overlapping spheres of authority in that country mean it is unable to respond even when India makes the effort to create a conducive environment.

Following almost three decades of collaboration, the World Economic Forum and the Confederation of Indian Industry (CII) are hosting the India Economic Summit in New Delhi from 4 to 6 November 2014. Over 700 participants have convened under the theme, Redefining Public-Private Cooperation for a New Beginning.

The Co-Chairs of this year’s summit are: Shobhana Bhartia, Chairperson and Editorial Director, HT Media, India; James Hogan, President and Chief Executive Officer, Etihad Airways, United Arab Emirates; Yorihiko Kojima, Chairman of the Board, Mitsubishi Corporation, Japan; Anand Mahindra, Chairman and Managing Director, Mahindra & Mahindra, India; and Sharmeen Obaid Chinoy, Documentary Filmmaker, SOC Films, Pakistan.