Federation of Indian Chambers of Commerce & Industry's (FICCI) Secretary-General Sanjaya Baru speaks to Kartikeya Sharma on Moody's new ratings, Goods and Service Tax (GST) and economy.

► What explains Moody’s new ratings?

Moody’s new ratings are delayed and ratings should have been upgraded sometime back. In a sense, Moody's is catching up. They have recognized what has been done in India rather than us doing something new or special. Other rating agencies are yet to catch up.

► The ratings have come in the wake of demonetisation and GST when experts are saying that economy has shrunk?

I think Moody's used GST and other policy changes. India deserved to upgrade much earlier. Indian economy is a good story to tell. India’s story is a strong story.

► Will these ratings have an impact on the economy?

It makes easier to borrow internationally as rates are much below the interest rates available in India. ► Many experts say that this still calls for greater fiscal prudence?

There was fiscal liberalism during UPA. They spent money before 2009 elections and then during a financial crisis. This government has been fiscally prudent. We at FICCI believe that roadmap which was announced was a conservative roadmap. We are a developing country and private investment is not picking up and overall growth has slowed down. So, I don’t feel anything wrong in government spending a little more to boost demand.

► But high deficit levels also remains a cause for concern?

I agree. We shouldn’t be having a high deficit. Going from 3.2% of the GDP to 3.5% of the GDP is not such big slippage and India should not be punished for a little additional spending. If the government wants to spend on electricity and rural housing then it should be allowed as it will have a positive impact on development.

► Are you saying that investment in rural economy would benefit?

It’s much better like this. If you expect the future to be better then you take different decisions in terms of spending and savings which helps the economy. If you think future is not bright then spending gets reduced, people save a little more and demand goes down. If the future seems positive then economy benefits from it and that’s what precisely drove the Indian economy from 2003 to 2012. For 9 years India had 8% growth because India was optimistic. Since then the steps taken by the previous government and inadequate steps taken by the present government meant that the overall sentiment became negative. In last one year PM Modi has turned the tide around and has made the mood positive.

► Does GST 2.0 version satisfies the industry?

Not yet. Most people and Indian business wants fewer rates. We began with too many rates but we must understand that any tax reforms, the government tends to be extremely cautious. The biggest challenge for Finance Ministry is to ensure that change doesn’t lead to fall in revenue. I think high rates were introduced to see what sort of impact it will have on the revenue. The first month the revenue went down and subsequently, it picked up. This has given government confidence that even if some commodities are to be taken off from high bands then revenue would not suffer. It is entirely understandable that no government would take up reforms which would reduce its ability to spend. A tax reform needs to be revenue neutral and when it came to GST no one knew as to what the impact would be. And seeing the reality on the ground the government has recalibrated which is very good. It is good the government admits that there is a need for change.

► Can the GST be equated with reforms unleashed by PV Narasimha Rao and Manmohan Singh?

In a manner, yes and in the field of taxation, it is a fundamental change as we have moved into a new regime. In 1991, licensing regime was brought to an end and that was the big reform. The trade policy reforms happened too and then fiscal stabilisation happened. That had a negative impact. People forget that economy’s growth rate from 5% in 1989 went down to 0.8% in 1991. The economy collapsed for a year. It was almost like giving a booster shot to a patient. Then the recovery began and Indian economy bounced back. The impact of GST is similar. Initial impact is negative but over a period of time, the impact would be positive.

So, good economics makes for bad politics?

► In some ways, yes. In the 1990s within Congress, Prime Minister Rao was blamed for a setback in the assembly elections as defeats were heaped on reforms. Even today there is a criticism of PM on hurting the electoral prospects in Gujarat. Some of the reforms have an impact on growth and employment but over a period of time, things will recover. Congress too recovered.

► So, what you are saying is that GST is not only about transformative economics but also a change in behavior and state making its presence felt? It is also about compliance.

Absolutely. This is one point successive Prime Ministers have spoken about and that being low tax GDP ratio in India. Even tax compliance is low. People don’t pay tax. You have people driving AUDI’s but they don’t pay tax. Forcing people to pay tax is not a popular thing to do but no country can afford not doing so. In the US, it is a different thing when they reduce taxes as they are at a different level. They can afford it but the state in India is expected to spend on health and infrastructure. Where will the money come from?

► Many detractors say that Demonetisation built more political than economic muscle. But did it really work against black money?

There were three different objectives to this scheme. First, there was the whole thing about the cashless economy then the second was to unearth black money and third was political. It changed the political discourse. After the initial defeats in Delhi and Bihar, demonetisation changed the political narrative for them. The political benefit was found in Uttar Pradesh. The jury is still out on black economy as to how much black money was impacted. Government is also right in saying that they have the information to chase those who don’t pay taxes but we still hear about corruption. On digital transaction, the data is positive. To that extent, it has had a positive impact.

► PM Modi’s politics and economics somehow resembles that of Indira Gandhi?

In some ways, yes. Mrs. Gandhi’s strategy was to position as the messiah of poor who took away the privileges of the rich. She nationalized banks and did away with privy purse. It did hurt the private wealth but projected herself as the messiah of poor. It is very similar to PM Modi who has taken cudgels on behalf of the poor. Vijay Mallya is on the run and there are notices against him. His assets are being seized and banks are demanding recovery.

► Vijay Mallya is the poster boy of bad debts. Do you think government has done enough to plug the present loopholes?

Not entirely. But the bankruptcy bill and the decision to support the banks have ensured compliance. We at FICCI support corporate governance. All members would like to see Indian business operating in a financially transparent manner in which no one is cheating the government of the day. I think the political leadership should be careful to not to paint every businessman as corrupt or doing illegal things. It is like media saying that every politician is corrupt. Then the political class shoots back saying every journalist is corrupt. The blanket categorization is incorrect. This campaign against black money and people who are holding on to bank’s money should not become a campaign against businesses as a whole. It discourages investments at home and many companies find it easier to do business abroad. This should not happen. We must instill confidence in global business and foreign investment will only happen to us when Indian companies remain invested in India.

► This is happening at a time when many people would say that global capital has not benefited the middle class?

India is not a homogenous entity. There are many states who have benefited from globalization. Kerala has been saved by globalization. IT boom is a positive aspect of globalization. Every country had to deal with the cost of it. Look at Indian economy after 1991. We have done better on all counts. The post-1991 story of Indian economy being integrated into the world is a positive story. West is under pressure. The decline in job opportunities in West is part of a historical process. For last 300 years, Asia went down and Europe and North America went up. Now Asia is rising. Asia will continue to rise. This process will not stop. West has to live with it.

► Is rise in the prices of the crude impact the economy?

Studies suggest that up to 70 dollars are factored into our pricing strategy. Energy mix in India too is changing. More use of renewable is happening. The International market is also changing and the US has become a source of energy. India has entered into agreements with new emerging markets. So, both supply and demand sides are changing.

► Make in India and Made in India have not taken off, why?

A: There is no single India. This was an initiative of UPA and Make in India programme is an extended part of it. The problem of Make in India is that not enough was done on the ease of doing business which is now being the focus. The second reason is that we were hesitant in FDI in defence. We have opened the door but the other side is still waiting and the attempt must be made to draw them in and tell them that doors will not shut and if they would like to go then they would be allowed.

► What does FICCI expect from the budget?

We expect a little pause on the fiscal side. GDP has not grown very fast. We expect that it would have a positive impact on demand. There was a commitment on part of the government to rationalize corporate tax. I hope that policy objective is met. We would like corporate tax is reduced. The rate is regarded as too high. The government also wants to bring it down but as it is the last budget it strikes the right balance between political compulsions and economy.

► EU has brought in laws to curtail Chinese imports. Do you believe that we have been far too liberal with the Chinese?

This is a big issue. The trade deficit with China is unacceptable. We have repeatedly raised this issue with successive governments and one of the reasons for the deficit is that Indian exporters find it difficult to do business in China. They have a non-transparent economy and many disincentives. We must pay greater attention to this. There has been a public campaign on this issue too.

► Why does China gets away with it?

The reason is that we are trying to engage China on the economic side to offset the differences on the political side like border dispute. We have been a bit generous to China in last many years and that generosity is being tested. India finally agreed to work with QUAD. These are responses to the fact that Chinese aren’t attentive. See what they are doing in Pakistan and they have also been not attentive to the issues of terrorism. They are testing us. After all, they are neighbours. Beyond a point India also gets tired. We took a tough line in Doklam and said enough is enough.

► You took over as the Secretary-General of FICCI recently. What policy direction are you trying to give?

FICCI is a ninety-year-old organization. In 1927 Gandhi called GD Birla and JRD Tata and asked them that Indian business should be part of the national freedom. That is how FICCI was born. FICCI is the voice of the Indian business. This role got bit diluted by other things which FICCI did like doing more events rather than invest in research and technology. We would strengthen the knowledge capacity of FICCI. We have signed a memorandum of understanding with ICMR. We have the agreement with Indian armed forces to look at what Indian industry do for them to innovate on new technologies. We want to be a knowledge-based institution and not as a source of lobby and seminars. This will strengthen the personality of FICCI.