oh yes if you go that way right there sir there's coffee and soda and water go ahead I think so because Maria just filling up the one here yeah we keep that for next week okay what is the most comfortable thing for you to do I mean will you stand from here and then just how do you oh can you you can control it through that yep so yeah you just press the forward this is forward moves the slides forward this is it moves the slides back and is there a pointer yeah in like the red one red one points okay perfect this is lovely just make sure you turn off your phone my phone yes well good afternoon or to all of you and welcome to the Carnegie Endowment for International Peace I'm Ashley tell us I'm a senior associate here at the Endowment in the South Asia program and it's my pleasure today to welcome Ajay Chibar who I think all of you who've heard him before will know the quality of his presentation and his work but I can assure you in a special way today you're in for a treat because the presentation that he is going to make on India's budget is at a level of detail granularity and insight that you are not going to get from the general commentary on budgets that have been visible in the last few weeks as all of you know this budget that Ajay is going to speak about has been a much anticipated budget because the first budget that Prime Minister Modi released a year ago turned out to be something of a damped squib in fairness to him of course that budget was released within weeks of him coming to office and so everyone had high expectations and was wondering whether the second budget would be the budget that actually defines the pattern of reforms for India for the years to come and this budget of course was not a big bang budget but it all the same was a very interesting budget because of its ambition in many crucial areas and I think some of the pessimism in this city about this budget was perhaps unwarranted because people quickly concluded that the absence of the big bang necessarily meant the absence of reform. I don't think that is quite the case. What Ajay Chabad will do this afternoon is actually walk us through some of the nuances and the detail of the budget and obviously I'm not going to give his presentation so I will let him draw his own conclusions but it's really a presentation I spent some time looking at the slides last night and this morning that walks you through details that oftentimes are missed in the broad 80,000 feet surveys of the budget. For those of you who have followed Ajay's political career in recent years he obviously needs no introduction but I'm going to introduce him all the same very very briefly. He spent a good bit of his career at the World Bank, 25 years to be precise, managing the programs on Vietnam and Turkey, Indonesia and the Pacific. So there's absolutely no doubt about his competence to understand budgets and numbers and other things that most people who are not involved in economics consider to be esoteric. More importantly he was actually the lead author of a very seminal World Bank study on governance and an early study that was published by the World Bank in 97 on the role of the state and if I remember correctly it was actually one of the first studies that attempted to integrate non-economic factors into the understanding of development economics at least insofar as it affected the work of the bank. Ajay then went on of course to be in New York where he worked at the UN development program and most recently was India's first Director General of Independent Evaluation and I hope at some point we will have the opportunity to hear stories about the challenges that he faced in setting up that office because governance as you might imagine are extremely low to evaluate themselves they're happy to evaluate everybody else and Ajay had done a remarkable job actually putting this office in place and I hope that office continues to do the work that he set out for it because in years to come much of governmental success will not be simply measured by its ambition but actually by its delivery. So without further ado I'm going to yield the microphone to Ajay Chabar who is currently spending a little time here in the city as a visiting scholar at the Institute for International Economic Policy but continues of course to be deeply involved in issues relating to the Indian economy. So welcome Ajay I hope this will be the first of many visits to the Carnegie Endowment. Thank you Ajay, thank you Ajay for that very generous over generous introduction I'm really not my political career is has always been short-lived but it's the economics that I will focus on today. Ajay probably could have given a better presentation than I will but I will walk you through quickly through the through the presentation and and then of course I mean if you have further questions we'll be happy to to take them. I've just organized the talk a little bit around what is the economic context of the budget some of it Ashley already mentioned the fact that you know the first budget was so soon after the government took power that it had very little time to actually change it and one of a good friend Swami Nathanaaya described it as the UPA described the first budget as the UPA budget with a saffron lipstick I don't know I'd agree with that but per se but you know there was very little really new in that budget it was more a carryover and the other joke was that they had they were so shortchanged in the finance ministry that they had Mr. Chidambaram write the budget for them anyway so this was the first big one that the new the new government could call its own budget so obviously there's a lot of commentary and a lot of hoopla on it anyway but there's an economic context behind it which I'll just walk you through and then the budget itself what are the potential game changers in this budget then looking a little bit beyond the budget and and what does it tell us a little bit about the economic philosophy of this government and does it have a clear roadmap does it not I'll just take you through that now the economic survey of course describes the context as India's sweet spot that growth was already beginning to accelerate we had a very sharp decline in inflation lower fiscal external deficit bigger foreign exchange reserves but of course we all know that you know India's got a huge backlog of problems some of it coming from very ancient past but some of it actually that made themselves quite evident in the last four or five years some of these I list here but let me just take you through some of them one of course is the fact that GDP we had GDP numbers which were showing a decline in the last two to three years but we have been delivered what I call a do so those of you who don't know cricket there's there's a googly in cricket right which is kind of fairly common which is the left-brake bowler trying throwing a ball that balls to the right but a doos rise and in probably more a subcontinental invention by subcontinental bowlers of an offspinner going the other way and so we had these new GDP numbers that have just been brought out by the Ministry of Statistics which have delivered a bit of a doos rise we call it because they show that India was actually beginning to accelerate quite rapidly in the last two years and because they have not given us enough information going far back it's very hard to understand these numbers and they're also hard to reconcile with the fact that many other indicators whether you look at taxes whether you look at credit off-take whether you look at investment whether you look at you know other physical indicators on the economy don't really synchronize well with the new GDP numbers now there are three things they've done with this GDP that one is they've changed it from GDP at factor cost to GDP at market prices but as you can see by itself that may not have made such a big difference the base year change has made some difference and then they've got new data new surveys which are which the statistics office claims are more inclusive and that has changed things quite considerably as you can see what it has done is of course changed the source of GDP quite considerably for several service related sectors have gone down not all though if you look at trade repair hotels and restaurants that seems to have gone up manufacturing and mining and quarrying which were for example for 2013-14 which were negative have actually shown reasonable uptake so you know there's a whole set of these factors that one doesn't really fully understand and and so it's not the it's not the shift to market prices per se that have done it it's there is some base year effect but there is some new data which is very hard to reconcile with other indicators so there's still a question mark on these numbers and the issue is really how how should policymaker take these numbers but I'll come back to this as we speak as we go forward now on the inflation rate of course we've had a fortunate break if you like we've had as you can see we were sorry we were other than Vietnam probably we were and maybe to some extent Indonesia we were even among the emerging economies we were pretty high up there on the inflation scale we had seen a decline in inflation since about December of 2013 and this of course is a combination of external factors oil prices coming down food prices internationally coming down some perhaps some action on domestic food policy as well may have helped but clearly inflation is on the downtrend we have seen over the last four or five years substantial appreciation of the real exchange rate which is harmful to our exports and of course encourages more imports and what has become more evident is that in the past the real exchange rate was calculated using the wholesale price index so if you look at the real exchange rate based on the wholesale price index it doesn't show much of an appreciation but with the new data series that on CPI that have been now adopted by the Reserve Bank of India if you can recalculate the real exchange rate based on the CPI you see quite a big divergence between the two because the WPI and the CPI have diverged quite considerably and you see that based on that you do find quite substantial appreciation of the rupee you can look at comparators with some of the other middle-income countries also and as you can see India's appreciation is way up there if you look at broadly at competitiveness indicators also India has been doing pretty badly in the last five or six years as you can see the red line is India and our competitiveness index value is coming down our rank is also coming down quite considerably if you look at doing business indicators also India is not doing so well as you can see India is the red bar here there's been there's there's reports of some improvement this year but by a couple of positions but I think there's a long way for us to go on that score and of course the outcome of all that is that FDI inflows into India real FDI inflows into India have been quite low as a percentage of GDP we are probably among the lower end of the emerging markets as well of course our index stock exchange index which I don't know what that reflects obviously inflows coming in not FDI but other inflows coming in into India we've done quite well we have also started started to rebuild our foreign exchange reserves and that's a good thing the because of all this of course the external current account deficit has started to come down now part of this is of course the you know was probably the slowdown in the economy part of this is because a gold imports were controlled once again but the question of course is gold is still coming in into the country and where is that being shown now if it's not being shown in the current account deficit it is being shown somewhere else I mean gold the IMF classifies gold you know on the in the current account but for given the reasons why gold is being important into India you sort of wonder whether it is a capital account or it should be in the capital account or should it be in the current account or in the capital account we can debate this if you like at some point if people are interested in that kind of thing so how much of that improvement in the current account reflects improved competitiveness how much of it is temporary and in a way cosmetic if you were to actually show gold imports coming into India they might be showing up in other other in some other other part of the current of the balance of payments sheet somewhere but surely gold imports are coming in and they are not coming in recorded in the current account deficit now coming to so this is the context that I wanted to share with you that we have question marks on the GDP we have a sweet spot in that inflation has come down we have a window of opportunity for sure and it is in this context but we have of course these huge challenges that we have to overcome I'm not talking anymore yet about the social challenges I'm just focusing on the economic challenges of competitiveness of being able to attract a high quality foreign direct investment into the country in order to make it you know have this improvement in manufacturing in make in India that we talk about but of course with these new GDP numbers one doesn't really know how bad a situation we are in with the old GDP numbers we knew we were in a very pretty bad situation and we had to get out of it but you know with new GDP numbers if the government and the government seems to have accepted these numbers although the economic advisor and even the Reserve Bank governor probably are not recommending basing policy on the new numbers but but for all practical purposes the government has adopted the new GDP numbers so how bad is the situation one doesn't know or how good the situation is one doesn't know but and therefore one there's a question mark on how you judge policy whether you accept the new numbers or you don't now in this is the context in which this budget has been put together and the budget one of the main features of this budget is that it has big it has deviated from the fiscal consolidation path that was accepted by this finance minister last year when he presented the budget he was given an opportunity then to shift from the fiscal consolidation path he didn't do it then but he has done it in this budget and of course the target of reaching 3% fiscal deficit has been shifted by one year and so of course the question that does arise is if the new GDP numbers are accepted by this government then the situation is was pretty good the growth is accelerating inflation is coming down then why do you have to deviate from the fiscal path and why do you have to push growth as hard as you appear to be wanting to do and for that I think it's interesting to look at the maths of the budget sort of you know when you all said and done the shifts are not that big and I have a table here which basically summarizes in a nutshell for you where the shifts are so we have a decline in the fiscal deficit from last year by point two percent of GDP we have higher capital spending by roughly point three percent of GDP the for all the big talk on fiscal devolution and I'll come to that because I'm actually a strong proponent of it the actual numbers the shifted numbers isn't that large because the finance commission gave with one hand but the center then took it away in the central grants in the central transfer of money to states by a considerable amount and I'll show you a table on that as well but it the total amounts to about point three five percent of GDP so this is the sum total of the entire shift in the budget lower deficit higher capital spending transfer to states and this comes from slightly less current expenditure less subsidies so because of the oil price we have saved on petroleum subsidies by about point eight percent of GDP but our food and fertilizer subsidy will go up this year and so the net benefit from lower subsidies despite all the rhetoric of you know jam as they call it is actually only point three five percent of GDP of which the savings in petroleum alone is point eight percent and of course if oil prices don't turn out to be as low as being projected for for the for this year then we may lose some of this as well and then there's additional disinvestment of about point three percent of GDP so this is the you know with all the numbers this is the budget math that we are basically talking about and this is the picture on what the 14th finance commission which the government adopted for for the budget as you can see the finance commission gives increases the tax devolution from 32 to 42 but then the central assistance from this to the states drops from 27 to 16 so the total effect is not that big and this is what amounts to close to point three five percent of GDP but what but it is a very positive thing because what it does do is it gives much greater control to the states for the money that they have when the money was coming in this form the center was not only telling the states how to spend the money it was actually forcing states to spend part of their money in as a share of the total central schemes so that state money which was generally considered fungible was now tied into the implementation of the central scheme so by reducing also the number of central schemes I think what this the the idea of this cooperative federalism takes on some real meaning although the total amount of transfer from the center to the states is not that high now what are some of the risks and worries the quality of the fiscal consolidation is question mark the revenue deficit remains quite high at about 2.8 percent of GDP and stays high you know when you project into the future the tax assumptions are quite optimistic but at the same time unless we see some more action on the GST which is going to be a bit of a struggle there is no clear effort to widen the tax base so we still remain in a very narrow tax base zone and as I mentioned on this petroleum subsidies projected to decline by 0.8 percent and if that doesn't happen then the fiscal math starts to go apart and again on this investment we've always fallen short so of course we've just had a huge spectrum license which will has brought far more than probably what the government hoped for so some of this worry on the disinvestment might not be as worrisome there are other interesting features in the budget there's the establishment of a public debt office which is a good thing I mean people have portrayed it in the press as taking away the power of the RBI which is not I think good public debt offices have a very useful purpose especially in a middle-income economy where it is very unclear what the total quasi liabilities of the government often are and a good public debt office especially if it's independent should be able to put some constraint on on the fiscal side the Monetary Policy Committee has been accepted flexible inflation targeting has also been accepted personally I don't think much of this I think flexible inflation targeting is an oxymoron if inflation is below six percent it really doesn't matter it doesn't matter to me whether it's three percent or five percent I mean below six percent all the evidence shows that if inflation is above six percent it starts to hurt growth but when inflation in a middle-income country is below six percent then fine-tuning it between you know three percent three point five percent or five point three percent I mean it's not that critical in any case it's very hard for countries like India to have inflation targeting and then consider monetary instruments to address it when some of the causes underlying causes of inflation are on the real side so I personally I don't think much of it but if the it gives some assurance to the credit agencies that we are going to remain prudent then it's alright I just worry that you know mechanical application of this in future might create problems there's also the idea to merge the FMC the forwards market committee with sebi which is probably a good thing they have demonetization you know one of the things that people want is that when this goal comes in how do you avoid it how would how do you avoid people wanting to hold gold and then have the say at the same time you want to demonetize it and so they have had this idea of sovereign gold bonds I think we tried this before I doubt if the precautionary motive for holding gold will go away and a lot will depend of course on how inflation plays out because a lot if inflation comes down I think some of the worries that people have and why they hold gold will probably go away but if you want we can talk about it there's other things that have been done the wealth tax has been abolished but replaced by two percent higher income tax then the last one is interesting it is and not a very good policy which is that FDI and FII are to be treated the same and why I say this is that here are the limits existing FDI and or FBI FII limits and as you saw earlier we have had much less FDI than we hope to have and of course the way to fix that is to address real structural problems address the reasons why FDI is not coming in and also worry about the fact that too much of FBI is coming in because that complicates macro policy quite a bit and what they have done is they have said basically FDI and FBI will be treated the same that is the same limits that apply to FDI will now also apply to FBI that is you bring the two together as far as you know the classification is concerned and this could be quite I mean it would make our numbers look good on inflows but the quality of those inflows is a huge question mark at least as far as I can see and unless somebody knows better can it reeducate me on this I'm quite worried about this so you know let's look now at the pro growth elements of the budget which is what the big push on this budget is there's certainly more infrastructure spending some 70,000 crores but as you saw it's in percent of GDP it is not that large there's the fact that you know PPP model is not working there's no clarity on a new PPP model as such but for the power sector five ultra mega power projects have been brought into the budget in something called a plug-and-play mode it sounds very playful but it's more I guess the idea is all the clearances will be done before the investment is get started so so that the investor can just come in and plug into the national transmission system if you like the more interesting one for me is not 70,000 crores because that's a drop in the bucket is this new investment and infrastructure fund which could be a game-changer it's a small amount at the moment but we had previously the idea under actually under a Congress government which the previous NDA government kept on of a national investment fund where all the privatization proceeds of PSUs would be placed into this fund for infrastructure investment that fund was gradually eroded by the government and particularly when we ran into fiscal problems during the last global recession it was completely brought into the budget so the idea of having something which sits outside the budget if it is genuine and you can use it like a sovereign wealth fund to leverage more money for additional resources either from outside the country or from inside the country this could be an interesting idea there's of course the push to do ease of doing business but much of it is in state hands Gujarat for example if it were a country would have a doing business index of 60 it would be ranked 60th in the world so if India's ranking is 142 you can imagine that there are many states which are probably at the bottom of the world ranking so if if all the states caught up to Gujarat's level you know we would already be 60th in the world so there's a there's obviously then corporate income taxes they've announced that they will bring them back to bring them in kind of line with global standards to 25% and all the loopholes will be removed but you know it's it's in 2019 so four years now the Gar has been delayed by two years I mean there's there's no clarity yet on retrospective taxation although the government has clearly said that they do not intend to do it but legally it's not off the books yet there's a few other things there's the rights tax benefit I don't know how big that will be there's the import duty on inputs components has been reduced a mudra bank established there's the interesting game changer for me is this new bankruptcy law because we don't have chapter 11 in India and we have a lot of contractual issues whether it's between public sector private sector or within the private sector or within the public sector sometimes you have you know one part of the government fighting the other part of the government in court because there's no clarity I mean so this could be interesting now all said and done about the infrastructure what you see is that the road sector gets a boost the railways gets a boost defense gets a boost rural development gets a bit of a boost but the spend on social the social spend and agriculture goes down so we have a kind of a Gujarat model if you like at the national scale you know much more on infrastructure much less on social spend although I must say Gujarat did do quite a lot on agriculture so I shouldn't really call it a Gujarat model but just as a joke I put it up there now one very interesting thing in this new is on investment or disinvestment disinvestment by the way in India we don't use the word privatization it's politically incorrect to use the word privatization so they call it disinvestment when you sell a minority stake in a company you call it disinvestment when you try to sell a majority stake in a company you call it strategic disinvestment which is kind of privatization right so as I said this was started under the NDA government when Mr. Bajpayee was president prime minister and Mr. Shuri was the Arun Shuri was the disinvestment minister pursued it quite aggressively although in some total it didn't amount to a lot but then the last ten years the UPA government completely stalled all this and had some disultory disinvestment I mean they didn't even want to talk about strategic investment so the big change here is that for the first time sorry the strategic disinvestment has been brought back there's still disinvestment which is the minority sale but this has been brought back which has the potential for huge efficiency gains and these are the some of the companies that are now being considered to be on the block I can talk more about this if you like but I'll just go on because we're running out of time but it is an interesting move and we'll see how well it goes the government says the finance minister says we are also a pro-poor budget and there are some features to it but the funding for Manrega has been kept but other programs the education program the health and the child development program these have been reduced and states have to pick up the slack there's a big push on housing and toilets but it's a lot of construction activity related to this whether they have a clear idea of how to fix our India's toilet problem I don't know but we can discuss that if you like the other interesting thing for me is this universal security system for the first time India is now moving to you know for a country with such a large amount of disorganized labor and self-employment as universal social security is not an easy thing obviously but clearly the signal from this government is that that's the way they would like and this will I personally believe will help in doing labor reform and other reforms because you do have now a at least some security for people that you know you you can rely on and the the three big schemes that they have announced here the Atal pension Yojna the Pradhan Mantri Jyothi Bhima Yojna Suraksha Bhima Yojna these are all ideas which if properly implemented could quite significantly change our social safety nets in the coming years and I think there's now discussion going on about how the existing schemes will map into all this but other but there's huge cuts in health spending so this is a this is sort of you you you give people this and then you take away this but it's a move which is potentially of great interest to in India and I think potentially quite a positive shift if properly implemented the government claims it's also got a pro environment budget well certainly their carbon taxes have gone up and in fact India will now meet the global carbon tax requirements quite easily with these new cesses that have been put on petrol and diesel and on coal there's there's targets for renewable capacity these are the targets but these are with 2022 and you know how we will get there of course is not very clear so it's a it's a it's an asp it's a it's it's a budget that I believe starts to show shifts from handouts to handups you know it's more of a budget that starts to has small bank reforms as Ashley said but you can begin to see the role of the state shifting from provider to enabler and as I mentioned while I was speaking game-changers the devolution to the states the new investment and infrastructure fund the bankruptcy law universal social security and strategic disinvestment in my mind are kind of game changes middle the middle class seems to have lost out in this budget the middle class has higher service tax and also higher petrol prices because of these cesses that have been put so I don't know the middle class may not be very happy with this budget but so what's left then what was missing in this budget well we have of course and between budgets that needs to be done if the kind of incrementalism that the government talked about both in the budget as well as in the economic survey has to begin to add up one is of course this land acquisition law which by the way yesterday or the day before did pass the lower house and is now in the upper house so this is a revision to an existing land acquisition law there's stalled infrastructure projects amounting to about 7% of GDP and there's no clarity on how these will get resolved because of these stalled infrastructure projects and slower growth you have very high NPAs in state banks so NPAs plus restructured loans in the state banks on average now are around 12% and in in a band of these state banks these are reaching 16 to 20% so there's a if you take all the state banks there's a tier of state banks that are far more risky situation than some of the others so there's no clarity yet on how these will get resolved and this is still a very large part of the banking system in the country so the question is if you don't resolve these how do they play a role in the new growth strategy that the government has you have no clear PPP model as I mentioned there was no mention of a power sector reform there's the five plug-and-play projects for the generation side but our real problems for India on par are all on the distribution side and there's no clarity there as far as I could see then from as I said from hand up hand up hand out to hand up but the hand out for food and fertilizer remains and I'm not saying they should not have food and fertilizer subsidies but it's the way they are being delivered that makes a huge difference and there is a excellent report headed by a former food minister called Shanta Kumar that has been presented to the government but as far as I can see none of its recommendations have been accepted I've already talked about the middle class and agriculture and the clarity on the energy so talking about incrementalism since we have the World Cup going on these days you know in cricket you start slowly in the first 20 overs and then you accelerate in the last 20 but in politics you have to go the other way you have to do the difficult and quick reforms quickly in the first two years or so and we already lost almost a year because of that previous budget so we have the next budget perhaps and I you know before we start looking back at another big Lok Sabha election and we have a huge number of state elections in between so if the Delhi if the Delhi election as was claimed held back the big bang reforms at this time we have we have Bihar we have UP elections coming you know we have big states that affect the mathematics of the upper house of parliament very significantly so we have to get these some of these things done soon so we started off with the sweet spot can the elephant fly and I think for us the issue for is can the elephant even can run if we take the new GDP numbers we seem to be on the run we have growth now projected officially projected GDP and market price growth projected at 8.4 percent the Chinese have just come out with a projection of 7 percent so we clearly going to be faster than China and now of course when you adopt these new numbers then the question comes do you go for double digit growth and how quickly can one get there so I think my assessment overall is that if you're looking to unshackle India for faster growth the budget does make a start and I go back to the the most famous finance minister and economic advisor India ever had to end my talk I said who said it well when he said Jaharaj Vipari Vahapraja Bikari meaning where the state is the trader the populace becomes paupers and we begin to see in this budget some move in the direction of getting the state out of the hand out of the business of business so that we can grow faster and become a less poor country and certainly help to reduce poverty in the country thank you I'll be happy to take questions as you like thanks Ajay I promised you when I introduced Ajay that the presentation today would be detailed and meticulous and I think what we saw was a remarkable antidote to much of the commentary that has dominated the city since this budget was released there are obviously a series of questions that come out of Ajay's presentation I want to open the floor to individuals who may want to ask questions and make interventions the usual ground rules apply just introduce yourself so that Ajay knows who you are and keep your intervention as focused and pointed as possible if you want to make a long and lengthy speech meet me privately afterwards and find a different forum for you but the floor is yours if you don't mind actually I want to start with a question on the infrastructure fund because you correctly pointed out that that is potentially a game changer since infrastructure such a huge need in India and since a PPP model hasn't quite delivered what must the infrastructure fund do to obviate some of the problems that we've seen in infrastructure in the last several years so I think it's not just the so it's not the infrastructure fund alone but the ability to attract money into that fund will require changes that will cover a number of areas so it would require of course changes in the land acquisition law itself because if you one of the problems we've had with the existing PPP models is that because partly it's that the economy slowed down right but partly it was that because of difficulties in acquiring land the projects which should have completed in three to four years were now giving no return at all in the fifth sixth year so all the finances and the economics of these projects goes out of whack and then there was no clarity on how you know the kind of revised projects would get restructured or how they would be able to go forward so people have invested large sums of money initiating some of this and then of course are seeing no returns of the money the finances are coming out so I think it will require the idea of the infrastructure fund is interesting because it sets it becomes a catalyst as it were to say okay if you want to attract funding into this fund what are the other steps you will have to take in order to be able to to do this in a particular way it also provides then if it is run competitively and outside of government it then provides a place from where you can do careful analysis then all you know if you have this amount of money here's an array of potential projectizable infrastructure sort of locations how do you then rank and where you will put your money in first it also then provides the opportunity to decide how we did how risks will be shared and what part of those risks the government has to share in the private sector has to share so there's a whole slew of things that has to be done which are not necessarily in the infrastructure fund that are around the fund and some are in the fund and how it is run that I think could be potential game-changers so would it be fair to say that the infrastructure fund is at best an enabling device exactly and much more has to be done in terms of policy decision-making and change for it to realize its potential that's right but also at the moment you see so you have a road ministry how does the road ministry sit and decide which are the priority places in which money should go and so if somebody comes in with a project how do you say well this is this is a high up on our priority and we are willing to go the extra mile to do this that and the other if you have an infrastructure investment fund you have a place where you know commercially one can look at these and say this is where this is where the government should put where it can back as part of this sharing arrangement with its own funds what the private sector will bring in and these are the priorities that should be established for this so there's a way in which you you will rationalize a lot of this through a through one entity like an infrastructure fund now people say well we all we had the there was this infrastructure bank that was set up earlier but you know that was so far removed from government as such and had some government money but really not really run as part of a sovereign wealth fund of the government that it didn't have that kind of you know kind of macro scrutiny if you like now in some of the funds elsewhere yes the source of the fund has usually been dollar surpluses that have to be recycled that's fashion where what is the source of the funding in the infrastructure well fun obviously government of India has put in a small amount is the expectation that foreign investors might be is it open to foreign sources of money outside of India as well yes okay I mean should be okay in fact you would want you would want to be able to put in your privatization receipts into this fund or any other source of money that you have but typically I would think of you know the privatization receipts as a major source of funding for this sort of fund so that you you want to focus on public goods investment you want less of PSU investment because you don't know how good that is so you want to be able to privatize some of these and then shift that money into such a fund but you also want to be able to leverage international resources and foreign resources into this fund and that will a lot will depend on how well you run such a fund and you know what are the returns what are the risks and how do how are those risks being shared obviously but you could also of course raise funds through tax free infrastructure bonds and you could link those in into this fund as well if you like but there are many ways sure one last question of this what is your judgment about the state of debt markets in India I mean is does it make sense to be investing in creating a regime for debt instruments because traditionally people have looked at banks right at the source of funding for infrastructure yeah and India has been odd in that respect because a lot of the burdens are borne by the banking system right as opposed to the creation of private debt now will the creation of the infrastructure bank in a sense enable the expansion of a private debt market is that yeah I mean the I mean you you're absolutely right that India has relied too much on the banking sector and within the banking sector if you look at the portfolio of infrastructure lending all of it has been with the state banks no private bank has lent any money to any infrastructure project which tells you something right so all of the bad debt in infrastructure is is is in the hands of the state banks and and clearly I mean you know the banks are not the place in which you want the kind of 80 or 10 year money or long-term money that you need for infrastructure investments so you do want to have you know the the money market and the bond market develop much greater in India than you have at the moment and that's why I think now giving a greater role to sebi is that is being considered as part of that having inflation come down will also help because if you're uns and also the variability on inflation is so high that it's also an issue but I mean there are a lot of things that will have to be done to develop a bond market but such a fun and how it functions would certainly help yes I think yeah I'm not sure but I think yes just wait for the microphone so that Tom Timberg consultant I wonder about if you could ask you to do a little speculation about what's going to be done by as law the press has by stealth in three particular areas first labor reform which wasn't mentioned much in the budget second the land acquisition act which there seems to be if you read the Hindi press local press violent reactions but people who are generally pro BJP BJP and the final issue is is the retrospective tax issue I don't know if you saw the Financial Times today but apparently the decision not to proceed is rather limited and it's only act things that are after some period and so forth because they're a number of billion-dollar cases that are making their way through and one of them hit today yeah so yeah on labor reform I think the way this started it is very interesting because the way it was started was it was started in one of the states Rajasthan I mean you can question how big a reform that is but anyway it's the it's doubted as a labor reform of Rajasthan and it does change some of the limits by which permission has to be sought so it is a reform and at least it's an experiment or in you know in China they say you feel the stones before you reform so this was feeling the stones and and so that's still in play now two other states have also said they would like I think Haryana and one other state huh not Andhra it's anyway I forgot the other name but two other states have said they two BJP run states have now said that they would like to start this so one way to think about reform in India is you know it's like here in the US you see law you can certain things are in the hands of the state certain things are in the hand of the center now there's label laws and land acquisition laws that are federal but there are provisions there to make them to tweak them such that the decision making goes into the hands of the states and if so the labor reform of course started by that by Rajasthan saying to the center please give me permission to do this and the previous government would probably not have given the permission but this government said we'd go ahead and then it requires the president to sign off right so you could think of a whole series of reforms going in this way that you start by giving permission to states whether it's on land and if the land acquisition law reform land acquisition law does not pass Rajasabha then there are two options to the government to have a combined session which is a like a nuclear option but or you can say okay I'll tweak it so that you allow states to go ahead on their own you know there are some options there so personally I think the way to do a lot of these sensitive reforms would be that route because the electoral math is such of the upper house of parliament we're not going to until 2019 have probably a situation where the BJP government would be able to have a majority in the upper house you know given the timetable of state elections so if you want to do some of these reforms you will have to do it this other way and the way forward probably is to go with that and then have a have an experiment to see how certain states are performing in this so that others can copy so you have cooperative federalism but you also have competitive federalism competitive for investment but competitive for reforms as well and I think that would be quite interesting way to go forward on some of these issues on retrospective taxation I don't understand I mean the finance minister is a lawyer and a legal brain of the highest caliber so he must know something on this that that this can be because he's clearly not wanting to openly announce that the government will not go in for retrospective taxation and you know there might must be some reason that I I'm an economist I don't understand because otherwise it's kind of sounds like a no-brainer right that you say to the world I want you to come and invest and I want to assure you that the policy of this government is no retrospective taxation they're saying we are not going to do it but they don't want to make it into a policy of the government there must be some legal issue that I foresee don't understand that is behind it and until that happens we will continue to have this kind of uncertainty where people will be testing people will not be sure how long and then you can never be sure what the next government will be and what they may or may not do so unless you have this this sorted out it's going to be quite tricky I think in private conversations what he has said about retrospective taxation is India has to affirm its sovereign right to be able to levy taxation retrospectively if it chooses to but as a matter of policy it won't now the problem is that's true as it goes but you know that makes sense if you've never actually done it in practice to affirm the sovereign right when you have done it in practice affirming the sovereign right only sends the wrong market yeah and so the problem that they have now is that the more they talk about sovereign rights the worse yeah the signaling to the markets is and so given our history I think we have to send the opposite signal at this point in our level of development and maybe in 50 years from now we can go back to our sovereign right but at the moment we need investment but the gentleman here I'm Vijay Indrakumar and I'm retired now used to work for department research my family is in business so what are the estimates of GDP that you make there's considerable amount of black black economy there right and what I'm told is a lot of the black money goes to Mauritius goes to where to Mauritius Mauritius yeah and some of it comes back so what what do you think the actual GDP would be what's the estimate of the black economy and how much of it does go to I mean I it's not my estimate but there are studies on this issue and I think the last one so when we started studying this issue the estimate was 10 or 20 percent but every new study has increased the share I think the last one if I recall correctly was almost 50 or 60 percent of GDP so I mean I can just relay you that that's what the people who have studied this issue have basically made an estimate but I think the way forward is what they are thinking right which is for example this whole issue of transfer pricing if you eventually get to 30% 25% corporate taxation you would have probably reduced a lot of the incentive for transfer pricing so one way to address this issue is to go after people like there's all this talk in the press about going after people you know bring your money back or else and you know this is your last chance and all I mean you know people are not going to bring money on that basis the simpler way is to rationalize yourself so that you are there's no big incentive to taking your money to Mauritius and then round tripping it back into India I mean the only benefit is to people getting payouts for for whatever right all the loopholes for corporate tax also have served the same purpose basically you get into a bargaining game on how much loopholes you will get so if you start to play in a global market and then you have to rationalize all your tax and other systems into that market then you basically take away a lot of the incentives for all this and gradually of course people start to come back to India good people who left start to go back and good money that left starts to come back into the country and a lot of the investment that we have seen in many countries is some of it is real foreign investment but a lot of it is in this case I expect a lot of it will be Indian diaspora money that goes back into India and you don't need to have these special you know incentives like the RBI had to have last time the rupee went to 69 I mean the RBI governor had to give a 3% interest advantage to bring money back that was quite unnecessary actually in hindsight but of course and panic times that's what you had to do but you know in the end we need to get away from all this and get to a system where we are rationalized to some extent so I'm not a big believer and I mean enforcement is fine but I'm not a big believer in that our ingenious mind has many ways to get around that and the Indian mind is as ingenious as anybody else's and far more ingenious than any tax authority in India so this makes no sense at all which is actually the best reason not to overemphasize enforcement yeah I mean I don't know why we ever even got into that issue in the first place Sanjay thanks Ashley Ajay enjoyed your presentation Sanjeev Joshi Puri run a business and public policy consulting firm focused on US India issues there are a lot of questions of course that can that come about from your presentation but I'll focus only on two specific issues the first one is on subsidies you alluded to this a little bit in your presentation but I remember about six months ago I was fortunate enough to attend a talk that you delivered at the Center for Global Development where you talked extensively about subsidies and you made the point during the talk that one of the problems in India is that they don't mean means test their subsidies and their cash transfers and so the subsidies are not efficiently targeted and end up going to sectors of society that they were not meant to go to in the first place how much progress has the government made via this budget on that particular score that's my first question my second question is on the issue of monetary policy I think India is going in the direction of a lot of the erstwhile Commonwealth countries where you know for example in England and in other Commonwealth countries you have a parliamentary committee that decides what roughly the inflation rate should be and then the central bank does the actual execution of maintaining inflation around that target in India we've already announced that the inflation rate should be six percent plus or minus two percent and then Raghuram Rajan is saying that over time that band will be tightened to maybe plus or minus one percent over the next eight or ten years but my question for you is given that that announcement has already been made what is India's monetary policy committee going to do and how is it going to make sure that it doesn't interfere with the RBI in terms of the day-to-day micro management of the inflation issue thank you yeah on the subsidy issue well I mean on certain subsidies we are using now this DBT method what is called conditional cash transfers in other countries India calls it direct DBT direct benefit transfers DBT is the Indian word for cash transfers right so we have we started moving into cash transfers in number of areas call girls scholarships we had for a while also on gas cylinders which we reversed and now we brought back to DBT but you could think of many things that could go by DBT right you could do your entire fertilizer subsidy through DBT if you wanted to and you take out a lot of the middlemen in the process and you could decontrol URIA prices today in India you know you have to use NPK the amount the way you use nitrogen phosphate and calcium in a certain way in on the soil right then the norm generally is 4 to 1 and in India because of URIA pricing it's 26 to 1 so we are actually doing damage to the soil today by the way we are pricing fertilizer and then of course you don't know how much goes into Nepal and Bangladesh and wherever else it goes right I mean all those stories you keep hearing about so the simple thing is to do DBT you say okay these are the farmers these are small farmers let them get this much money let's decontrol the price of URIA and go forward so so we we are now gradually building up the mechanisms to do this right so we have the Adar we have the Jan Dan which is bank accounts and we have more mobiles also as a way to because you can transfer money now through mobiles as well and you can identify people on mobiles with thumbprints so we have the we are beginning to have the infrastructure to deliver DBT but the means test is you still a means test right you still have to decide who will get the subsidy and the Food Security Act says 67% of the people will get the subsidy the Shanta Kumar panel that I mentioned says this was outrageous this was a political move of the government which everybody had to accept as someone said who could be against an act called the National Food Security Act but it's crazy to have a subsidy system in which 67% of the population is getting rationed food right so you have to reduce that but then you have to also test it and all the evidence that at least the studies that I got done showed that the biggest leakage was not among the poorest people it was actually in this band of people from 30 to 67% where most of them wouldn't even show up to pick up the food but the ration shop was still getting the food that was assigned to them and and you know so I mean the means testing will still be necessary so what the technology does is only tell you that if Sanjeev Joshipura should be getting this he is Sanjeev you are Sanjeev Joshipura this is your account and this is the money that goes into it it can't decide whether Sanjeev Joshipura is eligible for this or not that is a still a means test that has to be carried out and I don't think they have made much progress on that issue on the money she coming so the I think the new agreement is 4% with band of plus yeah so if it's plus 2 and minus 2 you're going from 2% to 6% it's such a wide range that quite frankly personally to me it doesn't matter who sets this thing whether it's the RBI or the government I mean you could it's such a wide range that you could be anywhere and it and quite frankly at our stage of development I don't even know how important it is as I said all the economic evidence shows high inflation hurts growth but when you are in this range of 2 to 6 it doesn't really matter and I think the RBI governor knows that which is why he's when being asked how what's the meaning of this 2% this way that way he's probably saying well in future we'll probably narrow it so that you know it's it's more credible because at the moment it's if you set a target of say some whatever the committee is sets a target of 4 or and then you could be at 2.3 or you could be at 5.9 and it doesn't really matter because that's your range and you can justify it and explain it right you don't have to do any actions when it deviates that much so it's a it's probably some sort of a signaling device but personally I don't know I'm not you know I'm not a monetary expert but my reading of the literature on this is that inflation targeting is not upon not a instrument that has been very successful and not many countries even probably have it if it becomes so and then when you say flexible inflation targeting I mean that's a complete oxymoron because if you had tight inflation targeting that's an issue you can discuss and debate right because if it's very tight then you'll say well inflation comes first and everything else comes second growth comes second employment comes second every other indicator comes second a very rigid inflation target means the RBI governor is required to get us to that target or else right for the for the RBI but if it's so flexible and then the band is plus and minus 2% I mean well at the moment at least but I guess for for optics we say we have a monetary framework and now if we can find a way to improve it but I'm not in favor of a tight inflation targeting framework for for India at this point because then it means stabilize first and everything else comes later and we know from experience around the world that programs that follow that have always failed that that stabilization never sticks and we have had repeated and repeated and the most obvious example of that now is I the analogy is not probably totally appropriate but the austerity program in Greece maybe one example of that although I don't think they have an inflation problem because they have a pegged exchange rate anywhere snigga devils PhD candidate at George Mason University so I had two questions one was you briefly mentioned the political economy of this budget and I was wondering if you could talk a little bit more about that how credible do you think the commitment to these reforms is you mentioned that there are some very important state elections coming up is it at all possible that we might see at some point in the future a repeat of something like the India shining campaign which did not work out for the BJP at that point of time and my second question is can you talk a little bit about the role that you see regional trade playing going going over the next few years because that's something that the Prime Minister has been emphasizing a lot he's also made it a point to visit most of India's immediate neighbors so how do you see that evolving over the coming years so I think two things one on the politics of the budget what I was really trying to say was I don't know really what will happen but that if you think that this government has what three more budgets right that the last two budgets will be too close to the next looks of our election for you to have serious reform so the reform opportunities were this budget and possibly the next budget so if you say you didn't have big bang reforms now and you have India because it's not in a real crisis in fact it's growing quite well you will have incremental reforms then you'll need to make sure that the next one has sufficient amount of those incrementalist reforms in order for the total and then there should be reforms in between the budgets as well in order for the package to be sufficiently strong because the last two years there will be politically more and more difficult to do more reforms that was the point I was trying to make the opposite of how you play a good cricket t50 game right like we've been watching at night and these days that whenever we started slowly and then built up at the end properly kept all our wickets intact so to speak then we've done well but in politics you have to do the other way the other question you had was on trade yeah so I think what the Prime Minister is doing is very good because you know I know this is a politically incorrect analogy to use but we were a bit like Gulliver among the lily putians I mean that our neighborhood if you don't have good relations in your own neighborhood your aspiration to be a global whatever power or whatever you think your ambition is is hardly going to be possible because you know your neighbors itself your neighborhood is going to constrain you right so and we saw for some strange reason we had very good minds before in the government in the UPA government strategic thinkers you know you hear of all this and yet one by one we were seeming to have problems with all our labor including with buta you know and so you say what's going on here you know this is something amazing right so I think what mr. Modi did when he came to power he invited first his the Sark leaders to his inauguration he has he has given enough indication that he is as cognizant of Nepal and Bhutan and others as he is of his relations with the United States and with Russia and with other big powers and China and and I think one now as we speak he's on another trip this time to Mauritius I think he's going to miss Maldives because I don't know how many of you have been to Maldives but you know it's about the size of Dupont Circle Mali you gotta be careful you actually land in a reclaimed area and yeah there are lots of islands but you know those are all for tourists Mali itself is a quarter mile by a quarter mile and you know it's not a place to be there's turbulence there so I don't know for some reason he had to skip that but Sri Lanka you know with the change in government so we have a free trade agreement with Sri Lanka and look at the enormous increase in trade between Sri Lanka in fact Sri Lanka has benefited hugely from that free trade agreement with India their exports to India gone up five times and of course they are looking for more Indian investment into Sri Lanka tax regime in Sri Lanka is better than the tax regime in India so if our in our businessmen start to invest there it might force us to actually harmonize with Sri Lanka which would be a good thing but that aside so potentially we have with the and the Sark region has the lowest intra-Sark trade in the world if you take any regional grouping in the world we are the Sark the South Asian one has the lowest within group trade a lot of that has to do of course with Pakistan and India but nevertheless there even with the others it's not that great so I think this is very important and also not that you want to be speaking on anybody's behalf but if you as a big country in the region have good relations with all your neighbors you can project the voice of the region much better internationally as well and now what is happening is we have to be worried that what's happening around the world is also that regional trade agreements are becoming more and more important and we are getting left out of that because that can't be solved by solving our problem within Sark but India with ASEAN India with other trade groupings free trade agreements have to be looked at carefully of course by us because they may not always be in our interest but that is the direction in which we don't want to be left out of if you want to make in India we don't want to be left out of value chains that are going on around the world also and we are a good destination if we can get our some of our problems on competitiveness fixed we are still a very good destination because we have a large market but we can also be a base from for exports to other countries so I think what Mr Modi is doing is very good and it just shows how much energy he has that he can spend time in dealing with the big powers and he can still have enough time left for I mean you keep hearing now that the last time a Prime Minister of India visited this country was like 40 years ago or you know I mean like you say how could it be possible that we neglected our own neighborhood for so long and that we were seen as a big bully rather than a big friend and this cannot be for in our interest so we have to for variety of reasons both economic and also otherwise strategic it's very important because it's a it's a fast-moving world in which others as China has done also and others have done they have moved into the region which is fine I mean there is not like we have some exclusivity there but at the cost of India is not a good thing you know and so from that perspective I think he's doing good things in this I'm going to take one final round of questions so if you I'm gonna I'm gonna punch these together just wait for the microphone maybe I sit down and sorry I'm Ramesh Deshpandi from World Bank you talked about agriculture that budget has not done much and actually that's a very important area because agriculture's contribution to GDP has come down to 12% and still 50 more than 50% population is still dependent on its livelihood on agriculture so that's a serious issue but maybe talking about this budget we can look at it differently that as I said more resources are going to go to state governments and agriculture is the state subject so agriculture states government should allocate more to agriculture so I think we should watch what state governments do with the new resources coming to them with survey agriculture the second point is that a lot of resources are mobilized for agriculture through quasi-fiscal operations you know this this government of India scheme which is really that banks should lend 18 percent of their deposit funds to agriculture and if they don't the difference between that 18% action should be deposited with nabad and nabad is collecting crores and crores of rupees which is outside the budget and and whom are they lending to they're lending to state governments which are not really good borrowers you know they're inefficient borrowers so private sector savings through this quasi-fiscal operation are going to government and they are outside the budget but they help agriculture so that is the additionality of the utility resource of our agriculture so we should take that into the third point is that if expenditure on infrastructure you talked about roads and talked about in the new information fund if that goes into rural areas you create more employment opportunities in rural areas and more cash in rural areas and that may help agriculture what do you think about you know this approach thank you the microphone just behind thank you my name is Ram Janakiram consultant working hello yeah can you hear me my name is Ram Janakiram and I consultant on rural development compared to other budgets will this budget make a visible impact on poverty reduction anybody else in the room last chance okay great thank you Ajay last question so on agriculture yes I agree with you well of course agriculture is a concurrent subject so state governments have now they have the resources and they will they should be able to use them more specifically to what the state needs are and so but it will be now on the owners of responsibility will clearly go on them to be able to allocate resources but I do feel that you know if you read the Shanta Kumar panel report they did make a plea that if you could save more money from these food and fertilizer subsidies and in fact shift to this then we have this Manrega scheme which is Mahatma Gandhi you know the question there to ask is how long can you have you know digging ditches and making no visible you know the assets created in Manrega they are not very durable and no skill development is taking place either in the rural areas so you have a improvement in wages simply because you have created a demand an artificial demand for labor and therefore these people who were earlier migrating are not migrating and so you lifted the reserve age but you haven't done anything to improve the productivity of the land or of the labor or created assets that would help you in hard times like in droughts and other things you know real durable assets so I think we have to look at that that you know how much is being spent on subsidies versus you know in China you had much less subsidies and much more of rural infrastructure being developed and and also of course in the end you you have to realize that if you have a GDP of whatever 15 16% and more than half of the employment is in agriculture that's not sustainable also that these people have to come off the land but that's a 15-20 a process that doesn't mean you neglect agriculture in fact you need more agriculture services if you want to be able to release that labor so I think all these things have to be looked at more than they have and we will have to see how states will actually use some of this money on this budget well I think the big evidence on India is you grow fast and there's a strong correlation between more rapid growth and poverty eradication but you also have to be spending on education on health on other things and the fact that you probably will see some uptick in growth will help on the poverty reduction side but the fact that you will now spend less on education you will spend less on health may have longer term consequences unless the states will pick up the slack and you know the East Asian story is infrastructure but also a lot of money spent on education right so we have we are the they they have kicked the infrastructure shoe they pushed on that but the other lesson from East Asia is is that you have to also have human development and that part there's less spending on health although there's more on these universal social security how all that will actually get implemented we don't know yet you know so I would give it a mixed one on that that if we were to go into faster growth of course there'll be more job creation and it will help but in the end you know you got to have employable people and if you don't have fix your education it's going to be an issue and I don't know we'll see how this plays out because of the way the states will now spend the money but clearly there will be less money coming from the budget itself for these areas well on behalf of all of you I want to start by thanking Ajay for taking the presentation this afternoon and I also want to thank all of you for coming I'm sorry that we had to postpone this event because of the snow day but hopefully we will do many more of these presentations particularly on issues relating to the Indian economy in the weeks and months ahead so just check the website and make certain that you're in our mailing list if you want to get the invitation so thank you very much and good evening Thank you very much Thank you Probably too detailed Thank you We are dealing with it Anyway there's so many topics to talk about When are you leaving for India? I might be going on next weekend I'll send you an email I'm going to send you an email There are a number of things which I'd like to talk to but obviously Also We are doing a study I mean through our India Agricultural Group Restructuring in Maharashtra Restructuring in Maharashtra There are industrialization Urbanization is going very rapidly Labour is moving out of agriculture You have to restructure it It's very different Contract farming We are working with the government Taking it all down Taking labour out of agriculture Thank you That's very nice Nice to meet you again Excellent presentation Thank you I'm Komodo Mehta from the Indian Embassy Oh really? Okay Wonderful presentation Thank you I think they have it on the web Thank you One element I invested over there One of the slides