Arun Jaitley Reflects on India's Economic Promise

Arun Jaitley, the finance minister of India, joins former U.S. Treasury Secretary Timothy F. Geithner to discuss the Indian economy. Jaitley reflects on the reforms undertaken by the new Indian government, led by Prime Minister Narendra Modi, over the last thirteen months. Jaitley, who held both the finance and defense portfolios in the Indian cabinet, highlights his government's successes in a range of areas. He expresses his confidence that India will continue to grow and that the economy contains a great amount of untapped economic potential. Jaitley additionally notes the political difficulties of rapid political reform in India.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics, such as outsourcing, monetary policy, and competition policy. This meeting series is presented by the Corporate Program and the Maurice R. Greenberg Center for Geoeconomic Studies.

GEITHNER: Welcome—welcome to the council.

Welcome to the minister.

I'm going to just give a few brief words of introduction, then we're going to have a brief conversation. Then we'll turn the floor over to the audience and let you—give you all a chance to have questions.

You have the minister's bio. Just let me say a few things about him. He was born in Delhi. He was trained as a lawyer, I believe; served in government and politics most of his professional life. He's the president of the Delhi Cricket Association—was.

(LAUGHTER)

Very important. You know, being finance minister is a big consequential job for most people, most normal humans. But it's pretty amazing. He began his tenure as finance minister also holding the portfolio of the Defense Ministry and Industry and Commerce, and maybe some others, too, at that time.

Can you imagine in the United States, asking the secretary of defense to run Treasury at the beginning or the opposite? It proves you're extraordinarily capable and brave, intrepid.

I think the minister has one of the most interesting and complicated finance portfolios in the world. India has the potential to be the fastest-growing major economy in the world over the medium term. He's presiding over an admirably ambitious economic reform program, which aims, among other things, to jump-start private investment, improve education, bring clean water and 24-hour power to hundreds and hundreds of millions of people.

In his own words, and I'll quote him, "It's quite obvious that incremental change is not going to take us anywhere. We have to think in terms of a quantum jump."

Of course, as we all know, the main challenges in economic policy are not really about objectives or about ideas. The main challenge is getting good ideas through messy political systems, designed and executed competently, less distorted by political interests or by private interests. And as Americans in our messy democracy know, this is a challenge.

In India today, with, of course, a strong majority in parliament, a very strong prime minister elected with a clear mandate, and an excellent finance minister, this looks likely to be the most promising period of reform in India in decades.

So Mr. Minister, you've been gracious not (sic) to put aside your full remarks. Why don't we start with asking you to tell us a little bit about how you see the economy and the reform outlook today? And what are your—and how are you feeling about—how optimistic are you that you're going to be able to accomplish—achieve this very ambitious set of goals you've set out?

JAITLEY: I'll say a brief word about the context and the background.

India was by and large alien to reforms until about 1991. And I always held the view that at least two of our decades, the '70s and the '80s, we wasted a great opportunity. But clearly, the '70s we continued to move leftward and didn't really significantly add much.

We substituted substance for slogans. Even though my political rivals in Congress was in power in 1991—it was born out of economic necessity. But fortunately that put India onto a right track. And if you look backwards, good structural changes started during that period.

And despite really contentious polity, for the next 15-odd years, irrespective of the government in power, you had three different combinations in power. India consistently, at times faster, at times at a modest pace, continue to follow that course. And these became both ideologically and in substance transformational years.

The pre-'91 India, if I put it in one sentence, was a land where we relished shortages of all kinds, and so on. We had reconciled to low growth rates, huge unemployment; country devoid of many opportunities. And suddenly, the whole scenario had changed.

Then after the last few years, I think we lost our way once again. And the reason why we lost our way was we, both in terms of political administration and in terms of policy, we went wrong. In terms of political administration within the government structure, the prime ministers never had the last word. Authorities were outside the governmental structure. The kind that could happen in a, let's say a communist state.

Devoid of that political authority, decision-making came to a standstill. The prime minister, which was the highest functionary in the government, didn't have the last word. There were serious apprehensions that decisions were being taken or not taken for the wrong reason. There were allegations which lowered the credibility of the decision-making process. And our credibility as an economy was being shaken.

On a policy front, where we went wrong was we started concentrated not on increasing productivity or generating wealth. We were just distributing what we already had. And we thought—we are going back to the slogan of the 1970s, and that this would be very populist.

It didn't work. Now, we were falling off the global radar. But the—in India, there was a huge change which had taken place between the 1970s and this generation. People were getting restless. People knew this is not our potential. Parliament was being rocked with scandals. Media was coming out with exposes. There was a huge generational change, where aspirational India had come up and people were aiming for the best.

And I think what happened last year in the elections—the electorate didn't vote on any caste or religious lines. Normally in India—Indian politics, caste has a very important role to play. So political parties which normally organized their support base on that social base of a caste lost.

Charisma of dynasties had a very important role to play. Nothing worked. And after thirty years, India wanted almost a single-party government. Though we have allies, which makes our majority much more. So it's a single-party government. People wanted decisions. They didn't want democracy to become a hurdle in a decision-making process.

In fact, most of the studies I did during the elections, our prime minister, Mr. Modi's personal acceptability was about 15 to 20 points higher than the party's acceptability. So that means the leader was growing taller than the party because of his image of being decisive. And therefore, obviously, the aspirations are going to be very high.

And since then, when we set upon this agenda, I'll just give the—just flag the issues. We had to open up. And within a gradual manner, which we have, we had a dual task of expanding businesses, encouraging economic activity to increase, at the same time being concerned because you have to blend it with prudent politics. And that's the reality of India.

So you have to blend it with addressing the concern of the very poor segments of the society. We still have about 25 or 30 percent of people below the poverty line. And therefore, higher growth rates mean more money, better infrastructure, and also more spending for these sections, which was necessary.

So, after opening out, you have to ease-in your processes of doing business. You have to make yourself more attractive as a tax destination because it is not that global investment was not coming in. Our own domestic investment was traveling outside. People don't invest in an uncertain environment. We've had cases where people invested and lost investment because there were serious allegations against the government.

Your taxation structures had to be rationalized. So major taxation reforms had to be undertaken. And a lot has been done

Some work is in progress. You have to bring standards of transparency into various decisions of the government. So no longer any (inaudible) in matters of contracts and matters of allocation, natural resources. You have to go straight. You then had to concentrate segment by segment on each section of industry which had been stalled.

I think we've covered a lot of distance. If I go by bear statistics, they look good. But then as I said, the aspirations are much higher. So India today, neither the government nor the people, nor the industry whose representatives some of them are here, nobody very excited about a 7 or 7.5 percent growth rate in India. Because everybody realizes, including me, including the prime minister, that probably our potential is a little higher than that.

And therefore, having covered this distance, I think the next two or three years are going to be very critical, because a series of reform steps which are in the pipeline have all to be implemented. We now have identified all the problem areas. And I think one by one as we go resolving most of them, hopefully we should reach what our destination targets are.

GEITHNER: How do the politics feel now, relative to when you came into office? Do they feel—does it feel harder? Are you facing more constraints than you thought you would face? Or do you still feel like you have that, what looked like from the election results, you know, pretty exceptional capacity still, broad consensus, ability to move across this very complicated agenda.

JAITLEY: You see, eventually, the strength of Indian democracy is that we end up, in most issues, building a consensus. Indian parliament is actually a very good forum for that consensus building.

For instance, parliament functions through a very interesting institution called the committees, the standing committees. So when contentious proposals go to those standing committees, almost in nine out of 10 cases, they come out with unanimous recommendations.

Government proposals are partly altered also, and therefore, having gone through the grill, it's very rare that a proposal, with or without amendments, is eventually not accepted by parliament. It's in a very rare case that could—could happen.

So most proposals are approved by parliament. It's not particularly hard, and I'll tell you the reason for it.

Overwhelmingly large number of decisions are executive decisions. So even for the purposes of economic reforms, you don't have to take every decision parliament. Parliament can discuss it, but then these decisions don't need a parliamentary ratification. There are executive policy decisions outside the legislature.

A lot of economic decisions under our constitution only require ratification of the lower house. They can only be discussed in the upper house and referred. They don't require to ratified by the upper house, which has always been a balancer.

It's very few that get blocked in the upper house. And they don't get blocked in perpetuity; they appoint committees, they discuss and rediscuss, and in most cases—so far, not a single one of our government has been rejected.

Some—two of them are stalled. Stalled means they're being discussed in the committees, but they wouldn't be rejected. So the others, after some discussion, are all approved.

And if there is a conflict between the two houses, you go to the joint session. So there is a constitutional way of resolving it.

GEITHNER: If you—maybe it'd be helpful to give people here a little bit more texture about where—where you go next on, for example, the tax front.

You mentioned taxes in your initial remarks and the importance of the environment for investment, both domestic and foreign. You have this JST plan, reform plan, still moving through the pipeline. Tell us a little bit about that.

JAITLEY: You see, on taxation, the first set of changes we are making is goods and services tax. The policy has been announced. It's being implemented. And in this term (ph) of the government, we intend to make a major shift.

There are direct tax rates for corporate tax, which is the main stay, come down to 25 percent. And 25 percent is fairly globally comparative.

Otherwise—because in our neighborhood, that's what commonly (ph) the tax rates are, if not lower, so we couldn't afford to live with a much higher taxation regime, because that would distract investment coming into India.

It's a very difficult reform, particularly because populist politics thinks that it's a big concession you are making to industry, but eventually, that's where jobs are going to be created as a result of the investment.

There are some other taxation proposals—I'm not getting into that—which are facilities we are giving to attract investments. These are alternative investment trusts, et cetera.

Indirect taxation is going to be the GST formula. A consensus has been reached. It's been passed by one house of parliament. It required a two-third majority. It's pending before the other one.

The other house has sent to a committee, the committee's currently functioning, and broadly, the majority support in the committee seems to be for the bill. And therefore, over the course of the next few weeks when the parliament meets again, this will come up before the upper house.

It'll then require ratification of 50 percent of the states, which I don't see as much of a problem. Then to implement it, it'll require three other supporting legislations.

So I am running against time, because I intend implementing it with effect on 1 April, 2016. So this reference to the committee has actually shortened the window of time available to me. And I'm now—have to run faster in order to catch up.

So if nothing unusual happens, hopefully, I will make it. But I'm conscious of the time constraint.

GEITHNER: You sound—you sound reasonably optimistic, still, reasonably confident, still.

JAITLEY: No. Eventually, it's an idea, which is—which has been accepted and which is going to be implemented.

The—I think if it's to be implemented, it's better, because it has a capacity to make India into one uniform market for goods and services—uniform rates of taxes, much more convenient for businessmen, much more convenient for government, higher tax collections, reduced taxation liabilities because they'll be no tax on tax.

And hopefully, it's a better thing.

GEITHNER: Oh, yeah. Looks like a very—like a very compelling thing.

Maybe you could say a little bit about how you think about—how you envision the role of the state and the economy going forward. I mean, the Indian government still plays a large—just to be polite about it, a large role in some sectors of the economy. Finance is one of them.

How do you—how do you see that—how do you see that changing?

JAITLEY: See, the role of the state was very large, because the moral we were conventionally following was that the state was not merely the policy formulator, the state was also the key player. It was (ph) state-run enterprises, which occupy the center space (ph).

I think the last 25 years of reform—and that's why I call 1991 a very important defining moment for India—a huge space for the private sector was created. And therefore, they're very—hardly any (ph) area of governmental monopolies anymore.

And the private sector in India has a very important role. Most sectors, it's only the private sector.

The state is gradually taking a backseat as far as businesses are concerned. But there are still important state enterprises which are in competition with the private sector where we are reducing the state equity.

Last time, when my party was in power, we had privatized many of them. This time, we've reduced the equity holding of the states—of the state in many of them.

Some of the sectors, we are going to go in for privatization again. And in some areas where the entities are very powerful and have a key role, and are efficient, will continue to exist.

For instance, power. We have a very large, expanding presence in the private sector now. But still there is a state sector present in generation, which is there. I—for the first time just now, we were removed the state monopoly in coal mining, and therefore a large number of private sector companies have come in. Also, commercial mining is going to be permitted for the first time.

So there are going to be a very large participation of the private sector. But as the private sector grows, there is still a large public sector company where we have been gradually bringing down the state equity, which will be in competition with them.

GEITHNER: Could you say a bit about education?

You know, you have these elite universities, which are I would say world-class in quality, but you've laid out—you've spoken eloquently about the importance of improving the basic quality of education through the—throughout the system.

Talk a bit about what you think is possible in that area.

JAITLEY: You say education regrettably was one of the more unreformed sectors in India in 1991, and therefore there's a lot which has still to be done.

In the last many years besides this feat, the private sector also started paving a way for control in education.

And some very good professional institutions, universities by the private sector have been coming up.

We of course have some very good quality institutions in India today in management, in medicine, which are actually world-class. And therefore expanding those brands, our government has decided to have expanded brand and established them in almost every state of the country. So that quality institutions do come up.

But whereas the base of primary education also has been expanding, I think still a lot needs to be done about improving the quality of higher education.

And that's—that's still a challenge in India.

GEITHNER: By higher, you mean post--secondary?

JAITLEY: Post-secondary.

GEITHNER: Maybe before we turn to the audience for questions, you could just talk a little about the broader foreign policy, national security context in which India exists, and this is the Council on Foreign Relations. Your prime minister has made this series of very interesting early moves in defining India's place in that region, so tell us a bit about the challenges you see on the—on the foreign policy side.

JAITLEY: There was a—there was a time not so long ago where India was in the midst of a disturbed neighborhood.

And a number of problems with that disturbed neighborhood were spilling into India.

When the new government was formed, the prime minister took an initiative even before his oath, swearing in. And the initiative was that we invite all the heads of government of the south nations, and this turned out to be a very correct and a very positive move.

And since then, we haven't looked back. So traditionally we had, for instance, our relationship if I may start on a positive note, a small country, Bhutan, we're very good. The country needs to be strengthened.

Nepal, we've been able to do a lot. And Nepal has gone through a terrible crisis because of the earthquake recently, and India spearheaded the assistance to Nepal and will continue to do that.

There is a conference of Dorno (ph) friends in Nepal on the 24th of this month, and we are going to play a leading role in that, and in rebuilding all institutions in Nepal, India is going to play a very important role.

So Indo-Nepalese relations seem to be very positive.

Countries like Myanmar, for instance, an Indian prime minister had not visited Sri Lanka in almost the last 27, 28 years. And therefore—and this was because of constraints of domestic polity. One state in particular, the prime minister visited Sri Lanka. We had a huge bending issue with our immediate neighbor Bangladesh. The prime minister was there two weeks ago, and he signed a historic pact after we amended our constitution to settle down the boundary issue, the land boundary issue with them.

Which it was an exchange of thousands of people from both sides: Indian citizens going over to Bangladesh and vice versa. It's almost, some newspapers compared it to the fall of the Berlin Wall. So pending issue for the last over 40 years has been resolved. So India and Bangladesh, India and Nepal, India and Sri Lanka, India and Bhutan.

Myanmar, recently, when insurgents have been holding camps in Myanmar, the government there has cooperated with us in tackling those insurgents. So these are all countries with whom we have an excellent relationship.

The prime minister has particularly developed an excellent relationship even with the Chinese leadership. We have a boundary issue with them. And the boundary issue is unresolved. There are other several issues related to China, which are issues of our concern.

But at least the—the tense situation around the boundary doesn't exist.

And economic trade relations with them have become fairly normal.

The prime minister recently got a very rousing reception in China.

Pakistan, the border frequently becomes dense. Where there are exchanges on that border, I think the message in the context of Pakistan, the prime minister recently has been speaking to the prime minister of Pakistan.

That India is interested in improving the relationship with Pakistan. And therefore the onus of responsibility for creating an environment in which that relationship can grow would also depend on much more in Pakistan and the kind of provocations which come from there.

Now this message that we are interested in normalizing our relationship with them or at least improving our relationship with them, and the onus is on Pakistan. For this purpose, I think this message is very loud and clear.

While relations elsewhere in the world are very cordial, the prime minister has been taking extensive visits to most significant countries, you know, of consequence, as far as India is concerned.

And I think the relationships, there are no serious issues.

GEITHNER: Good, that was excellent.

OK. Let's give the audience a chance to ask some questions.

Please wait for the microphone and identify yourself, you name, and your affiliation.

And we'll get on with it.

Yes?

QUESTION: Thank you very much.

I'm Robert Rosen of Arias Management (ph).

I'd like to ask a two-part question, one rather narrow, the other a bit more interpretative.

The first, there are certain non-strategic industries in India, strategic from a governmental point of view, where direct foreign investment is limited to minority interests. One simple one that comes to mind is retailing in India. Direct foreign investment can only be a minority stake.

Perhaps an understanding of the thought process these days about that limitation, and whether there are prospects for change.

The second part of the question relates more to a philosophy. Many of us who have done business in India have experienced retroactive changes to some of the investment regulations by the government or the Reserve Bank of India. And in the spirit of expanding the opportunity for foreign investment, I'd like you to please talk a bit about the philosophy of those retroactive changes making transactions a bit more difficult to underwrite.

Thank you.

JAITLEY: You see, as far as sectoral limits in various segments of the economy are concerned, they've been gradually expanded. And from an economy which until a few decades ago, two-and-a-half decades ago was virtually a closed economy, I think more segments have been opened out. Now, depending on strategic interests of India, and along with strategic interest, depending on the dynamics of our political decision-making, which at a given point of time makes possible what is acceptable, and that's not a fixed sponsor. So that keeps changing. That keeps evolving.

For instance, we started in defense with only 26 percent. When I was holding both the portfolios, as mentioned, the first decision was (inaudible) the government. We made it 49 percent. In some strategic sectors, we said on a case-to-case basis, we would do even higher than 49 percent. Now, if you ask me 10 years ago would it have been possible, probably not.

And therefore these decisions are being reviewed from time to time. And they are being reviewed in favor of opening out. In fact, one of the decisions which we took about two to three weeks ago was to equate a nonresident Indian's investment equal to a resident. And person of Indian origin, an OIC cardholder, would be equal to an ally. Somebody who could be—whose great-grandfather was an Indian would be regarded as a resident investment.

Now, these are all steps in favor of that liberalization which have been taken. But if you would expect these sectoral caps to immediately go up in all sectors, maybe not. Gradually, that's the moment in that direction.

I have no difficulty in saying that any decision which is retrospective, except in some very unusual circumstances, which creates fresh liabilities is certainly not acceptable. And therefore, ever since the present government has been formed, we said it when we were not in government and therefore we've lived up to our word, this government will not legislate anything that is retrospective.

And if you have any grievance amongst any pending decision, I'm quite willing to look at that.

GEITHNER: Thank you.

Yes?

I should have said at the beginning, this session is on the record.

QUESTION: This is because I'm a journalist. I'm Annie Sender (ph) with The Financial Times.

Thank you so much for that very clear elucidation.

You touched on infrastructure very briefly. To me, there is a logjam. And I wonder how you resolve it. The infrastructure companies of India don't have the cash flow to repay their banks. The banks don't have the capital to write-off those bad loans and extend new credit.

In many cases, part of the reason why the infrastructure companies don't have the cash flow is because they're in disputes with government-related entities like National Highway, and these disputes are held up in the courts for years and years and years. How do you resolve that? How do you attract new capital to the sector?

You know, when many players say the government has to be the catalyst, the markets can't do it.

Thank you so much.

JAITLEY: Well, nobody could have put it better than you have.

(LAUGHTER)

And therefore—therefore, you know the problem that I've inherited. And I think that's very well put. You are absolutely right. The—so this problem has to be resolved exactly in terms of the analysis that you have made.

Why is it that the infrastructure companies are in disputes? So, the infrastructure companies, even their ability to resolve their disputes, and I'm going a step further than you, was being constrained for more than one reason. So we started addressing the problem.

The first problem: How do you resolve the disputes and where do you get the money from? So we exactly followed your advice and the government has started putting money substantially into the sector so the sector will start moving. The resources have come from the budget. The resources have come from the reduced tax—the increased tax on petrol and diesel. And therefore extra resources this year have been put in.

The result of this is that a completely stalled infrastructure sector has started moving. Today, one of the Indian people's—the best known economic paper in India reports that, still short of our target, but we have now started building about 13 kilometers a day. Our target is to cross 20 and reach 30 kilometers a day of national highways.

So, what was completely stalled has started. So the government puts in money, that's one answer. How do you resolve disputes? Highway authorities and civil servants are not willing to resolve disputes because whatever settlements they bring, and this is a prudent business thing, is tomorrow going to be questioned for the—as a decision with a collateral motive. So they have the fear of investigating agencies lining (ph) up.

So we've created a mechanism, a negotiating mechanism, which will start resolving the dispute and start paying the contractors some money. There's no point in having a bankrupt set of contractors because nobody else will be left to build the highways.

Additionally, to protect them from the legal consequences, I personally took up this cause and initiated a public debate which nobody has contradicted the argument that on these prudent business decisions, which are taken bona fide, penal actions can never be involved at a subsequent point of time.

So India's corruption law, I've had it amended by the cabinet and introduced in parliament. It's now before the committee and hopefully very soon it will come up for approval, so that civil servants and administrators of these infrastructure state companies or state authorities could be emboldened to take correct business decisions.

A wrong decision or a decision where an alternate viewpoint is possible is not necessarily a corrupt decision. And, therefore, these laws can't apply to such people.

Having said that, and get these into motion, let me tell you, for our key infrastructure industries, we made more funds available this year from the government and through this ses (ph) which we are collecting, then probably what these companies can spend this year.

And, therefore, the challenge is going to be will they be able to spend this money? If they are, I think the sectors get moving.

Now, we come on to the banks. We've started analyzing sector per sector which are the segments of the economy which have caused the (inaudible)? And these projects is certainly one of them.

Now, both with regard to financing and other policy flexibilities, we are addressing both the issues. So, contractors who can't build must exit. A provision for that—to that effect has been approved by the government, so they'll have to exit and make way for the others who can perform.

So when we took over, we had about 75 on the highway contracts which were just stalled because of these reasons. Over 30 of them have restarted. Some are in the pipeline. And I think it's a matter of months before most of them, either with substituted developers, that they'll get going.

So, too, with regard to many other infrastructure sectors. We're really the important mainstay in that.

Banks, we are looking at separately. Banks, themselves, are looking at these companies and stalled projects in order to address their MPAs (ph). But eventually the proposal to recapitalize them is being considered very seriously as far as the government is concerned.

GEITHNER: Yes?

QUESTION: Thank you very much for being here. I'm Jamie Metzel (ph). What more—what can be done to make Indian agriculture more efficient?

JAITLEY: I'll give you a two-point response.

We have examples of three regions in India, Madhya Pradesh, Andra Pradesh and Gujarat. These are three states which have made a significant investment into irrigation.

The pattern was different. Gujarat did it by minor irrigation projects like check dams to collect the rain water and then use it for agriculture the whole year.

Madhya Pradesh created a river grid. And both of them, Gujarat, which was a dry state with less rainfall, for almost a decade as a result of this campaign has a double-digit growth in agriculture.

Madhya Pradesh is the most fascinating experience, because it's considered one of the sick states in India, one of the least-performing states. And suddenly, it's turned around, on the backbone of agriculture. I've been repeating their figures. The last three years it was 18 percent, 20 percent and 22 percent growth.

And, therefore, if you grow at this kind of a pace by the river grids that they are creating, you can actually change the whole economy of the state.

I think the obvious answer is—Andra Pradesh also gained at a particular point when the Congress government was there, that they made, that one state, serious investment into irrigation projects.

Punjab conventionally had—and Haryana has conventional had strong agriculture, because from the British days they had the canal system. And, therefore, most of the areas were not rain fed.

I think India needs to make—and that's one of the determinations which I have, in the coming years India needs to make a concentrated investment into irrigation and into rural infrastructure.

Secondly, the present agrarian distress will carry on unless we are able to make lesser number of people dependent on agriculture for livelihood. Therefore, you need to get a large number of people out into other areas.

And, ultimately, this whole debate on the land law in India is centered around this point. The 2013 law which has been misrepresented as a farmer-friendly law is, in fact, the most unfriendly law to the rural sector. It prevents irrigation projects. It prevents rural roads. It prevents rural electrification projects, because it doesn't make land available for any one of them. It prevents low-cost housing in rural areas, land available for that.

And, therefore, it prevents industries being set close to rural areas which will be the ultimate set (ph), because out of this the 60 percent which is remarked as a figure, people dependent on agriculture—it may be slightly less than that, more than half of them are landless. And they can't get prosperity until alternate jobs are created for them. And alternate jobs will have to be in other sectors of the economy. It can't be in agriculture alone.

So it's these areas which will ultimately require to be addressed in the long run.

GEITHNER: Yes?

QUESTION: ... Jaitley, Alyssa Ayres from the Council on Foreign Relations. We had one question already on infrastructure, and I wonder if I can ask you another. The kind of missing piece in India on infrastructure financing is the role of cities.

Cities don't have the ability to raise their own revenue. They can't create taxes. They can't issue bonds. Is there any plan to look at what cities, what the municipal level in India, could potentially do to try to solve this...

(CROSSTALK)

JAITLEY: Well, suggestions have been made to this effect. Suggestions have been made to this effect. But before we can reach that stage, the civic administration in cities will have to mature.

Currently, cities are still reluctant to even raise local taxes, because that's not popular enough. And therefore, even in very large cities with have a potential of sustaining on their own, they require assistance of the state.

For instance, Mumbai and Delhi also won't sustain on their own strength. They have to depend on the state revenue, because the local civic administration has not spendthrift and professionalized enough in order to raise its own revenue.

GEITHNER: Yes?

QUESTION: Mr. Minister, I'd like to ask you about trade policy. I realize that's not technically within your ministry's purview, but...

GEITHNER: You got to remind us who you are and...

QUESTION: I'm sorry. I'm Marshall Bouton from Chicago Council and Asia Society.

The prime minister has put Make in India, bring manufacturing to India, in a big way, at the top of his agenda. India is increasingly outside the global supply chain, so that will dominate trade in the 21st century.

If TPP becomes a reality and you'll be farther from that goal, what can be done? What is—where does trade stand as—on the agenda of your government, sir?

JAITLEY: Well, you rightly mentioned it's not a part of my ministry, but I'm certainly concerned with this.

And therefore, increasingly in terms of trade, India has been integrating globally. To say that we'll remain outside the supply chains may not be exactly very accurate.

The only area of concern that we significantly have in terms of trade, again, emanates from the same question of the agri products, the reason being that our holdings are very small and our agri sector is still vulnerable.

And in terms of international trade, I think in terms of services, we—we have an ability to be quite aggressive now. In terms of manufacturing, a little so, but we—we—we are in the process of developing.

It's only in the third area of agriculture that we still have a lot of concerns, because our agriculture has not come to a situation where it can withstand that level of global competition.

GEITHNER: Yes?

QUESTION: I'm Marshall Sonenshine, Sonenshine Partners in Columbia University.

Mr. Minister, I'd like to ask you a question from your earlier legal background, which I think is also very relevant to the economic sphere.

There's a perception, I think, among people doing business in India—and I think Mr. Rosen alluded to it, in some of the other questions about infrastructure do, that—that the legal process simply doesn't work the way sometimes is expected and that there are entrenchments in the legal process that make it slower and more difficult for everybody, Indian and foreign interests included.

Is that a fair perception that there is a different infrastructure problem in the country, the—the infrastructure of the legal system? Is that a fair perception, and if it is, is it one that can be reformed in any reasonably foreseeable time and process?

JAITLEY: Well, I can't deny the fact that India's legal system is very independent but somewhat slow.

(LAUGHTER)

And therefore, because it's very independent, the government's ability to increase its pace is limited. The independent system has to improve upon its own speed and pace.

There's also a tendency to not restrict your own authority and power as a part of judicial discipline. So in regard to the infrastructure space, even when India did legislate in terms of global compatibility, dispute redressal laws for international commercial arbitrations, et cetera, the courts interpreted it to mean that our jurisdictions are still not ousted. We can interfere.

Now, this has proved counterproductive for India. It's proved counterproductive, because when contractual authorities decide upon their own bilateral terms, they don't really show excessive judicial interference from courts of one of the countries of the contracting parties itself.

Therefore, Indian parties have suffered on account of this approach, because an essential ingredient, then, of all contracts is that the—when you offer dispute redressal will be outside India, the substantive and procedural laws will also be outside India. They become very costly for Indian parties.

So excessive interference or a tendency to have excessive judicial interference is not necessarily a move which is friendly to the interest of the investor itself.

Now, in terms of some of these interventionist judgments of the court, have been examined by the government and by the law commission in India, and therefore, changes in our own dispute redressal law have been suggested.

Those changes are now before the cabinet and hopefully to nullify the impact of those judgments so that domestic tribunals are—agreed tribunals could work on their own terms, that regime gets reestablished in India.

So the government is, through a legislative change, addressing that issue.

GEITHNER: Yes?

QUESTION: Thank you. I'm Kabir Sagal (ph) at the First Data Corporation.

Question on financial inclusion, what are you doing from a policy standpoint to promote financial inclusion, whether it's expanding bank accounts helping merchants get the technology to join them on the global marketplace?

Thank you.

JAITLEY: India is currently implementing its own massive program of financial inclusion. In India, a year ago, only 58 percent of the families in India had an access to a bank. So 42 percent of India was outside an access to a bank.

So the government has started various programs in this direction. And I must say that they've produced some excellent results. We had an opening for a certain number of months where every bank employee was encouraged, either the employees or their correspondents. Banks also have this private individual attached to them who act as a representative of banks and go from village to village where there are no brick-and-mortar branches of banks.

And we have been, as a part of the financial improvement program, been able to bring in 155 million people in a period of a few months into the banking system who were earlier outside the banking system.

Now, to incentivize them, we gave a facility for a nominal overdraft facility, we gave them a facility for an insurance as a part of that account. And that encouraged people to join in.

And a large number of these accounts, almost 75 percent of these accounts, the people are so poor that they didn't have any money in the accounts, but they opened the bank accounts.

Now, to make those accounts functional, we've used technology. And all state-support programs, the monies have been transferred to these bank accounts. So if a widow gets a pension, if an old-age person gets a pension from the state, these pensions are now automatically transferred to these accounts.

We have a subsidy nationalization program which is going on; 125 million people are getting the cooking gas subsidy now indirectly into these bank accounts. We've used technology for that purpose.

Our right-to-food program may be on a future date targeted in the same manner. The kerosene subsidy, which people use as a cooking fuel in some villages, may be used for the same purposes.

We have now carried this experiment further and are using this entire data which is now available with us, we've now used—are using it to expand the insurance and the pension facilities of India. And it's worked so well that in a period of some 33 days, announcing a new welfare insurance measure we've been able to bring in about 110 million people into the insurance coverage service.

So these programs are moving quite rapidly, quite fast. And we are using the most technology, as you mentioned, for inclusion of all these facilities.

GEITHNER: We've got time for one more question.

Yes?

QUESTION: (inaudible) of Pfizer, and I'm going to return to the question of manufacturing.  You've flagged it as a corazone (ph) sector, and this has really pivoted away from agriculture into manufacturing. Two specific areas of concern. One is that the enabling legislation, for instance land acquisition, there's a lot of political sort of—it's a fraught political question.

The second thing that a lot of people who are invested in this country are looking at the anemic rate of investment by local corporates. So are these kind of lagging indicators? And what are the things that you'll be looking for to see that you're actually getting to the point where you can say the manufacturing sector is at a sort of take-off point?

JAITLEY: You see, there has been in the last few months some improvement, but not an improvement which would entirely satisfy most of us. Some of the statistics which are coming in show a slight increase, but then I think the sector needs to be—to be addressed.

Land, of course, is one issue, but I don't think it'll be that critical an issue. I emphasize on the land bill, because land available near rural residences, villages, will enable job creation there. So today when industry wants to set up and he is willing to buy land from a farmer and ask for a conversion of that land, land would still be easily available in India. It's not that land is not available in India. There's an abundance of land

Besides this, I think we need to address the relevant concerns. Land would be available. Power is available today in surplus in India, so that's not a serious issue either. Cost of capital will be an issue. Infrastructure, and that's where we are putting in a lot of spending now, is an issue. Facilitation of trade in these areas is an issue.

And, therefore, it is these issues which will require to be addressed, which we are capable of giving a lot of spots (ph) to manufacturing.

Labor flexibility. Now, a large number of very progressive states, at least three of them have come up and said, if India can't reform its labor laws, at least we are willing to reform ours, and therefore, the central government is to permit that. And we've decided as a policy, which I will state, asks us for a reform (ph) to the labor in India, we'll probably agree to that.

GEITHNER: Excellent.

I want to thank the minister for being so generous with his time. And to compliment you not just on all that you've accomplished in such a brief period, but on the—on the—just an incredibly impressive reform agenda.

And I want to compliment you for being so direct and open, and forthright and crisp in responding to what were really good questions from this group.

So, thank you. Thank you very much.