Arun Jaitley’s focus on key reforms reshaped Indian economy
When Jaitley took charge as the finance minister, growth was on a slump. By implementing GST, Insolvency and Bankruptcy Code, he laid groundwork for economic resurgence.Updated: Aug 25, 2019 07:25 IST
Arun Jaitley’s time as India’s finance minister (May 2014 – 2018, August 2018 – January 2019 and February 2019 – May 2019) will be remembered for two major achievements — the implementation of the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC), both fundamentally reformist policies that should help the cause of economic growth in the medium- to long-term.
Both were already in the works when he took over, although they were far from being ready for implementation; anyway, at the time, the primary concern was neither. It was the economy itself.
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By the end of the previous United Progressive Alliance’s term in power, the economy was in a mess. Growth, in the three months ending April 2014, was 4.6% and as Jaitley pointed out during a conversation at the Hindustan Times Leadership Summit in October 2018, 2012-13 was worse in many aspects. India came to be spoken of as one of the world’s Fragile Five economies, the others being Brazil, Indonesia, South Africa and Turkey. A foreign exchange crisis was looming. Policy decisions were held up by politics. The bad loans crisis in banks was spiraling out of control, and there was a general feeling that the UPA had let things slip on the economic front.
The only two things working for Jaitley were a clear mandate for the Bharatiya Janata Party, which meant policies couldn’t be held hostage by intransigent coalition partners and a benign global oil price regime, which helped keep the fiscal deficit under control. Indeed, Jaitley would reap the benefits of low oil prices for much of his stint as FM.
By October of 2016, most high-frequency indicators were beginning to show enough green to suggest that growth was back on track but the Narendra Modi government’s decision to invalidate all old high-value currency notes, effectively 86% of cash in circulation at the time, announced in early November as a way to crack down on black money, provided a jolt to the economy; although, as Jaitley later explained, it also gave the tax department enough information on people who deposited huge amounts of cash in the system after the event.
When GST was rolled out on July 1, 2017, Jaitley was criticised for being ill-prepared and many called the structural reform ill-timed. One top bureaucrat, who was working with him in rolling out the tax reform, said immediately after its roll-out that it would have been an endless wait hadn’t Jaitley insisted that it happen on July 1. He told officials that it was impossible to devise a perfect GST that would be accepted by all, including the Opposition. He wanted a framework that could be implemented and he was willing to correct course along the way. That he and the GST Council did, several times over, rationalising rates and also simplifying processes. He always maintained that as revenues picked up and the tax regime matured, the council would consider more radical changes.
Jaitley’s greatest achievement was his democratic style in running the GST Council, which had some influential state finance ministers from the Opposition-ruled states. About three dozen meetings took place under his leadership and all decisions were by consensus. He showed the nation, and particularly politicians, that despite coming from politically divergent groups, a body such as the GST Council could work by consensus. In his own way, he re-defined Indian federalism. Jaitley would often speak about the model of cooperative federalism; but he also walked the talk on this.
“His unwavering commitment to a consensual approach at the GST Council, despite a brute majority of his political party, will remain a beacon in the annals of policy discourses...,” West Bengal finance minister Amit Mitra said.
It was during his leadership that the Reserve Bank of India’s (RBI) asset quality review (AQR) unearthed huge non-performing assets (NPAs) amounting to around ₹9 lakh crore. Discovering that his government had inherited an NPA problem of huge magnitude, he devised an effective instrument to resolve it. The instrument was the IBC.
The IBC changed the debtor-creditor relationship. Banks stopped the endless chase of wilful defaulters and took resort to the National Company Law Tribunal (NCLT), an effective institution that could remove the defaulting management and invite a competent entrepreneur to take over the company. The IBC changed the debtor-creditor equation for good.
Jaitley wrote about it on its second anniversary: “The IBC was approved by both Houses of Parliament in May, 2016. This was the quickest Economic legislative change that I have seen being made by Parliament. The NCLT was immediately constituted, the Insolvency Bankruptcy Board of India was established and the regulations were framed. By the end of 2016 corporate insolvency cases were being received by the NCLT.”
Growth in the Jaitley years was an average of 7.5% compared to 6.4% during UPA-II.
As he wrote in a blog post (he was an avid blogger), “The Economy and the Markets Reward Structural Reforms and Fiscal Prudence” on June 18 2018: “Demonetisation, GST, digitisation, AADHAR and the anti-black money measures are leading to gradual formalisation of the Indian economy. Measures like Foreign Black Money Act, Benami Prohibition Act, Income Disclosure Scheme, changing the tax treaties with Singapore and Mauritius have all yielded rich dividends.”
And in many ways, they have laid the foundation of a modern, transparent economy where it is easy to do business.
Vikram Kirloskar, president of the Confederation of Indian Industry (CII), called him a “true reformer” and “keen advocate” of economic liberalisation. “The introduction of the GST under his leadership of the empowered committee represented a historic transformation of India’s indirect tax system... Equally, the IBC, financial sector policies, and amendments to the regulatory systems added immensely to the economic framework,” he said.
Deepak Parekh, chairman of Housing Development Finance Corporation Limited, said, “Today the nation has lost one of its tallest leaders. The country will always be beholden to him for leading one of India’s most significant reforms of recent times, which was the introduction of GST. His uniqueness lay in his ability to be a consensus builder. He was appreciated for listening to the views of industry and then putting forth practical and implementable solutions...”
Shardul Shroff, executive chairman of the law firm Shardul Amarchand Mangaldas said that Jaitley would be remembered for key economic reforms. “Arun believed in the reality of Vasudhaiva Kutumbakam (the world is one family)... He was a friend of friends. The smallest inconvenience of his friends moved him to help. Such souls are rare and immortal. They never die,” he said
First Published: Aug 24, 2019 23:20 IST