India's finance minister, Arun Jaitley, tells Stefania Palma how he is using the country's strong economic performance to push through legal reforms and extend its financial inclusion programme. 

India was one of the few developing economies that weathered the downturns hitting emerging markets in 2015. The country's currency and inflation remained stable and its gross domestic product (GDP) grew by 7.3% in the fourth quarter of 2015 – the highest rate among large economies worldwide. Other countries in Asia instead struggled with record capital outflows, depreciating currencies and drops in commodity prices.

“Today, India stands out as an economy with credibility. To be able to do well when the going gets challenging is itself a statement,” says Arun Jaitley, the country's finance minister.

In his view, India’s strong performance in the past 12 months could increase foreign investor appetite for sectors within the country such as infrastructure, which is often seen as being beset by red tape and inefficiencies. “Indian infrastructure is a safe, long-term investment. It gives you reasonable rates of interest that are highly competitive versus the rest of the world. India is an economy that is doing well and that has the capacity to absorb consumption. And if India’s growth is destined for a high trajectory, [infrastructure investment] is a great opportunity for investors and India,” says Mr Jaitley.

Reform minded

Indeed, hopes are high that legal reforms introduced by the ministry of finance could encourage foreign investors further. To Mr Jaitley, passing a new bankruptcy law is vital to increase the ease of doing business in India. If the bill passes, India will eliminate fragmented and conflicting laws addressing insolvency in favour of a single bankruptcy code. The bankruptcy law now needs to be passed by India’s two houses of parliament. “And we have reasonable support in both houses,” says Mr Jaitley. “It is reasonably possible that the bill will be passed before the end of 2016.”

Mr Jaitley is also pushing to implement the goods and service tax (GST), in what would be the biggest indirect tax reform in India since the country's independence in 1947. The GST will remove all indirect taxes levied on goods and services by the central and state governments and replace it with one unified tax. This would therefore eliminate India’s double taxation problem.

“The GST [would] certainly add to India’s GDP; it helps to avoid tax evasion and increases the volume of trade,” says Mr Jaitley. Unlike the bankruptcy code, the GST law requires a two-thirds majority in both the upper and lower houses of parliament as well as clearance from 50% of state legislators. But Mr Jaitley believes this bill too could be passed before the end of 2016.

Financial inclusion drive

In addition to pushing for unprecedented legal reform, the Indian government’s financial inclusion programme is another key pillar of Mr Jaitley’s mandate. In August 2014, the state launched the Pradhan Mantri Jan-Dhan Yojana (Prime Minister's People Money Scheme) to bring more Indians into the formal banking sector.

Spearheaded by the ministry of finance, the programme urged banks to open zero-balance accounts for every Indian citizen. More than 20 million such accounts were open as of mid-February 2016. “The first step was to bring 42% of Indians who were outside the banking system within the purview of the banking sector,” says Mr Jaitley. 

But the scheme quickly came up against the hurdle of poor financial literacy. Even though accounts were opened quickly, many remained unused. So, the ministry of finance started distributing government subsidies through these new accounts and offered a Rs5000 ($73.11) overdraft to increase take-up. “People had to get into the habit of using these accounts so we had to incentivise them. We started transferring a lot of government support for weaker sections of society into these accounts. Now, more than 75% of the accounts have become operational and have funds in them,” says Mr Jaitley.

Some market participants argue that poor financial literacy in rural areas could limit the scheme’s potential. Mr Jaitley, however, remains optimistic. “People need to realise the advantage of this scheme. These accounts will also become operational for insurance, pensions and microfinance loans, which are part of India’s social security programme. Each account holder has also been given a [RuPay] debit card. They will need to get into the habit of using it. It is all part of the user’s banking education,” he says.

And, adds Mr Jaitley, the government will announce more financial inclusion initiatives throughout 2016.

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