'Economy may take 24 months to recover'

'The full effects of the government initiatives will have to work their way through, whether in infrastructure or in the banking sector.'

Deloitte India Chairman P R Ramesh says initiatives like GST and demonetisation have been taken very positively by foreign investors.

Companies face many tax woes in India, yet Ramesh tells Dilasha Seth and Indivjal Dhasmana why they fare worse in other tax jurisdictions.

How long do you think it will take for the economy to recover?

The defining moment in the past ten months was demonetisation. It was expected to have a short-term impact.

However, demonetisation coupled with the goods and services tax roll-out, and the banking sector facing its own challenges, resulted in a setback.

Then there are geopolitical issues -- the Trump administration's effect on our services sector.

Though it affected a few thousand jobs, the optical impact was larger. We had top Indian IT companies talking of creating more jobs in the US than in India.

The effects of all this will take more than 12 months to subside, may be closer to 24 months.

Why do you say 24 months?

Ultimately, the full effects of the initiatives will have to work their way through, whether in infrastructure or in the banking sector.

One expects that the haircuts banks will have to take, particularly through insolvency proceedings, will be large.

One case that is nearing completion involves a 94 per cent haircut.

These have implications for financial reporting of banks, and will add to the sense of despair.

Further, banks have to move towards Basel III by 2019. That measure will require recapitalisation, which depends on the amount of current capital after the effects of all these write-downs.

Banks will also have to report in IFRS and they will have to provide for expected losses.

And then there are small and medium enterprises, which have been affected the most by demonetisation and the GST.

If you see all these factors, it should take 24 months.

What feedback do you receive from foreign investors on demonetisation and the GST?

These initiatives have been taken positively. The GST exists in many countries. Investors say we should have imposed it earlier.

Other initiatives by the finance ministry in terms of business erosion and profit shifting reporting, place of effective management, and measures against black money are in line with global standards.

They also expect India to improve in the World Bank's ease of doing business rankings with these initiatives, although dramatic changes are unlikely (Since this interview, India's ranking in Ease of Doing Business has jumped 30 levels to 100).

If we have contract processing in place, initiate an alternative dispute resolution mechanism and mitigate clogging of the judicial system our ranking will improve significantly.

Investors also view India's demographic dividend positively.

But people say jobs in India are not growing...

That is a paradox. The world is moving rapidly in technology, but it is true of all countries.

If we create an ecosystem for technology-related jobs, we can bridge this gap.

There is a huge mismatch between the type of jobs needed and workers being supplied.

The skilling initiative of the government needs to look at what types of jobs are required now.

Technology will take down certain kinds of jobs, but will create many others. Look at the number of stores that have sprung up to repair mobile phones.

Do foreign investors still flag the issue of retrospective taxation?

There was a concern. But the tax authorities are becoming significantly hawkish in other countries. I know of global Indian companies facing worse outside India.

These countries may not have retrospective taxes, but the companies are wary of the attitude of the tax authorities.

The UK, and to some extent the US, have progressive tax authorities, but in many other countries the authorities are interpreting tax laws in an extreme manner to maximise collection.

This is impairing the ability of foreign enterprises to operate in those jurisdictions. So if you ask global Indian companies if India is the worst jurisdiction in terms of taxes, the answer will be no.

You are associated with a few insolvency cases...

These are early days. The first challenge is to ensure that assets do not deteriorate during the insolvency process.

To keep the wheels of companies running as negotiations with creditors are on requires liquidity.

Is interim finance an issue?

Banks' ability and willingness to take risks are becoming a challenge. Willingness is affected by the fear of action against officials.

Ability is limited by the balance sheet.

That is why the RBI had to issue a circular...

That is there, but the RBI should not step into operations of the banking sector.

Photograph: Rupak De Chowdhuri/Reuters