Arvind Kejriwal brings a refreshing change to polity: Rahul Bhasin

The Aam Admi Party has received mixed reviews from the investors community on the Dalal Street. AAP's anti-corruption plank has won it many fans, but on the other hand, its economic policies - such as a sharp reduction in power tariffs- have drawn miffed reaction from India Inc. Rahul Bhasin, managing partner of Baring Private Equity Partners India, told NDTV that nothing could be better if AAP's victory leads to a cleansing up of India's political system. However, more than AAP's intent, it will be the execution that will be under close watch, he added.

Here is the edited transcript:

How do you view AAP's politics?

AAP's politics is welcome. Arvind Kejriwal is refreshing and a lovely change, and is forcing the system to ask itself the questions which are relevant. However I may have issues with their understanding of economics and also their approach to management.

Subsidizing energy is quite an absurd notion. Lots of documented evidences suggest that the higher your per capita income the more energy you will consume in every form. So if you subsidize energy you are actually subsiding the rich rather than the poor.

So it's a moot point whether a country like ours which has 2.77 per cent of citizens paying income tax can afford to give subsidy? Ultimately this will have to be recovered by indirect taxes or through inflation and in a circular manner the person getting the subsidy is paying for it himself.

Does AAP's pro outweigh cons?

At this moment definitely, but I hope they adopt same level of integrity in their economic thinking. The basic economic truth is nothing is made for free, whether its electricity or water, somebody makes it and somebody pays for it. So this concept of 'giving for free' suggests that somebody else is paying for it... leads to distortion in the supply chain.

Is the AAP impact an exaggeration?

AAP will have a definitely an impact especially on urban centers. The dangerous fact about AAP that they make leftist and socialist comments now and then, but they have demonstrated willingness to be open and so I think that will prevail.

Narendra Modi is talking about things which are economically rational. You can't change economics no matter how populist it sounds and Narendra Modi is the one politician in country who is acknowledging it. In the state elections, the BJP contender won in Rajasthan despite stating that handouts are not a good thing. I hope we witness this type of outcome in next elections.

However, if you look at market outcomes and economic returns, history suggests that even in third front governments markets don't do too badly. Reform track records of third front governments haven't been too bad. What UPA has done of throwing the economic textbooks out of window to follow policy of appeasement has been very unfortunate. I believe that this embedded inflation we are seeing is a result of over spending and unless they correct this we are going to have structural problems.

Are elections make or brake?

I don't think it's a make or break; it's an opportunity as this is the first time since independence that somebody is talking about something which actually works. I hope that whether any political configuration comes to power or not this type of thinking remains there in the political landscape and doesn't get swatted out.

Would the fiscal deficit target be met?

May be the government would meet the arithmetic fiscal deficit but by delaying subsidies to fertilizer companies and oil companies its lengthening all those business cash flows which results in down the line delaying of cash flows.

If you look at government finances, this year the repayment of debt was Rs 50,000 crore for next year this number jumps three times. So this is creating tremendous problems for coming years, just because you are not reigning in your expenses today.

Your views on abolishing of income tax by BJP?

Transaction taxes are usually easier to collect taxes from but direct taxes are the right way. There has been so poor record of execution in terms of collection of direct taxes that now government has to think of alternatives. Aadhar is a game changer; by linking Aadhar to bank account government might get rid of massive tax evasion which usually takes place.

It's better to correct the execution of the present system than try something like this.

Why are you in support of current system?

Direct taxes the most equitable. Those who earn higher, pay higher tax in this system. The minute you have indirect taxes everybody starts paying the same tax.