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Q&A: Pranab Mukherjee
May, 24th 2010

Finance Minister Pranab Mukherjee reiterates to Business Standard his resolve to reduce the fiscal deficit over the next few years, for which he hints at taxation measures. Edited excerpts:

How do you see the state of the economy?
It is picking up. In 2009-10 IIP was quite satisfactory compared to the previous year. It had reached the double digit figure. The contribution of the manufacturing and services sectors, to some extent, has compensated for the deficit in agriculture, because the adverse impact of the monsoon was felt in the second and third quarter of last year. For 2009-10, we are expecting the economy to grow at 7.1 per cent. Somebody was suggesting that the last quarter figures, which will come on May 31, may make it 7.2 per cent. But Im sticking to 7.1 per cent. For 2010-11 it will be 8.5 per cent. So India will be the second fastest growing country in the world.

How will the crisis in Greece affect India?
Greece indicated that we should draw some lessons. One such lesson is that you cannot have unlimited fiscal profligacy. According to some analysts, the problem of Greece is that its  sovereign borrowing rate is 115 per cent of GDP and its fiscal deficit is more than 14 per cent.The current account deficit is around 14 plus. This level of deficit is not sustainable. That is the lesson Greece is conveying. In my Budget proposals, I dealt with these issues. More than once, I have mentioned that a nation cannot live on borrowing perpetually. Therefore, we must undertake fiscal consolidation. We should come back to the path of fiscal discipline. Deficit should be brought to a manageable level. This year I have improved a little bit on the roadmap, which the Thirteenth Finance Commission provided. I could have gone up to 5.7 per cent but I stuck to 5.5 per cent. In 2011-12 it will be 4.8 per cent and then after that it would be possible for me to come back to 3 per cent or around that. We already reached that level in 2007-08.

Critics point out that this years 5.5 per cent was possible because you had some one-time benefits like the 3G revenue and some expenditure savings. Looking forward, how confident do you feel about managing fiscal deficit?
As we had some advantages, we had some disadvantages also. Disadvantages are that I have not rolled back the duty cuts. Three per cent of GDP I injected into the system as a fiscal stimulus in three instalments. I have done only a partial rollback. The excise duty was brought down from 14 per cent to 8 per cent and now we have moved it to 10 per cent. Therefore, I am still carrying some losses on the revenue side. So the revenue buoyancy which we enjoyed was around 12-14 per cent of GDP. I am also expecting this will be possible because my tax to GDP ratio will improve and it will be around 14 per cent. Therefore, in a growing economy there will always be some points of plus and some points of minus. The net impact is to be taken into account. Last year the fiscal deficit was more because I had to provide for the Pay Commission. We substantially stepped up the Plan Outlay from Rs 2,40,000 crore to Rs 2,85,000 crore and then to Rs 3,25,000 crore. That means in a span of 18 months Rs 85,000 crore was injected into the system. But this does not take place every year.

Apart from raising taxes are you looking at using any other instrument?
We are rationalising subsidies. We are going to have some major tax reforms. For goods and services tax, we are talking to the states. I hope it would be possible to have a consensus. On the direct taxes code, I will shortly introduce the legislation. The process of consultation with various stakeholders is over. Drafting is taking place and I will again put the redrafted code on the website for discussion.

What is the target date for that?
I want to introduce it in the monsoon session of Parliament because if I do that perhaps it will be possible to make it operational from the next financial year, which is the target. I also want to do GST but there I shall have to build up consensus. I will use this period to talk to the chief ministers and finance ministers of the states. 

Perhaps the GST rate will be higher than 14 per cent and that will give you some flexibility. Is there any indication on that?
Rates are to be negotiated. After two or three weeks, state finance ministers will meet me. What we are suggesting is that there should be a common threshold, exemptions should be minimum, there should be a common rate for goods and services and there should be uniformity. These are the broad parameters on which we are operating. We will provide compensation to the states. It has been discussed in the Thirteenth Finance Commission report and you can work on it. But without a consensus you cannot have it. Direct taxes are in the domain of the central government. But indirect taxes with regard to GST depend on a Constitutional amendment, which is not possible without the cooperation of the states.

Are you considering a Fourth List in the Constitution?
Ideas have come. There will be a Third List where both the Centre and the states can tax the same item. This requires an amendment to the Constitution...If GST and DTC can be introduced from the next year, that will be a major revolutionary change in the tax reforms.

Are you certain it will happen next year?
No, next year we have fixed the date. I provided fiscal stimulus to the economy last year and now I want to inject a reforms stimulus to the economy by not merely privatisation or allowing FDI. I do not look at reforms from that point of view. When Chidambaram introduced the service tax he brought about a change. When VAT was introduced it was a major reform. Nutrient-based subsidies, which I have introduced, this year is a reform in that direction. I hope it is a success and after that we can introduce it in many other areas. I can give you the examples of fertiliser and oil bonds.

Are you worried about inflation?
I have just got the figure today. Out of 17 food items, prices of 14 items have come down in the last three months. Moong dal prices have gone up but prices of potato, rice, wheat, flour sugar and other pulses have come down. This shows a declining trend between February 19 and May 19. But there is a tendency of food inflation being transferred to general inflation. I do feel if the monsoon is as per prediction it will have its moderating influence in the next couple of months. So on the whole the overall price will be manageable. It will be around 4-5 per cent.

Are capital flows a cause of concern?
We shall have to be watchful because now there may be a possibility that with these levels of growth and stability in the fiscal system India is likely to emerge as an important investment destination. But volatility of capital flows may upset the system. So we shall have to be watchful. But right now I am not pressing any panic button. If we find intervention at some point of time is needed we will do so.

Is the foreign transaction tax on your mind?
I am not going to look into any specific area or modalities of tackling it. The Reserve Bank will also be watchful.

On oil prices the Kirit Parikh committee has come with its recommendations. But the government is perhaps dragging its feet on it. What is your perspective?
That is not correct. A group of ministers has been appointed. I think they will take action.

There are reports that if crude oil prices remain at $80 per barrel and there are talks that it will go up to $100 the oil subsidy will be Rs 98,000 crore.
Those are all speculative stories. Surely that amount of money cannot be borne as subsidy in the system.

Do you have a time-frame in mind for addressing the issue?
The group of ministers is working on it.

In recent months we have seen regulators battling among themselves over jurisdiction. How would you resolve such issues?
We are shortly going to resolve these issues. I want to take an action which is appropriate to ensure that these kinds of things can be avoided and because of that I require a detailed legal examination of various problems. I have asked the law ministry to give its views. Final interpretation will be done by the court. So far for my internal action, the law ministry is looking at it.

Why did you ask them to go to court?
That was an agreed decision by both of them to go to the court to accept a binding judgment. This emerged during their discussion with the finance secretary. If they had second thoughts on this they could have told us. But anyway Im keeping that behind and look in to the main issue.

How do you hope to carry the financial burden of so many new entitlements the government has been legislating?
Entitlements have arisen from the compulsion of the regional parties. In the first four five-year plans, we believed in the notion of the trickle-down theory. If there is growth, it will trickle down to the bottom and benefit the underprivileged sections of society. Indira Gandhi started confronting the poverty and gave the slogan  Garibi Hatao . The current social entitlements with legal rights are a direct outcome of that transformation. There is a need to serve different constituencies which have emerged now. Apart from the Congress and the BJP, there are regional parties ruling some states. But these dont have a significant strength in the Lok Sabha, be it Uttar Pradesh or Bihar. So, political transformations are taking place. Most of the parties have come out of the Congress. There will be some burden on finances but development is essential. If we stop development then there would be no transformation. Earlier, I was spending substantial resources to support an inefficient system. It was just a waste of resources. Today if I go for disinvestment, it is not selling family silver to meet the grocers bill but to put these units stand in competition and make them stand on their feet. I am also diverting the resources to that extent for better purposes for the people in the form of legal entitlements for job, education and food.

How will you sustain these efforts?
We have to augment resources to sustain these efforts. We would also inject efficiency into the system and plug the leakages. And we will have to face competition from within and outside. Once upon a time, our economic slogan was to save one dollar. But if you have to spend Rs 20 to save one dollar when the dollar-rupee parity was at Rs 8, it did not make any sense. Then, to support the domestic industry, we raised the slogan of import substitution, not export promotion. Import substitution created the capacity to produce but sometimes inefficiency also came in. Actually, if you read the Budget speech of the Finance Ministers from 1947 till date, you will find the transformation of economic policy of this country.

So, are you saying that the central government cant avoid these entitlements?
Exactly, take the example of the law and order situation. As per the Constitution, it is a state subject. But can you leave the Naxal or terrorist problems for the states to handle alone? Can you leave the task of modernization of police forces to the states? States have police budgets, but we are giving so much money for training, equipment, asking them to fill up vacancies. The states are gradually also recognizing these facts.

Do you see disinvestments playing a major role in meeting your funds requirements?
If in a budget Rs  10 lakh crore or 11 lakh crore, what is the percentage of Rs 40,000 crores  from disinvestment ? It is not merely a resource mobilization exercise. There are some Navaratnas where the government holds up to 90 per cent stake. I am just going to disinvest just 10 per cent more so that they become credible as per the SEBI guidelines. And you will get the price discovery.

Why not privatise them completely?
Well, I can only explain the policy of the government but I cant go into the theory of whether the government should do business or not. Thats for you to do. My disinvestment policy is clear: the governments equity in these companies will not come below 51 per cent. It will not be privatization. And companies which have 100 per cent government holding, I will not disinvest full 49 per cent in one go. I will do it gradually.

What about financial sector reforms?
Financial sector doesnt mean merely raising the FDI cap. There are many other issues. I am talking about no-frills account, extending banking services to 60,000 villages in two years without physical branch expansions. All these are also reforms taking advantage of technological innovations.

More than 70 bills are pending before Parliament?
In certain areas, legislation is required like land acquisition or raising the FDI cap in Insurance or in the area of pension fund management. But I dont have 273 MPs in the Lok Sabha. The Congress party has improved its position to 207 MPs but the balance I am filling in from other parties. I cant do if I dont have majority.

How do you look back at the first year of the second tenure of UPA?
Its not the question of one year or two years. Running a government will always have some teething problems. Even if you have majority, there will be disruptions. Earlier, in the 1960s, 19770s or the 1980s local issues hardly came up for debate. But now as more and more regional parties have come up, local issues are getting more prominence. What has a regional party got to do with foreign policy, fiscal policy or the foreign trade policy? Will it be interested in international border management if the party doesnt come from a state with international borders?  But Indian democracy has the power of self-correction and I am hopeful, this trend too, will change otherwise democracy will be destroyed.

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