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'Budget to focus on expenditure reforms'

P Chidambaram, Finance Minister of India.
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January 30, 2007

In an exclusive interview with CNBC-TV18, Finance Minister P Chidambaram says that he is not against Special Economic Zones but is trying to grapple with the proliferation of SEZs.

Chidambaram adds that he did not anticipate such a large number of SEZs. He intends to resolve all technical and administrative issues for 63 SEZs. He also informs that new approvals for SEZs will be done only complete review.

Shifting focus to the SLR cut, the finance minister says that the cut was only an enabling ordinance. He adds that nobody will advocate SLR cut in the current situation.

Moreover, he mentions that liquidity is ample, and that LAF (Liquidity Adjustment Facility) is taking care of liquidity.

According to him, the key external challenge is a decline in global output and disorderly unwinding of global imbalances.

Talking about the insurance sector, Chidambaram says that the expansion of insurance sector needs both domestic and foreign capital. He adds that he will consult parties on the Insurance Bill to hike FDI. He also informs that they are in talks with Left parties for the Pension Bill. Also, pension funds will have 100% government bonds option.

Furthermore, he mentions that the final call on semiconductor policy will be taken by the Prime Minister. On the budget front, he says that the budget will focus on expenditure reforms. He further adds that more private and public investment is needed in agriculture. Chidambaram also says that the ministry will look at tax concessions for pvt investments in agriculture.

Excerpts from CNBC-TV18's exclusive interview with P Chidambaram:

Let me start by asking you about the title of the book Why Good Economics Works For Everyone. Have you managed to successfully convince members of your party and your allies about this very fact?

I think everybody deep down believes that good economics works for everyone. What they are impatient about is -- why does it not work for everyone at the same time?

In a country as large as ours, in a very pyramidal structure with social stratification, economic stratification, etc, the fact is that economic reforms will work for those who are at the top of the pyramid first and then will percolate down to the middle as well as the bottom levels.

In order to compensate for this slow effect, we address the concerns of those that are at bottom of the pyramid. This is a complex explanation, which will take time to carry through the party, through the allies and finally reach the people.

In the book you also talk about how the finance minister is really the playmaker. He gets his team to score reform goals -- do you think you have been constrained because of coalition politics to play that role?

I did say that there must be more room for the finance minister and in a coalition that room tends to get somewhat constrained or reduced, which is a fact.

So, you haven't been able to do as much as you would like to do?

No, not I; I mean in any coalition. I do not think the prime minister or the finance minister or for that matter any minister has the same space and room as in a single party government.

The SEZ initiative seems to be caught in a bit of a muddle. Are you apprehensive about where this is actually headed because there seems to be public differences between the finance ministry and commerce ministry as far as the SEZ debate is concerned.

There are no public differences.

There have been on the number, on the revenue loss, as well as on the processing area?

There is, these are numbers, these are facts. Initially we thought that we should not stand in the way of clearing SEZs. I do not think we anticipated such large number of SEZs to come up. China has six, United States I think has got two, three or four. They didn't anticipate such a large number.

If a very small number of SEZs had come, even if they were multi-product ones, or large land size ones, the problem may have been contained. When such a large number comes and you then multiply, the revenue losses over these large numbers are indeed revenue losses - it is forgone revenues.

There is an argument that the Congress Ministry is not buying?

The point is the buck stops at my table as far as the numbers are concerned of revenues.

Where does the SEZ debate then lie, because we just had the e-GoM (empowered Group of Ministers) meeting?

Since then, there are issues that have come up; issues relating to land, land acquisition, rehabilitation, compensation, etc, have come.

So there will be no fresh approvals for further SEZs?

That is not the decision. The decision is that pending the GoM meeting, which was inconclusive, they will go ahead and resolve all the technical, administrative issues relating to the 63, for which notifications have been made and then the process will resume after the e-GoM decision.

So you are not giving fresh approvals as of now till issues of land rehabilitation and so on and so forth are sorted out?

It is not as of now -- it is just that the meeting was inconclusive. Therefore the meeting will take place in the next few days.

The BJP is calling for a white paper and calling for an all-party meeting at least that is the line that they have put. They are asking for a complete review of the SEZ policy?

Remember they too have voted for the Bill. Therefore, I don't think you can point fingers. The Bill was voted by Parliament, issues have risen now. These issues have to be addressed and I am not against SEZs; we are only trying to grapple with the issue of proliferation of SEZs.

Inflation, because in the book you talked about price stability and how that is a critical area or area of concern for pretty much every government, has become an area of concern as far as your government is concerned. How worried are you of the inflation mark moving touching six point this time?

Fairly concerned, not worried. The difference is that some part of it is una able, when the economy is growing at 8-9%. The reasons for some inflation is clearly discernable, which is supply side constraint, wheat, pulses, edible oils and until a month ago, sugar.

So it is not as though we are grappling with the unknown. Therefore I am not worried; we know what the problem is. If I did not know, I would have been worried.

There are only three fronts on which you can add to the inflation. One is fiscal, one is monetary and one is a supply side. I have taken action on the fiscal side, which would have been done anyway on February 28 in accordance with our autonomous policy.

We are reducing customs duties. So I have done it five weeks ahead. On the supply side, here are no short-term answers. In the short-term, you cannot increase the production of wheat or edible oils or pulses. In fact, pulses are the main problem, the production of which has been stagnant whereas pulses' consumption has increased by 20%. On the monetary side, the governor has taken action in the last two monetary policy statements and I am confident, he would review the matter.

Please remember, in a way we are paying the price for our success; there is so much money flowing into the country, FDI, FII, NRI remittances, tourism earnings, software export earnings, private equity, venture capital -- all this money is feeding money supply.

Managing money supply of course is the governor's responsibility but he too is facing a difficult situation.

The governor is facing a difficult situation and he has got the monetary policy coming up at the end of the month, not an envious job, really for him with the inflation pushing 6%. The President has just cleared the SLR ordinance. How hard is it going to be for him?

That is an enabling ordinance; nobody anticipates that the SLR ordinance will be applied immediately, not in the present situation.

Because even a 1% cut will result in Rs 24,000 crore being pushed?

Nobody is going to cut the SLR now, given the current situation; it is an enabling ordinance. It should have been passed as part of the Bill, which is stuck for another reason. Therefore we thought of pulling it out and gave the RBI, the power.

Another argument being presented by the petroleum ministry is really a cut as far as excise duties are concerned, reading in terms of customs duty. Do you buy into that argument because this has been going back and forth between the petroleum ministry and the finance ministry and you have been talking about how concerned you are about inflation and have talked about these issues in the book?

If you cut fuel prices, it will immediately benefit the final consumer but it is very unlikely. It will pass through to all products because the cut is recommended as such a small cut, a Re 1 cut and that will not pass through.

You are okay with the Re 1 cut?

No, I am not commenting on that but this is not a decision that I can take unilaterally. The petroleum minister met me yesterday and we agreed to examine it.

Does he have a valid argument?

There is a reason and there is no reason, it depends on who you are speaking for. For the immediate consumer as I said, who fills his tank, there is a reason but will it pass through into the whole system in terms of prices of fruit, vegetable, pulses -- I doubt it.

In the book, you have talked about tax offs and tax exemptions. We have just had the prime minister talking about how we need to do away with tax exemptions - this entire business of export oriented units and SEZs. There are concerns on whether this sunset clause is actually going to be extended post-2009 and is it not going to be extended for EOUs after that? What is the finance ministry's viewpoint?

We are only in 2007, why should we think about 2009 now.

Is there a rationale for continuing with it - for extending these sunset clauses?

Every exemption has a rationale or is supplied a rationale when it is introduced, but every exemption must be reviewed periodically.

Has it outlived its issues?

Some exemptions have outlived their utility.

EOUs for instance.

I cannot name any at the moment.

There has also been talk about the commerce ministry asking for an FBT (Fringe Benefit Tax) exemption on employees working within the SEZ sector. I believe the finance ministry believes that preferential treatment should not be given to employees within a particular sector. What is your view on that?

I cannot talk about tax issues now -- certainly not five weeks before the Budget. The point is you can always supply a rationale for an exemption. In fact, an exemption is justified by some reason supporting it but I think the reasons must be closely analysed. As far as possible, exemptions must be phased out over a period of time and introducing new exemptions must be very carefully weighed.

Given the kind of boom that we are seeing in the Indian equity markets, there will be a service tax levied on pubic listings or follow-on public offers, both in the equity market as well as the commodity markets?

I don't know.

You don't know but is that an argument again that you would see some sort of.

This is a free country, people can speak, they can give their suggestions, each one will be carefully weighed.

Merit, though, in that argument you think?

I cannot say. If I say it is a merited suggestion, then you will draw an inference. If I say it does not merit, you will draw another inference. So I don't comment on any suggestion at this time.

Last time, we spoke that these stock markets were in a dismal state. Last we spoke and saw the largest crash in a single day, we are not sitting at record highs of about 14,000.

The point is that media takes snap shots of the stock market and then freezes that snap shot and looks at it.

We are not freezing it. I am basically asking you as we sit here.

The stock market like any other market is a running story, there will be ups, there will be downs.

Are you convinced by the bull-run that we are in the midst of at this point of time?

Please remember these are phrases, which have gone into the stock market lexicon. The point is the Index represents 30 or 50 or 100 companies and the Index reflects their corporate performance and the prospects of future corporate performance.

The Index is not a single indicator of the health of the economy; there are multiple indicators. Looking at all the indicators including the stock market Index, I am happy that the economy is performing on all gears.

If I could talk to you about improving efficiencies as far as the public sector is concerned, one of the proposals really has been consolidation within the banking sector, which had gone to the back burner, seems to be resurfacing again. Are you optimistic and hopeful that you will see consolidation?

It still remains the matter of persuasion and negotiation. I am told at the bank union level, that they recognized the need to join hands and build strong banks -- that is what China is doing and that is what we should be doing. But at the national level, the union leaders do not seem convinced about it.

So you don't see it happening?

I have told the bank chairman and the board of directors that it is their business to communicate with their unions and then ask the union leaders to communicate with their national leaders. This is inevitable and has to happen; we need world-class and world size banks.

China's banks are now ranking among the world's largest banks; of course, there are other US banks and the European ones, which are large and now the Chinese banks are breaking into those banks.

Unions don't buy the arguments; do we actually see this going anywhere?

It will take time but I am not ruling out that they will come around. t will take time to convince them.

When Gordon Brown was here, you gave him assurance that the insurance Bills will actually go through the Left parties.

That is rubbish, he did not use the word 'assurance.' He said that "the Finance Minister of India had indicated to me." What is new about it? This announcement was made in the 2004 Budget.

He asked me in the dialogue, in financial dialogue, he wanted to know about the progress of the insurance sector and I 'indicated' to him that the Bill is likely to be introduced in the Parliament.

Have the LEFT parties indicated to you that they are willing to move forward on this?

No. I also told that to Chancellor Brown; they are opposed to 26% being increased to 49 but I said that this is one clause of a Bill. The (insurance) Bill is a comprehensive insurance law, amendments bill. This is one clause, the rest of the reforms of which are as important as this one.

On this one, we will hold consultations with the parties in the Parliament and decide whether we can move forward and raise from 26 to 49.

The BJP agrees on your point of view, but they have unnecessarily bailed you out and you may not want them to bail you out in this particular situation.

There is no question of bailing out anyone. I am not sinking for anyone to bail me out. The point is, do you want the insurance sector to expand or not. Please remember that 26% is not an entry barrier; with 26%, we have attracted nearly 15 life insurance companies and I think a little over a dozen non-life insurance companies.

Having attracted them, we have to increase insurance penetration. So the question is, where is that capital going to be raised from? If the capital can be raised within India, I will be the happiest person. But if the capital cannot be raised within India, you must allow more space for foreign capital. That is elementary logic.

On the pension reform side, we have actually seen some momentum and some movement. The Left is again opposing that, 19 states have bought into your argument and the investment model for New Pension Scheme is likely to be notified very soon. Give us a sense of when we are going to see this economic architecture being prepared and presented?

Please remember that this is an interim arrangement. I emphasise it is interim; the final arrangement will emerge after the Bill is passed, with amendments, of course.

But at the moment, since a large amount of money has been collected, for example, government of India a little over Rs 200 crore (Rs 2 billion), the State of Rajasthan said they have collected Rs 113 crore (Rs 1.13 billion). This money has to be invested wisely and prudently.

The way we are allowing an option, either you want to put it in 100% government bonds, or we are giving the alternative, namely, the pattern now enforced for non-government provident fund, which is already notified; you will have to apply it.

Now I will call the Pension Fund Regulatory and Development Authority, who has to select the central record-keeping agencies for which bids have been invited; then the authority will select the pension fund managers.

The first will be a public sector and may be the second will be a public sector manager; we may not need more than one or two at this moment, as the amounts are still manageable. Then he has to notify the two plans, which will take a little time, but I think we will set the ball roll.

Now are you hopeful that this Bill will go through unlike the insurance one?

No, I am talking to the Left parties and they have made some suggestions. That is why I said we will continue to engage with the Left parties.

On pension, I have made it very clear that there will be a 100% government bond option. I have made it clear that the first three or may be four pension fund managers will come from the public sector. I have also made it clear that a government servant will have the option of having his funds managed only by a public sector manager and have his funds invested only in government bonds. So that option is also being built into the Bill.

The question is, should other options be given from government servants and obviously should other options be given from non-government servants?

Everybody is waiting for the Semiconductor Policy. It has got an in-principal nod from the Cabinet now. But we understand that there have been differences between the IT ministry as well as the finance ministry?

You seem to take any shade of opinion, which doesn't match.

Has there now been consensus between the IT ministry and you on the Semiconductor Policy?

The decision of the Cabinet is to take the matter before the prime minister, who will give us the final view on what the package should be.

Less than a month is left for the Budget. Give us some sense because in the book you have talked about how the Budget, in that sense has lost that big bang reform push, real changes on the margins. But given the fact that you have seen hike in corporate tax, you have seen hike in indirect tax.


No, I am saying that your collections have been a lot more robust. So in that sense, you are sitting on a prettier picture as opposed to the past. Do you actually think you will get room or scope for big bang reforms this time around?

Please remember the big bang reforms were done between 91 and 93. Again, in 96-97, the trade policy big bang reforms were done between 91 and 95. You cannot do big bangs every five years.

The point is tax reforms by and large are being done; now we are addressing sectoral issues, exemptions, incentives those kinds of things. The direction is clear, but obviously, there will be some changes in rates. I don't know which way, what rates, I cannot say that, but there will be some changes here and there depending upon the situation.

Room for expenditure reform; you have talked extensively about that in your book.

It is not entirely in my hands; ministries have to come on board to weed out outdated programmes; programmes that have outlived their utility. They have to consolidate programmes, focus on areas where the Central government intervention will be effective and shade areas where the Central government's intervention will not be effective.

So I think ministries must come on board to economize on expenditure and try to get the best band for the buck. These are issues, which the ministries must address.

Agriculture and infrastructure now, will these be the two thrust areas really in the Budget?


We understand the National Commission of Farmers has submitted the interim report. What can be possibly seen to propel that secondary revolution -- you have talked extensively about agriculture and how we have not articulated what we actually need to do to this sector in your book?

First, more investment in agriculture -- public as well as private.

Tax concessions for private investments?

There are already tax concessions for private investments. So more investment, second is expand irrigation facilities rapidly, far more acreage must be brought under assured irrigation.

Third is breakthrough in seeds and varieties; there has been no major breakthrough in the last several years, as the marginal farmer, somebody who has got a couple of acres or two acres or three acres, can no longer sustain himself only on cereals or wheat. He has to have a supplemental income.

I think that is the order in which I would address agriculture, but this is really for the ministry of agriculture to address, I can only do so much through a Budget.

Breakthrough ideas on infrastructure; you have talked about using foreign exchange results, but breakthrough ideas at this point in time, in terms of infrastructure?

If you have got any ideas, I am willing to listen to them. But for my ideas you will have to wait till February 28.

Aside of the finance minister that we saw the day of the book launch, your eyes seem to well up when you talked about your mother and the faculties who were actually present there. Many people see you as sort of mechanical and a policy-maker with no heart really in that sense. Has the real Chidambaram been misunderstood?

I do not know who is the real Chidambaram; the point is that I have to be stunned; I have to be stiff, this seat is not an easy seat. Ultimately the buck stops at my table if something goes terribly wrong, but I suppose that there are other sides. I usually don't reveal other sides of myself. I am a very private person.

What do you think has been your biggest achievement in this tenure as the finance minister?

Keeping growth at over 8%. This has nothing to do with me, it has got to go with the government, the UPA, the Congress government, the Congress president, the prime minister, all of them get much larger credit.

But the fact is, I can look back and say that the period I was finance minister, we were growing at 8%. I cannot think of any other finance minister in the last fifty years that for three-four years running, if they were growing at 8%. So I enjoy that result.

The title of your book is also An Outsider's Perspective and you have said that the book would be very interesting if it were 'an insider's perspective.' But how different would it really be?

It would be very different. It is that book inside me, except that it cannot be written now.

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