In May, India's Congress Party beat the odds and the ruling BJP Party to win the general election. Under the leadership of Prime Minister Manmohan Singh and Congress Party President Sonia Gandhi, the government outlined its plans to reform India's economy by placing special emphasis on helping the rural poor. The man charged with this task is Palaniappan Chidambaram, the new finance minister. At the same time he needs to ensure that India maintains high growth levels and improves its fiscal accounts. In an exclusive interview he tells Emerging Markets how the government intends to pursue reforms.
By Kala Rao
EM: You have said that the mandate in the last national election in May is one for economic reform, not against it. Can you explain that?
PC: Yes, it is wrong to interpret the electoral mandate as a vote against reform. On the contrary, I interpret it as a vote against the Bharatiya Janata Party-National Democratic Alliance government that did not extend the reforms to rural India and particularly to the agricultural sector. That government was too focused on urban India and got carried away by its self-serving slogan of India Shining. I think the people of India want the reforms to be extended to them, to their vocations in life, to address their concerns.
EM: How does your government intend to pursue reforms without alienating the poor?
PC: We have to focus on agriculture, to promote investments in agriculture, bring new technology to agriculture. We must make Indian agriculture competitive and efficient. Secondly, we need to provide basic services to rural India. By this I mean rural connectivity such as roads, railways and telecoms infrastructure. We need to provide sanitation and education, and the bulk of our planned expenditure will go towards this.
EM: You have said that you are a minister for investment and that you intend to set up an Investment Commission. Can you spell out your plans for attracting investment, including FDI?
PC: This Investment Commission is intended to be a pro-active body. An eminent person drawn from the business sector will head it. The chairperson and the commission will seek out investors; its members will seek meetings with the boards of directors of international companies. They will ask why a particular Fortune 500 company or a big European company is not in India. Likewise they will also seek meetings with the boards of directors of Indian companies and encourage them to make ambitious plans for investment. The commission will also have the broad authority to engage potential investors and to commit support from India to their investment decisions.
Most sectors are now open to FDI from power to telecommunications. There are some sectors where there are caps on investment. We have identified three sectors where these caps may be liberalized. They are telecommunications, civil aviation and insurance.
EM: That decision has drawn criticism from your allies, the Communist parties.
PC: We are confident that we will be able to persuade our allies to go along with these policy decisions. And if necessary, we can look at some other sectors too.
EM: What about investments in infrastructure?
PC: We have an inter-institutional group mechanism (IIG) for infrastructure that has been quite successful in helping independent power producers to achieve financial closure. We want to extend this to some other sectors. The IIG is looking at Rs400 billion ($8.6 billion) of investments in infrastructure. We have identified airports, seaports and tourism as key areas. We have also published the guidelines for public- and private-sector partnership in infrastructure and hopefully these initiatives will bring in more investment into infrastructure. The prime minister has just announced the setting up of a cabinet committee on infrastructure that he will head.
EM: You have indicated a firm resolve in your budget to keep the fiscal deficit to 4.4% of GDP this year and eliminate the revenue deficit in five years. There are several challenges though. Isn’t this going to be a difficult task to accomplish?
PC: This government assumed office on May 24; by that time it was already 54 days into the first quarter, so no inference can really be drawn from the first quarter. Secondly, the Finance Bill was passed late in August, and will become law once the president signs it. I had the choice not to notify the Fiscal Responsibility Act; the last government did not notify it. But we took the decision to do it solely as a measure of self-discipline. The message sent out is that this government is committed to fiscal discipline. Yes, we may have some slippage in the first and second quarter this year, and in fact the Act allows us to go to parliament and explain the situation. The reasons are rather obvious. No one could have budgeted for the price of oil at $49 a barrel. No one could have budgeted for a delayed monsoon. These are external factors. If there are some risks, we have to take those risks. We have to redouble our efforts in other areas to collect revenues. I am confident that we will do better in some areas, for example in service tax. We are also confident of doing reasonably well in the collection of tax arrears and we are trying to plug some loopholes in the tax system. This government is here for a five-year term, so please do not measure us by the performance in the first quarter alone.
EM: On privatization your government makes a distinction between profitable and non-profitable state companies. Can you explain the policy?
PC: Our policy is clear in the common minimum programme. The navratnas (profitable state companies) will not be privatised; they will remain in the public sector. Public sector banks will retain their public sector character but will be allowed to go the market to raise more resources. Any [state] company that is profitable on a sustained basis in a competitive market environment will be allowed to remain in the public sector. We will have to define what we mean by `profitable' on a `sustained' basis and a `competitive environment'. Where there is potential to turn around loss-making and potentially loss-making companies, we will explore that option. Finally, there are chronically sick companies that we may have to close down.
EM: The government plans to sell a part of its shares in the initial public offering by National Thermal Power. Is that the way forward on privatization?
PC: That is an indication of the road we will take. If a navratna company wants to go to the market to raise money, we will take the opportunity to piggyback on them to divest a small portion of our shares in the company. The government can get value for its shares in that way. Let us wait and see how the NTPC IPO fares; if it fares well, as I believe it will, then that could be the way for the future. Once the government's policy paper is ready, we will decide on other companies where this may be possible.
EM: Having the state governments on board is vital for the success of reforms, particularly in the agriculture and power sector. Many of these governments face fiscal problems, how confident are you of being able to carry these governments with you?
PC: The state governments are in fiscal distress and we have to deal with that problem. They must increase their revenues or cut expenditure. The remedy is a well-known one; they have got to now take action. We have a medium-term fiscal reform policy that gives incentives to states that reduce their revenue deficit and fiscal deficit levels. Some states have gained by this, but some others have not taken advantage of it.
EM: Inflation is worryingly high at the moment, mostly because of high international oil prices. To what extent do you think it will impact economic growth this year and what steps do you have in mind to tackle it?
PC: Most of this is a result of the high international price of oil. We have taken some fiscal steps. We are also taking some monetary steps. The seasonal factors will play out too. If oil prices were not so high, inflation would not be a problem.
EM: You have introduced a new securities transaction tax this year and abolished the tax on long-term capital gains on securities. Can you explain what you see as the long-term impact of this move for Indian capital markets?
PC: From a long-term fiscal point of view it is good. Everybody pays some tax from the day trader to the long-term investor. We have only abolished the long-term capital gains tax on securities transactions like shares and bonds so that investors are encouraged to stay invested for a longer period. It also encourages investors to participate in the capital markets; we would like them to take some risks.