We Must Stop Competitive Populism
Q: Do you agree with the policy prescription package that has come out in the Economic Survey?
A: The Economic Survey has by and large analysed the economic situation correctly. But Im apprehensive about the government pursuing the broad outline features indicated there. For example, the survey suggested that there should be some control on subsidies. I am not going into the merits of these subsidies, but the government is doing just the opposite. Just the day before the presentation of the Economic Survey, they increased the subsidies on PDS from Rs 5,500 crore to about Rs 8,000 crore. I doubt whether the governments policies, including the Budget, will be in conformity with the prescriptions in the Economic Survey.
Q: With extra commitments on PDS and keeping in mind the Pay Commission recommendations, how would the government bring the fiscal deficit down to the targetted 4.5 per cent?
A: They wont be able to. I dont know whether there will be any jugglery with figures, but from a plain reading of the situation it is clear enough. Money is not going to come from heaven. Take the case of the governments tax revenue. The budgeted estimate of income tax was Rs 17,843 crore, corporation tax was Rs 19,600 crore, customs duty was Rs 44,435 crore and Union excise duties Rs 46,884 crore. Taken together with all other taxes, the tax revenue was Rs 1,32,445 crore. Of that, two items, customs duties and Union excise duties, account for more than Rs 91,000 crore. Two days ago, the finance minister, replying to a question in the Rajya Sabha, said in the first 10 months, excise duty realisation is little more than Rs 36,000 crore. So unless the balance Rs 10,000 crore is made up in the remaining two months, there will be a shortfall.
Given the slow growth in imports, how is the finance minister going to make up in customs and excise duties? Revenue receipts are going down, expenditure is going up. To top it all, the government is on a spending spree. Theyre busy distributing non-existent resources. Everyone is talking about concessions where will the money come from?
Q: What has been the Congress role? What have been the points of agreement and departure with the UF on budgetary issues?
A: We are supporting the government from outside. There is a political compulsion to support the UF government. But we cannot do any back seat driving. We are supporting them on an issue to issue basis. We cannot spell out all the issues at one go. As and when a situation demands, we will have to look into it. But we cannot provide them our shoulders to fire from. They are the government of the day. It is their responsibility to prepare the Budget, run the country, formulate policies and implement them.
Q: Where subsidies are concerned, just before the elections, even the Congress had rolled back some of the reforms. Why is every government apprehensive about increasing user charges?
A: It is a genuine problem. There should be some political consensus on the issue. In our own way we tried to find a solution. When I was the deputy chairman, Planning Commission, we appointed an austerity committee and tried to arrive at a consensus with chief ministers. We spoke to national party leaders and central trade union leaders. Unfortunately, we couldnt come to any conclusions. A step like this needs to be taken in cooperation. Many of these decisions have to be implemented by the state government. Parties want to avoid the responsibility of hard decisions...
Q: Why is the Congress not making an issue of inflation?
A: We have made an issue of it. Why inflation? I will give you just one example. Look at how money has been injected in the system (apart from increasing administered prices). On July 1, after this government came to power, in the slack season CRR (cash-reserve ratio) was reduced from 13 per cent to 12 per cent. A net Rs 4,100 crore was injected into the system. Then from 17 October, when the busy credit season started, they reduced the CRR by two percentage points in four instalments. First they brought it down from 14 per cent to 12 per cent, then they brought it down from 12 to 10 per cent between October and January. The net result was that Rs 8,600 crore was injected into the system, in addition to Rs 4,100 crore, implying that money supply during this period was 13.7 per cent more. That is one of the factors that has fuelled inflation.
I do not buy the argument that there was a major liquidity crunch. It is not a liquidity crunch, it is the high rate of interest that is standing in the way of utilising bank funds. Banks are flush with funds but there are not many takers because of high interest rates and some demand constraints, since industrial growth and export and import growth havent picked up. Yes, some of the decisions were delayed. Our government did not do it. In election time it is not possible to do it.
People are asking why we are not supporting the enhancement of petrol prices. We supported it when they did it in July. But the decision is to be taken in the government.
Q: But if petrol prices are hiked would you support it?
A: First let the government make up its mind. If they bring up these proposals, as I mentioned earlier, there is a need for us to support them, otherwise it cannot be passed in Parliament. But they must formulate a policy. After all office has some responsibility. It is not all a bed of roses, there are thorns too.
Q: Given the fact that there is an industrial slowdown, do you think fiscal compression should continue? Shouldnt the focus shift from expenditure to revenues?
A: There should be both expenditure control and revenue extraction. At least let us keep subsidies at the present level. Then let there be a horizontal expansion of the tax net. We are supposed to have a huge middle class population of 200 million. If there are five persons to each household, there are 40 million households in a position to pay income tax. But how many people pay income tax? Eight million? I am not saying that this has come about suddenly. What I am suggesting is that tax administration must be streamlined. Applying both the carrot and the stick, you will have to make for a horizontal expansion. And we must stop competitive populism.
Q: The Eighth Plan had cut public investments. But since private investments have been slow in coming, should the focus shift to public investment?
A: According to the approach paper, public investment is much less in the Ninth Plan compared to the Eighth Plan. In the Ninth Plan, I think the total investible resources they have computed is about Rs 21,90,000 crore for the entire five-year period. As a percentage of GDP it is 28.6 per cent. During my plan (Eighth Plan) the total rate of investment was 23.2 per cent of GDP, though it then rose to 24 or 25 per cent. Out of this Rs 21,90,000 crore, Rs 8,00,000 crore is for the public sector. The balance is for the private and household sectors. My ratio was 45:55. Left economists are saying there should be larger public sector expenditure so that it could generate demand in the private sector. To some extent it has its merits, but we found that private sector expenditure capacity has increased substantially and we should utilise that.
Q: What kind of Budget would you present given the present state of the capital markets?
A: The government has already taken some steps. They have formulated the Takeover Code and Sebi has been strengthened. These are steps in the right direction. But what is needed to revitalise the capital market is not some tinkering with the primary or secondary markets. Rather it needs clarity of economic policies and direction. Unfortunately, in the UF there are many cooks to spoil the broth. If people speak in different voices, how will investors have confidence?
Q: What action would you have initiated with regard to MAT and double taxation of dividends? Wasnt MAT in some form first introduced by you?
A: Yes, I introduced it, and it was called Minimum Corporation Tax (MCT). And from my experience I found that it was acting as a disincentive to savings and investment. After me, V P Singh abolished it. The experience with MCT was not happy, so I dont know why the finance minister suddenly thought of making another experiment. He could have drawn lessons from the past. And instead of double taxation on dividend income, I think there could be uni-point taxation.
Q: What about budgetary allocations for infrastructure?
A: That becomes more relevant in the case of planning. Four major areas need massive investment power, communication, transport and irrigation. These were the thrust areas in the Eighth Plan also but we didnt have enough funds.
Q: How would you generate these funds?
A: Insurance, pension funds could be deployed, I have no problem with that if it can be utilised efficiently. More importantly, we should not expect too much from external sources. Our finance minister talked of $10 billion coming in. In 1996, total direct investment the world over was $315 billion. Out of that, 64.5 per cent investment was in developed countries. Some 31.4 per cent was for developing countries, but out of this, nearly 73 per cent went to China and the Asian tigers. So what is left? In absolute terms S$38 billion dollars would be left to be shared between 150-plus countries. You may desire $10 billion or $15 billion but first we have to create the conditions and that cant happen overnight.
I would also encourage savings. It is not a theoretical proposition, I have done it. In my three Budgets, I have made maximum developmental expenditure at the rate of 26 per cent. To do that I had a simple formula I provided incentives for saving and disincentives for expenditure.
Q: What would your priority areas be if you were the FM today?
A: Priorities depend on conditions. Any FMs aim would be to contain the fiscal deficit and inflationary pressures in the system while providing adequate resources for developmental expenditure. These may sound contradictory, but after all the role of the administrator is to manage contradictions.
But I would never have accepted the post in a coalition. I cant. I believe the FM cannot afford to be populist. And an FM cannot afford to please too many masters.