Finance Minister P Chidambaram in an interview to P Vaidyanathan Iyer and Sunil Jain says that the UPA government maintained a fine balance between growth and equity to the extent possible, given the circumstances, and despite what its critics may say, the current set of challenges cannot be wished away by its successor.
Now that the economy is where it is, do you regret that we could have done some four-five reforms if we were at an earlier date, and what would those reforms be?
Of course. I think we should have pulled back on the monetary expansion at least a year earlier. What we have done beginning August 2012, I wish we had done it beginning August 2011. I can’t speak on labour reforms. It is very nice to talk about labour reforms. All those who talk about labour reforms when they are in the government, don’t try to implement labour reforms. All I can say is that all the measures we took on the fiscal side and on the monetary side, since August 2012, I wish we had done it earlier.
We would have given ourselves two years and six months to pull back the economy to the high growth path. What I had was only one year and six months. I can only speak for the fiscal side. I cannot speak for what other ministers ought to have done or what other ministers could have done. I can’t speak for that. I can only speak for what I have done since August 2012 and how I feel we should have done it earlier. What I have said in the Budget pertains to the finance ministry. Please look at the 10 points I made. Those 10 points pertain to the domain of the finance ministry.
When the next government comes, whoever that government is, what is the big constraint facing them? Will it be a banking crisis?
There won’t be any banking crisis. The big constraint will be resources. Unless we grow at a higher rate, we will not have the revenue resources, both tax and non-tax. That will be the big constraint. The forbidden solution to that is to borrow more. Just because there is a constraint on resources, one should not yield to the temptation to borrow more. While every effort must be made to augment resources, both tax and non-tax, we should keep expenditure within the limits allowed by our resources.
Specifically on banking, do you think in terms of recapitalisation and the needs of banks, it is much higher than the government estimates? Considering what some of the players like Uday Kotak and all are saying on TV about the NPA levels. He said that 30-40 per cent of the net worth of the banking system can be eroded. So that is about Rs 2-3 lakh crore needed to be pumped in over the next few years.
See, these are experts and I don’t comment on these experts’ views. The banks require much more capital even to expand their business. This is the only business in the world which requires additional capital even if it grows at a normal rate. What we have provided in the Budget as government contribution is limited, that is why we are exploring today two or three alternatives to raise fresh capital. We will come up with options to raise more capital. Whether those options include reducing government holding is a political decision. The UPA policy is government holding will not go below 51 per cent and banks will remain public sector banks. The NDA toyed with the idea of 33 per cent but gave up on that.
Is it time to revisit that?
That is a decision which has to be taken by the political parties after assessing the political situation and whether the political situation will allow you to make that policy. It is not whether I or you think it is a good idea. An idea is good only if it is politically feasible. I am not here to make an academic statement.
If the banks need Rs 2-3 lakh crore over the next few years to grow at 17-18 per cent, how will the government provide that while remaining within its fiscal boundaries?
I think these numbers are completely out of line. Banks require additional capital and I think the RBI, about 2-3 years ago, made an estimate of the additional capital that is required over a period of 10 years. Every year we have to provide a certain amount of capital. The government will infuse as much as possible, but we have to look at other instruments as well. The tier-1 capital, the non-voting share and other means. We are looking at options. This was discussed with bankers, this was discussed with the RBI board. I don’t think there is a worry about NPAs and erosion in net worth rising beyond current levels. Banks are making every effort to recover. At the same time, NPAs will remain elevated as long as the growth is sluggish. Once growth picks up, much of this will be recovered.
Having been a finance minister and a politician for as many years as you have, do you get the feeling that there is a trade-off between jobs and subsidies?
I have always believed that if you offer people a choice between a job and a subsidy, he or she would choose a job. UPA-I’s success was, in part, due to the welfare measures that we took. But in large part, it was due to the growth that we created and the economic opportunities that we created, including jobs.
Should the next government be looking at re-balancing subsidies?
You cannot eliminate subsidies entirely in a developing country. But subsidies have to be merit subsidies and they have to be carefully targeted. To that extent there must be some rebalancing. But the more important task is to stimulate growth so that economic opportunities increase for the people. That I think is a more fundamental task.
Given the state of the economy, are you of the position that a big public spending programme is what we need for a push?
As I said, the biggest challenge facing the next government will be resources and those resources must be carefully applied. You cannot think of any gigantic programme without keeping in mind the resources.
What is your ideal number for subsidies as a percentage of GDP. What should we cap that at?
There is no ideal number. It all depends on the context. If my resources are twice as much as I have today, why would I not give subsidies in another area where there is a need for that? Tax to GDP ratio touched 11.9 per cent at the Centre in 2007-08. If we go back to 11.9 per cent, that will give me far more resources than what I have today. That time, the GDP was growing on a base of a trillion dollars. Now it is growing on a base of nearly $2 trillion. GDP growth on $2 trillion, assuming 8 per cent growth, gives you far more resources.
When you became the finance minister, a big argument then was the retrospective tax amendment. Your view was we will get into negotiations and once we solve the issue with Vodafone, we will make sure that we repeal the law or the law is only prospective and not retrospective. Today we got the news that Cairn has put off an issue because of a tax notice. Do you think the taxman has gone on a rampage for the last few years?
I don’t think so. Every tax demand is not wrong or an extravagant act. Have you heard what the G-20 ministers said, what the Australian Treasurer said? Have you seen the joint statement of the Brazilian finance minister and the Chancellor of the Exchequer? Every country today is worried about what we call “base erosion and profit splitting”. And at the last G-20 meeting, the ministers said that the tax must be paid in the jurisdiction in which profits and incomes are earned. So it is only multinationals in India which scream every time there is a tax notice. And the media immediately jumps to the conclusion that the tax notice must be wrong because the multinational says so. I think this is a very wrong approach. Each case is decided on merits.
When you look at the Income Tax Appellate Tribunal (ITAT) and the courts, 60-70 per cent of the tax demands are struck down, which makes you feel that the taxman is very often getting it wrong. Does it make you feel that we need to re-look the tax plan?
That’s not something which happened today. That’s been so for many many years. That the ITAT and the courts tend to interpret and adjudicate upon cases leaning in favour of the taxpayer. That’s nothing to do with any policy change that was allegedly made in the last few years. On the other hand, there are any number of audit paragraphs, where the CAG pulls up the taxman for not adjudicating properly or collecting the taxes, and those cases have to be re-opened on the basis of CAG audit paragraphs.
But do you think that this is actually worrying foreign investors, because whenever you meet foreign investors they keep referring to the Vodafone issue.
The Vodafone case is a one-off case. When foreign investors have raised it with me, I have asked them, ‘How many of you know the facts of the case?’ Not one has ever told me that he knows the facts of the case. I explain the facts of the case to them and say why the capital gains in the Vodafone case ought to have been taxed in India. They have really no answer. Then they point out that ‘your Supreme Court has said it is not possible’.
Then I point out to them that two judges of the Bombay High Court upheld the department’s interpretation, three judges of the Supreme Court took a different interpretation, and the Parliament clarified through an amendment that the interpretation placed by the Bombay High Court was the correct interpretation.
When you explain these facts they understand. Then I explained to them, notwithstanding the Parliament amendment, since the perception is that we have made a retrospective amendment, we have offered to Vodafone a process of conciliation that can lead to a settlement. Investors appreciate that also. Therefore you simply cannot use the word Vodafone as some kind of a short-hand to say that everything is wrong with our tax system.
Put together UPA I and II. You have been finance minister most of that time. In UPA II you have been battling a lot of challenges. But both put together, what would be the biggest challenge for you?
In UPA I, the most challenging moment was when the financial collapse took place in September 2008. Therefore we had to ward off the consequences of that collapse and ensure that the Indian economy was not affected too much, which is what we did. That was the most challenging moment and I think we handled that pretty effectively. In UPA II, the most challenging moment was when I found in August 2012 that both the fiscal and the current account deficit were completely out of line and if we did not take some drastic steps, we were faced with a downgrade. A downgrade would have had enormous consequences for the economy which I loathe to spell out.
You made a statement the other day that Parliament will set a target for inflation targeting. So have you come around to the view that India should have inflation targeting rather than the RBI looking at it?
I have made a clear statement and I have said so in the Budget speech approved by the Prime Minister. Our goal must be price stability and growth. Now price stability is part of the objective. For price stability, the way to go about it is to set an inflation target. That inflation target, in my and the government’s view, must be set by the sovereign. The objective is price stability and growth; for the former, the target must be set by the sovereign.
The Urjit Patel report makes a different recommendation. We have made it very clear that we don’t agree with that conclusion. Our policy is that the objective of the monetary policy must be price stability and growth. And I think the RBI board, when I explained to them, is more or less in agreement with that approach.
According to me, the government will set the target, but if the Parliament enables the government to set the target, then it is Parliament setting the target. The target would be set in consultation with the RBI. My view is very clear. The buck stops with the sovereign and it is the sovereign which has to set what the inflation target will be and what the growth objectives are.
Would it be fair to say that Aadhaar, which was seen as this big way to reduce subsidies and leakage, hit a political wall, or that the homework wasn’t done in terms of implementation?
Aadhaar is in two parts. One is the Aadhaar itself, issuing the number. That I think has proceeded at a satisfactory pace. I think they have issued Aadhaar to 50 per cent of the population, which is an enormous achievement in a country of India’s size. It is not a mean achievement.
The other is the use of Aadhaar. Now, when we use Aadhaar to transfer scholarships everybody is happy. Every student, parent and department is happy that the scholarship money is going directly to the bank account of a student.
But when we use Aadhaar for LPG, there are groups of people unhappy for different reasons. One group is unhappy because somehow the perception has grown that we are paying out of our pockets and the government is only reimbursing us. That’s not really correct. People think there is no subsidy, little knowing that even if they pay from their pocket and government is reimbursing it, that is still a subsidy. So it is a matter of communication to this group.
Another group that is unhappy is perhaps a group of dealers who have been diverting the cylinders from a beneficiary to a non-beneficiary. The third group that is unhappy is genuine customers who support Aadhaar-based transfer of LPG benefit but who do not have convenient access to a bank account. For them it is a genuine inconvenience. Therefore, we have now constituted a group, and I have advised them to find a way in which we can still link Aadhaar to LPG benefit without linking it to bank accounts. We have to work out a system and find another way in which we link the Aadhaar to the dealer and the subsidy is passed on to the oil company without requiring a mandatory link to the bank account. This is a tall order, but we will have to find a solution.
Once these issues get sorted out, are you in favour of extending Aadhaar to, say, a food security act?
That is even more complex. If it has run into so many practical or perceptional problems in the matter of LPG subsidy, then there will be even greater perceptional problems when it comes to food subsidy. So I think we need to think through it completely before we extend it. Ultimately we should extend it, but we must think it through completely.
Is there some worry within the government about if a new government comes in there will be retribution in terms of picking on ministers or re-opening of cases?
How can I say what the new government will be? The UPA itself may be the new government. Why should anyone worry when no wrong has been committed? All the cases are being investigated by agencies already, there is nothing new about it. And they have come to the conclusion in many cases that there is no corruption. Take the coal scam. It is already being investigated by CBI, under the supervision of the Supreme Court, and I am told in many of those cases they have come to the conclusion that there is no corruption.
If you look at the constraints your government faced, whether its Goods and Services Tax or coal sector reforms, will another government have the same problems?
Of course they will have the same problems. That is why the BJP does not speak about these issues. The BJP’s prime ministerial candidate does not meet the media. If you ask him this question he must come up with an answer. Therefore the best way is not to meet you at all. On any issue, on Coal Nationalisation Act, have they taken a stand? If you don’t revisit that Act, the same problems that we face, will be there for the next government as well.
On non-legislative issues, people keep saying that there are many of those steps which could have been taken but perhaps were not pursued with earnestness.
That’s not correct. We have taken a lot of non-legislative initiatives. But why do you tend to brush aside the fact that if there is any paralysis in governance, much of that paralysis is attributable to the fact that Parliament is paralysed. More than the executive, it was parliament that was paralysed by mindless opposition and obstruction. There were difficulties in the executive side also, but more than the difficulties on the executive side, there was complete obstruction and paralysis in the way Parliament functioned.