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The Rediff Interview/ Jaswant Singh, Union Finance Minister

'Gross national contentment is my aim'

The meeting with 30-odd financial advisers, representing various ministries and departments, will provide Singh an overview of their expenditure needs.

Expenditure management will be key to keeping the fiscal deficit under check this year too.

In an interview with Business Standard, Singh talks about his priorities including fiscal deficit, tax structure and tariff cuts. Excerpts:

Just after taking charge of the ministry, you said you would try to put more money in people's pockets. What are your thoughts on that now?

My thoughts are still the same. There are really four elements. Reforms, higher production, enhanced employment, which is really putting more money...

It's not by hand-outs?

How long can you sustain hand-outs?

Or tax concessions?

I don't think the word should be tax concession. Tax reform, yes, tax rationalisation, yes, and better tax administration, yes. But if there is any aspect of taxation that has been expropriatory, then certainly concession. But why tax 'concession'? The suggestion would imply that everything is expropriatory.

Putting money in people's pockets suggests a short-term perspective. Whereas what you are saying is growth through reform.

That of course has to be, because otherwise it will not sustain itself. When I said what I did, it was not meant to be a gimmick. It was the declaration of a very serious intent. We have all these past 50 years lived in a psychology of want. But the reality is now markedly different. In fact we have an economy, in which of course, there is poverty, but the fact is that poverty in between the 80s' and now has shifted down from 44 per cent to 26 per cent.

Taking off from the argument about reforms and growth, we have seen growth slow down in the last five years, from 6.8 per cent to 5.4 per cent. And you now project an 8 per cent growth in the new five-year plan. Do you really see it as possible?

Yes, I do see it. We have the simultaneous occurrence of three of the most adverse circumstances that any country could have. We have drought of a kind that we haven't had for decades. We had a stand-off with a neighbour, troops deployed … And thirdly we have an international economic fiscal climate that remains suspended in question marks, and the recovery is sluggish. Despite that, we continue to demonstrate 5.5-6 per cent growth, and despite the drought we have exports in the April to August period growing by 14 per cent, and imports in the latest month going up by 13 per cent. All my industrial sectors have shown an ascending curve. All the corporate results have been much better than last year. It surely is not an indication of ill-health.

These are short-term indicators, we were talking of the five-year perspective.

I know. But does the short term not matter at all? In the five-year perspective, I believe, there is no alternative to reform and continuous reforms. This government is committed to continuous improvement. You can say that the pace of improvement or reforms should be faster

There is only one economy in the world that has managed an 8 per cent growth, which is China. So isn't 8 per cent overreaching?

I don't see how it is overreaching. China has demonstrated that growth. Yes, if we aspire to that growth, why should you see we are overreaching?

In the short term, what are your major concerns?

I think the sluggishness in global revival and the uncertainty about the hydrocarbons sector. Then, I have to provide quality infrastructure to my country at reasonable cost. I must endeavour to improve the tax-GDP ratio. I have to continue to work extra time for fiscal consolidation. I have to revive, as I said earlier, growth. I have to address myself to the fiscal problems of the states.

That's a five-year plan. What do you intend to do in the remaining part of this fiscal?

I must address myself to tax reform. And, if I can, give a leg-up to the manufacturing sector. I would like to address myself to manufacturing, I would like to address myself to such areas which provide high employment, like housing and tourism. I would like to address myself to the traditional sectors in the Indian economy, like cotton textiles. We have to address our challenge boldly, not in the spirit of what I call the psychology of want which has afflicted us.

You mentioned both reform and fiscal consolidation, and both these measures might take some money out of people's pockets. How do you reconcile the two?

I really wish I could transform and translate a growing GDP into a simultaneous growth of gross national contentment. There is no scientific basis to this. But I do think that even though this is not an economic criterion, governments have to keep this in mind because all policy in the ultimate is for the citizen. Policy is not for satisfying the purity of an economic thought. The challenge of governance lies in finding the right balance between two equally valid and just, but competing, views. When you ask me this question, of course, as a pure economist you are right. I might not have an algebraic formula to answer your question. I do think there is, like in the other job I did earlier, something called instinct. And I have an instinct. I don't want to make it sound too much in the first person singular. But there is an element of instinct also. You have to relate to it.

You are now into the second half of this government's life. The conventional wisdom is that this is a period when tough measures become politically impossible.

I don't think myself constrained. I have to take into account the factor that in a democracy like ours there are always two equally competing but just and valid demands. Are we talking about pure economics? Or are we talking about political economy?

When you say, cut subsidies, can you do it today?

I have to reduce the purely political element and convince others about the benefits of such measures for the economy.

What is the key difference that you would like to make, through the two budgets that you have before the next general election?

I would like to contribute to what I call the gross national contentment. The citizen must feel good. How can you feel good if the economy is not good? It's a combination of so many factors. Inflation must remain managed. Production must be enhanced. There should be more employment. And the economy must grow.

We are now at the start of what seems like a recovery cycle. Could you then look at what options you may have, in the budget?

I have to encourage that which is recovering. I have to encourage even more that which is lagging behind and not catching up. I absolutely have to improve the tax-GDP ratio, but can't do it through expropriation, and therefore I have to move into a far more modern tax system.

Will you elaborate on that?

Yes. Five factors are important. I need a modern, transparent, user-friendly, citizen-friendly tax administration and that is the primary requirement. And I have to establish an impersonal system, with minimum personal interface between the tax-paying assessee and the tax official. I would try and avoid and, if possible, eliminate cascading of taxes, and have taxes which are self-enforcing. I don't want to go into details how that can be done. We have things like VAT (value added tax). And I have an announced policy of reducing customs tariffs. We need to look afresh at the speed of this tariff action.

To accelerate or decelerate?

We have to accelerate, because import growth has only now shown an ascending graph. If you are not importing, something is wrong. My current account deficit is very low.

In the case of direct taxes, we need to look at an alignment between what we do on corporate tax and personal tax rates. You see, a quarter of my GDP is agriculture. It's out of the tax net. One half of my GDP is services. I can't depend for taxes only on manufacturing. Therefore, service tax has to come in. I am not robbing anybody. I have asked my officers in the revenue department to examine these reports from the task force. Let the inputs come in.

In these reports there is nothing much on service tax rates.

Deliberately I have not seen the report because I don't want my thinking to be coloured. Let the officers go through it and let it come. Service tax issues I did discuss with the finance ministers of the states. We are moving in that direction. They have some problem. They have some worries. I have already moved amendment of Article 269 for the forthcoming session of Parliament, to enable the states to directly tax services.

Then, if I am able to outsource computerisation, the whole network of information through computers … Look at service tax, VAT, everything. In a time frame of 6 to 9 months we should do it. If I outsource, it can be done. If I try to do it internally ... I don't intend to do it internally. I want to outsource. If her majesty's treasury can outsource the work to India and get firms in Bangalore and elsewhere to maintain the treasury records of her majesty's government, why should I in Delhi not outsource to my firm in India?

There will be resistance from within the revenue department.

That doesn't matter. There is always resistance when a new thing is to be tried.

On the divestment programme. Going by the news of the last two days, it's getting worse, not better.

Divestment is not for meeting the revenue part of the budget. Should divestment continue? Of course it must continue. The momentum of divestment must not be lost. If you examine what has happened in other countries at this point, then I would say what is happening in India is not dissimilar to what happened by way of public debate elsewhere. We do not really need to be discouraged. The programme has thrown up some questions. We need to address those questions, find the answers in moving forward.

You are saying this it will retard this year's budget programme for divestment. Yes. Of course. It looks that now the target of Rs 12,000 crore (Rs 120 billion) would be difficult to fulfil. But the target of Rs 12,000 crore (Rs 120 billion) would have been difficult to fulfil even otherwise. But that should not really be the angle. Divestment is a part of the reform programme. It is integral to it. It must continue. I am confident the current debate is not just within the National Democratic Alliance. It is a debate really within Indian politics.

Most of it is within the NDA.

Because the rest you are not hearing. The National Democratic Alliance, because it is in government, naturally you will hear the most. But the debate is really on in the entire political spectrum. This will be resolved. I am confident. Some 45-60 days have gone into debating an issue. It is a democratic demand. I don't know how it could have been done otherwise.

There is some lack of clarity on where you stand on the issue.

There is no lack of clarity. Because I have not spoken … I did not speak deliberately, because I didn't want to become a participant in the public debate. I can't afford it. Actually, a finance minister should speak very little, and only when absolutely necessary.

It seems to be a clash of interests, and turf battles.

I don't know if it is a clash of interests. I really would not wish to enter this territory. Because I do not think … I work on the basis that my ministerial colleagues, all of them without exception, are really inspired and work on the basis of the highest public interest possible....

But in the real world ...

I have to stand for my colleagues.

If you had to choose between cutting the deficit and investing in infrastructure, what would you choose?

I am not too much disturbed by that deficit which goes into investment for the future, I am disturbed when I am spending more than I am earning. So when you talk of fiscal prudence, the prudence that I wish to exercise is to contain the revenue deficit.

And you want to bring it down to zero?

Please do not place me ... then you would say that the finance minister failed. On the investment part, when I borrow internally I am depriving you of options, so it becomes a burden.

One argument today is that instead of borrowing, you should print more money and invest in physical infrastructure. Because inflation is low, there are plenty of foreign exchange reserves, there is scope for more budget deficit.

Do not judge by how much money allocation takes place, look at how much you physically produce. If you say you need Rs 3,000 crore (Rs 30 billion) to lay 1,500 km of a super class highway, I will tell you to go ahead. Once you have done 1,400 km and you are asking for another Rs 3,000 crore, I will give it to you. You improve the product end and there is no shortage of money. I will not let anyone be short of money.

So you are talking about the various departments' ability to spend, irrespective of budgetary allocations.

Absolutely.

What about expenditure control?

I am not really very enthusiastic about cutting two additional secretaries' posts and saying officers should not have cell phones, which now paan shops have. I have to make substantial cuts where revenue is just flowing out, and those are the areas I have to improve. I think interest payments and subsidies have to be cut. If I am a less of a borrower, my interest will come down.

Is a subsidy cut possible, given the political calendar?

There are certain areas where subsidies must continue. They must be better directed and food security is one area where, I believe, India should not be lectured by others. In the west they spend one billion dollars a day on their agricultural subsidy bill. So do not please give me lectures ...

You've been grappling with the problems of the financial sector. First UTI. Now the financial institutions. Next it might be the banks, and then the pension funds and provident fund.

There are certain areas where it is really not the responsibility of the Union government. I must be very clear on this and I would say it is not my responsibility. The financial sector is certainly my responsibility. You cited pension funds. The only example that I have is the seamen's fund that has come to me, and other than that no provident fund has come to me.

Now, UTI is not a bail-out. The purpose is to ring fence the liability and fence it in permanently. Now when I am fencing in, then I have taken on the responsibility for that for which the Union government has given its word. This is India. It is not a question of my government or any government. The government of India must not go back on what it commits as an assurance to its citizens. You design your tax policies in a way that if you invest in units, you will benefit. Invest in an IFCI bond and you will benefit. And then if you say I have nothing to do with it, that is immoral.

What we have done is to contain the liability. This is not a business as usual scenario. I will look after that which is my moral duty, which the government is committed to. It has taken me two months and I do believe that Unit Trust is my responsibility. We have taken in principle a decision on IDBI, and we hope to go to the Cabinet next week and get approval from there. Likewise, I would try to solve the IFCI problem. I have a responsibility towards IFCI. Though the government has no direct responsibility, through the institutions I am involved. It is the same principle at work. The same principle which worked for UTI will work for IDBI also. We will examine everything that is our liability and see what can be done. We have already done this exercise in great detail.

That is why it has taken so long, and I have involved everybody. From the Reserve Bank to IFCI to IDBI. It is not a diktat from the finance ministry. They are all part of decision making and if somebody has to take a hair cut, then somebody has to take a hair cut.

Would this not mean a hit on the budget?

UTI will not be a hit on the budget. I am sure, because it is now already showing a surplus … 270-odd crore of rupees. This has actually become a good investment. There will be an IPO sometime.

That is for UTI-II?

That is right.

To come back to the financial sector issue, there is the whole issue of state guarantees, the security of approved paper and the investments made in these. There is the argument that in other countries, the total liability would be up to 50 per cent of the GDP, while here this is still only about 10 per cent...

It is less than that.

It is said that you are of the view that this can be tackled …

Yes, this can be tackled. This must be tackled. I have a mind to tackle it.

What happens to the fiscal deficit?

You are assuming that I will reward profligacy. I cannot reward profligacy. I must address myself to the problem.

So how do you do it?

I do it by retiring my more expensive debt. The debt-swap scheme for the states that we discussed recently is part of that. And with the very first step we will address ourselves to roughly Rs 30,000 crore (Rs 300-billion).

This is the first step. Is it enough? No. But I want the first step to give comfort to the states. I want them to be convinced that it is a good idea. The states are extremely zealous of their prerogatives and powers. That is how it should be. Because we are a federation but I want to convince and persuade the states of the logic of what I want to do and want them to see the beneficial effects of my proposal.

But somebody will have to take a hit. And most likely it will be the central exchequer.

The government is the ultimate risk taker. I am not here citing a recent work which an American economist has done. Everywhere, all over the world, the government is the ultimate risk taker. But before the government takes that risk, it must prudently exercise all other options.

How do you prevent the recurrence of such problems? One way would be to privatise the financial sector and the banks.

Privatisation of financial institutions is an answer but I must simultaneously ensure availability of development finance. These institutions, when they were started, were meant merely for development finance.

But that business model is dead.

But when I meet trade and industry representatives they still hanker after development finance.

Businessmen might be looking for money which they do not need to repay.

So we have a medium-term fiscal reform package for states. There is uneven progress on this front. It is a huge country. I often tell my friends from Europe that the experiment you are trying now, we have demonstrated as a success for the last 50 years.

Do we understand from what you have said that privatisation of the financial sector as an option is ruled out?

No. I am saying neither yes nor no. For I must report my intent first to Parliament, otherwise the response would be "Off with his head". I do not want to lose my head yet. What I mean is that the part of the ordinance that was issued says that we will run Unit Trust-II effectively, as a true professionally managed mutual fund for about 3 to 5 years. Make it a viable mutual fund, and then think in terms of disinvestment.

The fear is that it will never get disinvested.

This is a part of the Cabinet note.

There are many bills stuck in Parliament. Is there any hope of seeing them through in the coming session?

You see, I can only endeavour. I know I do not have a majority in the Rajya Sabha. I know that a lot of the bills are pending with the standing committees. It is part of the parliamentary system. It is regrettable that in the last two sessions, Parliament was engaged in other issues. It is my hope, I can only endeavour.

Surely you can come to some understanding with the opposition parties on non-partisan issues.

I have initiated that.

How much do corporate rivalries influence your ministry's functioning?

You see we also need to grow up in India. When it was in the nascent days of private enterprise in India, when everything was dependent on the government doling out a favour, then the government had a much more direct role in this. Otherwise, business rivalry is part of the free market economy's functioning.

But they sometimes subvert and suborn governments.

I am not disturbed by the fact that corporate houses are against each other and some sparks are caused. The government has nothing to do with corporate rivalry. The government has to govern and not be a part of corporate functioning. This is so simple that I am astonished as to how and why it should be any different. And now, the less the government has to do with this kind of patronage dispensation, the less it has to get involved in such corporate rivalries. I am in favour of eliminating corporate rivalry totally, even the shadows of it. The government must govern.

Do you think corporate chief executives are paid too much?

I do not know whether I am saying something contrary to what my ministry believes, I am really indifferent. It is a decision that a corporate house should take and if the shareholders of the corporate house feel that the chief executive should get more salary, it is their look-out. As long as it is transparent and as long as it is within the four corners of the law.

Are you happy with the way the regulatory bodies are functioning?

They are doing much better. We have taken certain steps with regard to Sebi. Have I got a finished product? The answer is no. This is a constantly improving exercise. I am glad the Sebi ordinance is there. I believe that the freer the market, the stronger is the regulator. Free markets are not a synonym for free-for-all. Regulators are not policemen. They must encourage and regulate.

There is some dispute over the regulators' financial powers.

I know that, we will shortly resolve that issue. We have not arrived at all the answers to all the questions. They are not perfect, but we will keep improving.

Do you miss the South Block?

I am next door to it.

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