Part I: 'We have cut whatever tax exemptions we could'

Drawing flak for not taking enough measures to tackle India's ballooning inflation, Finance Minister P Chidambaram, in an interview with Business Standard said that three steps have been taken: fiscal, monetary and on the supply side.

Excerpts from the interview:

The main worry that the world and India have in this Budget is the lack of any element of reform in it. Is this government committed to pushing the reform process forward?

I don't know what your definition of reform is. If you are talking about the liberalisation of the economy, the economy includes agriculture and agriculture cannot be liberalised or liberated unless the farmer is happy. We are producing enough foodgrain and other commodities for the Indian people.

In earlier years, we addressed the concerns of industries and services. This year we left them almost alone, because they are virtually on auto-pilot.

Both sectors are clocking double-digit growth rate quarter after quarter. And if you were present at the chambers meeting this morning, they sang a very different tune to what they said to you on television yesterday.

Are you committed to continued liberalisation of the industrial and services sector?

The correct way to make that statement is to say industry, services and agriculture.

Everybody says there's not even a whiff of liberalisation for the industry or the services in the Budget.

I don't agree. Read the sections on banking, insurance, capital market, innovative financing for infrastructure. Secondly, if the farm sector grows, the direct beneficiary is the industry and services sector.

Mr Chidambaram, your Budget numbers seem to assume slower economic growth next year.

The nominal GDP growth is about 13 per cent. That's not slow. Please remember, Budgets are based on BE (Budget Estimates) to BE. What happens during the year could be a one-off, could be because of certain unanticipated developments. But year after year, Budgets are made on BE to BE. And BE to BE, we have assumed a 13 per cent growth rate.

If you are not assuming slower growth, why is tax revenue growth slowing?

BE to BE, there's tax growth of 20 per cent. You are looking at RE (Revised Estimates) to BE. That's not the way to look at the figures. The way to look at the figures is from BE to BE. Within the year, there could be a completely unanticipated development, which gives you a bonanza in revenue that may not continue the next year.

If there is buoyancy in revenue or there are higher growth rates in one sector or another, we take them into account and that gets reflected in the RE. But while planning, we always take BE to BE.

The economic growth is an average of 9 per cent in the last two years; do you expect a 9 per cent GDP growth next year as well?

We are assuming a nominal growth rate of about 13 per cent of GDP�Last year we assumed 12 per cent of GDP. Taxes are not predictable. I cannot say I will collect this much this year.

In the exercise of tax collection and tax administration �anything could happen in one sector of industry or another. Monsoons could fail. There are so many imponderables. We are assuming BE to BE 13 per cent this year, which is more than last year.

So you are saying you are not assuming a slowing down of the economy next year.

I am assuming a growth rate of about 9 per cent. It could be a decimal point less or a decimal point more. Last year we assumed a growth rate of about 8 per cent.

When you formulate the Budget, do you have the stock market in mind at all?

Surely, it is not the main input. No, not at all.

You have done things to make the stock market go down.

I can understand why media channels focus on the stock markets. It's one market. It is an important market.

It's 50 million voters...

There are 600 million farmers also. Therefore, it's one market, it's an important market, but it is not paramount. The Indian stock market fell by about 4 per cent, which is less than other markets (around the world). Today it has gone up again. The stock market has a mind of its own.

You managed tremendous control on expenditure. Why does the story on expenditure control not get sold, rather than all the increases in spending?

It's not a bad story to sell. I repeatedly said we'll meet the FRBM targets. I maintained that we have put control on expenditure. I started by saying that we are putting the money to good use. And I gave a list�every one of my new programmes is fully funded.

There's a belief that this is a very political Budget. This is your second last Budget before the next elections...It is believed that reform and high growth don't get votes.

Your definition of reform is something that I don't share. You are fascinated with the corporate sector. It's an important sector. But we have to take note of concerns of all the sectors. And today the corporate sector is like a strong oak tree and the agriculture sector is like a plant, which has to be nursed. We have left the corporate sector alone. We have done nothing to hurt their growth story. The corporate sector today is mature, enterprising and confident.

The government had led people to believe that there was scope for moderation in taxes.

For 12 lakh (1.2 million) firms the 3 per cent surcharge has been removed. I wanted to do it for all corporates but I can't do it this time because of revenue constraints. I have raised the threshold exemption for small service providers from Rs 400,000 to Rs 800,000 and bid goodbye to nearly one half of my taxpayers. For the SSIs, I have raised the exemption limit from Rs 1 crore (Rs 10 million) to Rs 1. 5 crore (Rs 15 million).

The net impact of your proposals is that the tax burden has increased. Some companies will now be paying 40 per cent of their income as tax. Education cess and dividend distribution tax...

It's not so. The dividend distribution tax is a surrogate tax. It has to be paid by shareholders.You can't add that to the corporate tax. The marginal rate for an average shareholder is 20.

We have kept the dividend distribution tax at 15, which is nowhere near the marginal rate of 20. So you are still paying a surrogate tax, which is less than what you pay when the dividend has gone into his hands.

The only addition to the corporate tax burden is the one per cent education cess. That applies to all tax payers in the country, including you, if you buy a pair of shoes or a jacket�That's to mobilise funds for higher education. What's wrong with that?

Why put a fringe benefit tax on Esops? Esops are seen as rewarding employees, a re-distribution of wealth�India is the only country to have this.

That's not correct. Australia and New Zealand also have FBT. If you take the view that e-sops are a fringe benefit, it must be taxed. EsopS is given to keep an employee with you. It's an addition to the compensation package, or is it not?

But wait for the rules to be made. We are not oblivious of the fact that it has to be carefully calibrated. We don't want to burden the employer or the employee twice.

How much do Budgetary issues figure in elections? Usually they don't figure at all.

I don't think elections are divorced from the Budget. The Budget is the direction in which you take government policy and government policy is also obviously to win the support of people for the party in power.

If you promise, say, in a Budget or an election manifesto, that you will do this or that, surely it has an impact on people's minds. You can't win an election by a Budget promise or an election promise. But it gives a direction to the party.

As a financial mind, are you in favour of a ban on forward trading?

I don't know enough about the subject to take a view. I have read a number of articles in favour of and against restricting forward trading. Now the Forward Markets Commission has taken a decision to ban new contracts on forward trading in wheat and rice. We have to wait and see.

Do you believe in the market?

I do. There is no black and white view on this. In the economic survey, there is a very positive spin to forward trading. I am neither for nor against it. We have appointed an expert committee that would advise the government on the impact of futures and forward trading. I can't say that it is good or bad.

Coming back to reforms...the key issues on tax reforms don't find a reflection in the Budget.

I think this government succeeded in pushing VAT, which was on the backburner for several years. We are phasing out CST. I reached an agreement after one year of negotiations. It is going down from 4 to 3, is that not reform?

I have also got an agreement for GST in 2010. We are preparing a roadmap for a convergence rate. Once I am sure what the convergence rate would be, then excise, service tax and VAT have to move towards that rate.

The biggest tax reforms have come in the last 24 months. Today there's an agreement for GST. One year ago, there was a hope. We have worked hard for a year.

This is a federal system. It requires legal changes, amending the Constitution. You have to work with 30 state governments, amend the Constitution, take it to Parliament. I personally take pride that I reformed the direct taxes in 1997 and that I am here to reform the multiplicity of taxes at state and centre.

Should we expect reforms in insurance and divestment outside the Budget, when there is not so much media glare?

The banking and insurance bills are pending in Parliament. I said we will introduce the insurance bill, the micro finance bill in this session. We are not going back on any reforms. What happens to the bills in Parliament is not in my control.

Does your party believe that high growth will win elections?

My party believes that high and inclusive growth is good for the country. And what is good for the country should be good for elections.

This government is supposed to have a dream team: the PM, you, the deputy chairman of Planning Commission. Is the dream team satisfied with what it's done?

By the end of five years, the average growth rate will be 8.5 per cent. That's a record that has to be matched by any successive government, including our own. That's a very satisfying record.

Do you believe that on 9 per cent growth you can have less than 6 per cent inflation?

There is a trade-off between inflation and growth but 9 per cent growth does not necessarily mean 6 per cent inflation. If the supply side constraints on wheat, pulses, sugar, did not emerge this year, then inflation this year would also have been under control.

What have you done in this Budget to control inflation?

Three steps have been taken: fiscal, monetary and on the supply side. In fiscal we took steps in January and we are taking steps now...the customs duty, the excise duty. Monetary steps are taken by the RBI.

On the supply side, a number of steps have been announced. I am addressing the issues that impact the supply side, like credit, water, power, seeds, and fertilisers. There is a sincere effort to lower inflation. We are assuming 13 per cent nominal GDP growth, we are hoping to keep inflation between 4 and 5 per cent.

Will you bring inflation down in six months?

That will be the effort. But it's not a switch I can turn off and on. You will have to wait for the supply side constraints to be removed.