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Will meet fiscal deficit target without expenditure cuts: FM

The Indian economy faces a number of challenges — from global slowdown to legislative roadblocks and bank health to tight fiscal space — but Finance Minister Arun Jaitley is confident of navigating them and reinvigorate the economy further from its current relatively-better state when compared to other economies.

Speaking to CNBC-TV18’s Menaka Doshi,  Jaitley outlined a number of steps the government is taking including infusing further capital into ailing public sector banks and stepping up further public investment, a month before he presents his second full Union Budget — termed by some as make-or-break.

Further, the FM confirmed that the government would meet its 3.9 percent FY16 fiscal deficit target despite facing challenges such as low nominal GDP etc, and said it would do it without cutting [growth-inducing plan] expenditure, something that he said the previous government was prone to doing.

“Someone here [at Davos] told me you have taken a total of 34 major [reform] decisions. But for me, what’s more important is we are moving in the right direction and haven’t made any mistakes,” he said.

Below is the transcript of the interview on CNBC-TV18.

Q: Let me start by asking you about the challenges that you think India will face given the global slowdown and the market volatility that we have witnessed since the beginning of this year?

A: If you look at India’s growth compared to the rest of the world and what is happening elsewhere, unquestionably we stand out and that is why everybody uses these phrases like bright spot, sweet spot and so on. If you look at our own economy in isolation unquestionably we can do better. Even in a global slowdown environment we have the capacity to do better.

I would split up our challenges into two. There are challenges which are beyond our control and there is very little that management of domestic economy can do. Of course there are issues that we can rectify ourselves and both these collectively as also individually can certainly add to this 7-7.5 percent growth rate. That is what gives you the cutting edge. For instance two important challenges that we face, one is the global slowdown itself. What is the impact of global slowdown on us, obviously the first impact is the shrinkage of exports. Shrinkage of exports leads to shrinkage of GDP.

In our case the shrinkage is substantially in value terms because the prices are low, it is not so much in volume terms but volume terms also is slow because the buyers capacity to buy has been contracted.

The second important challenge which emerges out of the first one is, that world is so interconnected and it is full of crisis and challenges. Currently if you look at it there is the worry of the Chinese slowdown, there is the US Q4 which may not be as good as the rest of the year and US slowdown is far more adverse to global economy than even the Chinese slowdown. 

Now you have this changed equation, who would have imagined months ago or years ago anybody saying the world needs higher oil prices. However that is the changed equation that has taken place in the world. Therefore it has slowed down. Now this has two impacts. It has impact on sentiment which adversely impacts the markets. It also impacts on currency.

Till about August last year we were, except the Swiss franc which is an exception, the only currency in the world which was keeping pace with the dollar. After the Chinese devaluation in August, we have also been marginally affected. The impact on us 6-7 percent is much less than impact on other emerging economies. It is much less than what has happened in China, what has happened in Russia, Brazil. It is also very different from the impact on other currencies Japan, Europe and so on. However we have been impacted. So, these are two of the important factors. 

The second factor which is again not substantially beyond our control, two bad years of monsoons. I think between Arvind Subramanian’s initial assessment at the time of the economic survey that we could touch 8 percent and where we have lagged behind – the monsoon has made the critical difference. It not only reduces the contribution of agriculture to GDP but it also adversely impacts on the purchasing power of the framing community.

Therefore today if you look at the Indian economy, it is growing on the strength of increased public investment, increased foreign direct investment, increased urban demand but that is not accompanied by increased rural demand. Therefore we need to rectify these systems. 

Besides this if I look at the other challenges, one of the consequential impacts of lower oil prices and lower commodity prices is, low levels of inflation particularly the WPI being in the negative for the last 14 months reduces the gap between the GDP and the nominal GDP. That impacts on quantum of revenues. So, at 7-7.5 percent GDP you well could have a nominal GDP of 11-12 percent. However if you are going to have 8.5-9 percent you lose out in terms of revenue. 

So, the money is available to you for poverty alleviation scheme, the money is available to you for adding to growth itself is impacted. So, I think nominal GDP is a challenge.

Then of course the continued structural reforms, I think the last 20 months have seen 34 major decisions that we have taken each one of which adds to the structural reforms. I think what is extremely important is in 20 months we haven’t committed a mistake. We haven’t reversed the direction, we have maintained the direction.

It is extremely important for us to carry on the reforms. Of course 2-3 of those measures are legislative, GST is legislative, bankruptcy code is legislative but a very large number of them will be covered by the Budget, money bills, executive decisions. I am absolutely clear that we intend to go on that path.

Once we continue that path I think it adds to the credibility of Indian economy. Once you are able in a global crisis like situation the credibility of one economy which stands out then you attract global attention. Once you attract global attention investment follows because interest is there as far as your economy is concerned. It is a virtuous cycle which sets in.

The last of the major domestic challenge is, reforms is something which is under our control, the second important challenge which is under our control is to rectify the health of the banks. My regret is that before the present government came in the kind of indiscriminate lending in some cases which have taken place, some sectors absolutely became fragile, no steps taken to deal with those sectors, no steps taken to recover those monies, no steps taken to recapitalise the banks, these are all steps which are now being put into place.

Therefore the Indian banking system has to lend for growth.

Q: So, where will you get the money to recapitalise the banks because you were faced with the choice of sticking to fiscal discipline and your government has done a great job of contracting that side of the balance sheet and making sure that you all are on the path of fiscal prudence.

A: That is only half the truth. The full truth is the last government achieved fiscal deficit targets by cutting huge expenditure. This year I will not only achieve the fiscal deficit target but I will achieve it without those significant cuts which my predecessors used to make.

Q: Or would you attribute much of that to the fact that crude oil prices came down giving you some cushion.

A: Obviously. But at the same time I lost 10 percent of the revenue because the finance commission said it must go to the states. And this year I am going to lose Rs 1,02,000 crore worth of fiscal space because that is the impact of the pay commission on the central revenues. The One Rank One Pension (OROP) impact being separate.

Q: It is the question that most global investors are asking. How will you balance these two issues, the fact that you need to put maybe more public investment to work to kick-start or help maintain growth in the economy and on the other hand tax collections have not been maybe what you expected, they have been 66 percent of target so far.

A: No, midyear you should not assess.

Q: Disinvestment also is way behind your target.

A: Let me set the record straight. As far as tax collections are concerned on indirect taxation I am way ahead of the target. On direct tax collection I am slightly behind but I am narrowing down on the target. So, overall on tax collection this year I am reasonably comfortable. So, the impact of global slowdown or of the corporate balance sheets is not being significantly reflected in my tax collections. I am not even cutting my expenditures.

The disinvestment target has not been achieved and I must honestly tell you that one of the reasons why in some of the sectors I slowed down disinvestment consciously because the markets are choppy, the markets are low, the commodity and metal stocks are low. That is not the right time to sell. I certainly won’t sell when the prices are low. Let the prices recover, I will sell it then. Let us be very clear at the end of the day what does disinvestment mean. It is a resource belonging to the government or people of India. Today it is lying by way of shares in a public sector company. Instead of holding that resource in terms of shares in a public sector company why not have a modernised railway station or why not have a highway connected to major areas, why not have a freight corridor on that money.

Therefore it is readjustment of a resource belonging to the people of India and the critics of disinvestment or the conventional critics of disinvestment if they still exist must realised that as a part of any responsible economic planning a government must readjust where its resources are. Do I need shares in a public sector company where in any case I am holding majority shares. So, whether I hold 80 percent or I hold 70 percent that is the question or I used the 10 percent to create a national highway.

Q: But if I may ask you, you said that disinvestment targets have not been met because you thought that the valuations were not correct. There were though windows of opportunity but that aside there are holdings that the government has for instance in Special Undertaking of Unit Trust of India (SUUTI) which is the ITC holding, the Axis Bank which you pared a little bit in the last year?

A: Can I now end the debate on disinvestment.

Q: Why is there reluctance to sell ITC or L&T stakes?

A: The financial year has not ended. There is still some time for the financial year, wait for some time and you will hear of the government’s decision next.

Q: Are you giving us a sense that you might in fact – finally the government – whether this one or the previous give up the reluctance to part with the stakes that they held?

A: No, I have not said so at all. There are some decisions which are in the offing and therefore the present figures that you have of disinvestment may not be the last figures that you have as of March 31.

Q: But what is the reluctance on the ITC and L&T stake?

A: There is no reluctance. There is government resource lying in several companies. It is a question of prioritisation.

Q: You have made a mention in the recent past that you would like to recapitalise banks further. Again I ask the question how will you find the money to do that given the many demands that you have?

A: The money will come from two sources. A; it will come from the Budget and therefore I have announced a program already earlier this year. I may add to that investment. So, that is not the final investment, I may increase upon that. Additionally as the strength of the banks picks up, that is they are able to make recovers of some of their NPAs etc and their balance sheet start improving. The banks also have been told to comply with Basel III norms as also issue some additional shares and raise a significant amount through the issuance of share capital bringing the government holding down. I have said the bottom-line for government holding is 52 percent and therefore that being the bottom-line the banks are entitled to raise money from there which will also be a part of the recapitalisation in addition to what will come from the Budget.

Q: But you are confident that you would be able to provide additional money to what you have already laid out in the plan?

A: This year’s growth may be somewhat better than last year and next year’s growth the current estimates are maybe still better and when growth increases tax buoyancy increases and as tax buoyancy increases there is an additional resource which is available to the government. Now how that additional resource is to be spent is a priority and banks are certainly a priority because good health of banks is necessary for funding growth.

Q: You all have increased the special dividend that public sector units must give to the government from the earlier 20 percent to now 30 percent and there were some questions being raised saying this is money just moving from one pocket of the government to another pocket of the government and I wanted to know is this because you need funds to be able to carry out the programs that you are doing?

A: Obviously, should we have money belonging to the people of India or the government of India lying as reserves in public sector or should those reserves be additionally converted into a facility for people of India. When monies go into government revenues there is a grudging feeling why is the government collecting the money. The government doesn’t collect for ministers, the government doesn’t collect it for itself. The government collects to spend on the people of India and therefore these are all money whether they comes from – let me take an example. The oil prices. Now the advantage we got out of the low oil prices has clearly been split up into three. One part of it went to the oil market companies (OMC) because their health was becoming precarious, they lost out money in the future purchases.

The second, we gave a significant benefit every time to the consumer and equal benefit also was reserved by the government. Now, what did the government do with that money. That is where the 30 percent extra public expenditure has come. So, people who drive cars, who pay for petrol and diesel and are paying duties on that must then also pay for funding the highways. They must also pay for funding the rural roads. Now, how is the highway program being revived. The first 17 tenders after the new government took over didn’t attract a single response. How is it that the highway sector has got going once again? It is on the strength of this money. Therefore it is the resource belonging to the people India being used to provide a facility for the people of India.

Q: The only question I would like to put on this issue is that in a sense it gives out the impression that instead of allowing public sector businesses to run their own decisions on how much dividend they want to pay out, how much they want to keep in reserve to be able to expand further, capital expenditures (capex) etc the government is telling them what to do?

A: The previous government and my predecessor had told a large number of public sector units that either you will use this money or you will lose this money. You are aware of this and therefore what my predecessor did was a correct decision. After all instead of sitting in the money today when you need additional public expenditure why should you have lakhs of crores collectively lying with public sector only in reserve. That money must be spent. At a time when the economy world over is facing a stress situation this money has to be spent on expansion and if it is not spent on expansion after all the shareholders can take a part of the money out, the government is a shareholder and the shareholder says I use this money for an additional resource.

Q: Can we expect in this Budget given that you have said that you want to provide some relief to the stressed aspects of the rural economy that there will be no rationalisation of food and fertiliser subsidies because one question is that you might need to rationalise those subsidies to be able to come up on more money?

A: I will tell you rationalisation of subsidies is a great unsung success story of this government. For instance forget oil and diesel the Liquid Petroleum Gas (LPG) people of past have only spoken about it. We have actually implemented it. We have made huge savings. Now, there are other areas where pilot projects are being experimented. Now, depending on the success of those pilot projects people who get the benefit of a resources from a state that is a subsidy am I not entitled to ensure for the benefit of the people that nobody receives it twice over. Am I not entitled to ensure that it is not diverted.

After all I said in parliament that subsidies are an unquantified amount going to an unidentified section. Subsidies must become quantified and must be targeted to people who need the subsidies. So, the poor in India have nothing to fear, they will be compensated for the subsidies. But those who don’t deserve subsidies, but those who misuse subsidies by claiming it twice over, fake connections, duplicate connections and look at the number of duplicate connections we found in the LPG by using the Aadhaar in the JAM platform if it works – let the pilot project results come out.

Q: As far as tax policy goes you have articulated that you would like to reduce corporate tax rates over the next two-three years along with that clean up the tax policy and reduce incentives as well to industry. Can we expect to see a roadmap in this project?

A: Why don’t you wait for the Budget. Obviously Budget decisions I can’t announce in advance. So, you are asking me how will you balance fiscal deficit with the needs of other people. Now these are all decisions which you will have to wait for the Budget to come out.

Q: Are you hopeful that interest rates would move further down through the course of this year?

A: The RBI in the last one year did well. After all they have brought it down by 125 bps. Now, the Governor has been repeatedly voicing his policy that he wants inflation to be under control and the current state of prices broadly the inflation is under control. If the RBI which is a responsible institution will take a decision. Everyone in India would like the rates to be low because obviously lower rates help the economy, the RBI is also aware of it but they have to do a balancing act between inflation, growth and interest rates.

Q: And the rupee are you comfortable with this level simply because it might give that much of a boost to our exports which is a sector that has been suffering all these times?

A: I don’t see any fear of free fall as has taken place in other economies. We have huge amounts of reserves. Our economy is doing well. We are probably best positioned in terms of macroeconomic data compared to any other comparable economy in the world and therefore we are stable by all counts.

Now the fall which has taken place in the last few weeks is completely attributable to global factors. And internationally the currencies have fallen far more than India. In fact we are amongst the least declining currencies. And as this choppiness of the markets, this re-positioning of investments from one economy to the other takes place and people take a balanced view I am reasonably certain that the rupee will recover some of its health for the simple reason. If people are withdrawing from economies across the world, where are they investing.

Risk taking is something which the investors are becoming a little averse to and therefore they are holding back their investments because normally the logic was with the rates going up in the US they will withdraw from everywhere and go to the US, but if the US fourth quarter results are not exactly exciting then probably in days to come the investors will have to sit back and take a more reason to decision.

Q: You are at the half way mark of this term of your government. How would you rate the work that your ministry has done?

A: I am nobody to rate it. I am not in the rating business myself.

Q: Rate as in are you pleased with the work?

A: I am extremely clear, the government is extremely clear that economy is one area we have to deliver. From the day we have taken over we have been part of a global challenges. The world economy has been most challenging and therefore we have our own shares of sleepless nights. To steer the economy through these challenging situations is something that we are doing and I am glad we are not making mistakes. We are moving consistently in the right directions. At the moment you are in an interesting place where almost everybody is appreciative of the way India has handled its affairs and I am sure domestic audiences will also come to the same judgement call.

Q: You won’t give me a number on 10?

A: I should not. I am nobody to rate it.

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