'Big Bang Budgets are passe'

Q&A/ P Chidambaram

FM Interview: We must learn from Fifth Pay Commission, proceed cautiously.

A day after presenting the Budget for 2006-07, Finance Minister P Chidambaram spoke to Business Standard and NDTV. Excerpts:

The general impression of this Budget is that it is typical of coalition governments. The finance minister has had to do it with one hand tied behind his back. For many, it's good news because there's less government, but is this a future pattern? Will we see more coalition Budgets where only the minimum that everybody agrees on is done? You would have liked to have done more but couldn't.

That may not be the correct way of describing this Budget. Today we're aiming at 10 per cent growth. Agriculture must touch 4 per cent, manufacturing must go beyond 10 and touch 12 per cent; and services must grow at 10. Industry and services are more or less on autonomous growth paths. It's agriculture that requires a helping hand.

What I've, therefore, done is very simple. I'm betting on growth and helping agriculture. The betting on growth "" and doing what has to be done for industry and services "" happens right through the year and sometimes without being noticed.

We address these issues on an almost continual basis. But when we take one day in the year and put together a big package on agriculture, then you think we have slowed down on reforms. That is completely wrong. What we have done for agriculture is to support and underpin the growth story.

Is there a withering away of the Budget in terms of reform announcement? Is there a feeling that it's too high profile "" it's better to do the reform through stealth through the year?

Reform by stealth is a very harsh judgement. It is reform throughout the year, addressing issues as we come along. But the Big Bang Budgets are now passe: there's no need for big bang Budgets. And I think that in a couple of years, even what we are doing now can be considerably diluted.

Is there a contradiction between your looking at 28 per cent growth in corporation tax next year, which suggests that companies are growing very well and have money, and only 6 per cent growth in excise duty?

The numbers didn't add up this year also. The reasons for the slowdown in excise collections is because of exports, area-based exemptions, SEZs and other concessions. There's a sharp decline in excise duty (growth). I am afraid that as long as these area-based exemptions and export incentives and exports themselves grow, excise will not register very strong growth.

If you look at the latest numbers, corporate profits are flattening. So how do you expect 28 per cent growth in corporation tax?

The third quarter of 2004-05 was slow and the third quarter of 2005-06 also appears slow. But I am confident that when the year ends and the actuals come in, like they did last year, we'll find that the growth story will be maintained. Our people are confident that the year will end with 28 per cent growth.

Apart from the big boost you've given to agriculture, there's this Budget philosophy of manufacturing versus services. The world is valuing our knowledge-based industries and services, but you seem to be focusing on a weaker area "" manufacturing and agriculture. What's the philosophy behind not giving services a boost and making India a services hub?

Government has stayed away from the services sector: we don't poke our nose there. The sector is growing well and whatever it needs has been done. Nothing more needs to be done for the services sector, but if there's a special request we can look at it. But what kind of jobs do services create?

The kind of services you're talking about creates high-end jobs for highly educated people. Where will I find jobs for school-leaving and basic graduate men and women? That can only come in the low end of the services, which is not what you're talking about.

55 per cent of GDP in services "" a lot of it is from the low end and is labour-intensive. You could have given it a boost instead of raising taxes on services.

That is a misconception. If you accept the GST, and the GST has to be somewhere between 14 and 16, I have to converge service tax, abolish the CST, subsume the VAT and bring down, if necessary, the excise duty. How do I converge without taking the first forward step? If you accept GST, this is unavoidable. The sooner we do it, the better, because we've given ourselves four years for GST.

The lower end of services has got a boost. Railways are doing well, a huge amount of money is being put into road building, 101 projects are under way in shipping and maritime development, the civil aviation sector is booming... so the other end of the services sector is also creating jobs. But where you will get real jobs for school-leaving men and women, or the technically-trained girls and boys will be in manufacturing.

The bulk of your tax interventions this year are to disperse the tax rates across the spectrum of rates. You are not converging towards one rate, in fact you're bringing more variations in the rates. The convergence to GST is not happening. You'll have more disputes this way...

That is not right. If you look at excise, we are converging to the Cenvat rate. Some we are taking away deliberately to expand capacity quickly. And there are no disputes "" the number of disputes today is a fraction of the number a few years ago. We are deliberately intervening on the excise rates of some products only to expand capacity. We have to expand the capacity in food processing, leather, paper and textiles.

To expand capacity and increase demand, we are deliberately reducing the excise duty. Once we agree upon a GST rate and enough capacity has been put in, we can always get back to the GST rate. Except of course, for idli and dosa mixes. (laughs)

Similarly, instead of raising services tax, you should have reduced services tax and given the sector a boost.

Eight to 10 per cent was not inflationary; 10 to 12 will surely not be inflationary. It is Cenvatable; the service tax paid can be adjusted against the service tax payable, as well as the excise duty paid.

The general criticism of Indian politicians is that they react only in times of crisis. There's no real crisis now "" is it that you are complacent now and therefore did not push for policy reform?

There are many policy reform packages in the Budget that may have escaped your notice. Look at the policy reform package on coal: there are three major reforms in that very short paragraph.

There are major reforms embedded in the paragraph on petroleum. Look at the paragraph on information technology "" we're opening a window for hardware manufacture. These are all powerful signals being given in response to what industry wants.

But they are not really big ticket reforms. Even the Left allows you to privatise loss-making public sector enterprises. No one's doing that. Why not?

The Left does not yet allow that. The CMP allows it. Every case that goes to the Board for Reconstruction of Public Sector Enterprises (BRPSE) comes out of BRPSE with a recommendation that you revive it. I do not have a single recommendation that says close it down.

The BRPSE recommendations come to the CCEA or Cabinet. There we have the option to overrule the BRPSE recommendation and close it down or to go along with the BRPSE recommendation. Now, to overrule the BRPSE recommendation raises the question, why have a BRPSE as an expert body then?

We set up the BRPSE with the mandate to tell us which PSE can be closed down or sold. Unfortunately, I do not have a single recommendation to close down.

On expenditure, the bulk of your speech was spent in announcing substantial packages and increases in specific programmes. And yet when you look at the total numbers, the overall spending increase is very small. So this was just a smoke and mirrors exercise.

I said I will draw a red, thick line and I will not breach it. This is the fiscal deficit line. Because I have to compress fiscal deficit and revenue deficit. I drew that line, took the revenues and factored out the non-plan expenditure and that left me this much money, which I said I am going to distribute.

You spent so much time on the social sector, but you didn't mention that on the capital expenditure in the Plan, you've actually reduced the expenditure.

There is huge spending. The economists' view is that there is more to plan capital expenditure than to plan revenue expenditures. We don't share that. Let me give you an example. If I build a hospital that is accessible only to the rich, that is plan capital expenditure. But if I spend money actually delivering medicines to primary health centres, appointing welfare workers in villages to bring expectant mothers to hospitals, that's plan revenue expenditure, which is considered non-merit.

We should not set too much store by plan capital and plan revenue. Look at just the Plan. If the Planning Commission is justified and the Plan is justified, then every item of expenditure in the Plan is justified.

You can't then say that what the Planning Commission did is justified to the extent of the plan capital expenditure, and plan revenue expenditure is unjustified. Plan expenditure has increased from Rs 1,43,000 crore to Rs 1,72,000 crore.

But all the studies show that these spending programmes on education, health and sanitation do not bear results. Every study shows that this money is mostly wasted.

The political consensus in India today, cutting across party lines, is that we must spend more on primary education, primary health care, roads, drinking water and sanitation. I could simply say that I disown this political consensus and walk away. But if I abandon these schemes, I abandon my right to govern.

This is throwing good money after bad implementation. Nobody minds paying tax if the money is actually going to primary schools. But take a look at the primary schools "" there are no teachers.

This is premature. I placed an outcome budget for the first time last year. The performance budget on the outcome budget will be placed before the house closes on 28 April. So let's compare the outcome budget and the performance budget. I believe delivery has improved.

You are the only one who believes that. Our international ranking on human development has not improved.

Can you deny more children are being enrolled in school now? That the number of children out of school is little less than 1 crore? That children's health has improved because of mid-day meals in schools? In absolute terms, the delivery has improved. I agree that relative to other countries we're not keeping pace.

There is a criticism that the Budget is fiddly. Walking sticks are up, umbrellas are up, shoes are down... it's like the old N D Tiwari Budget. Why is the government still interfering with little items?

Many of those items are being moved back to the 16 per cent rate. Take umbrellas. There was a specific request from the umbrella industry that we should re-impose an excise duty on them so they can take Cenvat credit. But that's not even in my speech. What I've mentioned in my speech are those items where we're departing from the Cenvat rate for good reasons.

The finance minister and cheap shoes? It just seems there shouldn't be a link in an advanced economy.

I don't agree. I know that the man-made fibre industry has slowed down. I know leather has slowed down. I'm addressing these issues.

In a modern tax system, you don't boost specific industries with tax incentives. Once the GST comes, you can't do this.

Precisely. But we don't have the GST. We must have a GST and we've set a date. But until we have the GST, why should I not do things to expand capacity and stimulate demand?

Please also remember the leather industry employs the most vulnerable sections of India's society.

You have reintroduced a tax on long term capital gains through the minimum alternate tax. And even foreign investors will have to pay it. That is the doubt in the stock market.

It's only for MAT companies. I'll tell you why. A MAT company by definition is a profit-making company. It's not a company that makes taxable profits, because of various exemptions. Therefore, when you apply MAT, there are two issues: what is the base of MAT and what is the rate of MAT?

Between 1997 and 2004, long term capital gains tax on securities was included in the MAT rate. It was removed in 2004. There is no justification for that. The MAT rate has been increased from 7.5 per cent to 10; the last time the rate was fixed was six years ago, in 2000.

Is this a pattern for the future, that companies that pay less tax and pay MAT will have certain penalties imposed on them?

It's not a penalty. All of you want exemptions to be removed. What was the sense when the rate was 7.5 per cent? 25 per cent was taxed, 75 per cent was exempt. Today I'm saying, one-third will be taxed, two-thirds will be tax exempt.

The overall feeling from the Budget is that this government has been minimalist about reforms. Even some of the issues you raised last year did not find mention in the Budget this year.

There's no reason to mention them year after year. I'll tell you the action. Bombay (as a regional finance centre) "" the committee has been appointed, the report has to come. EET ('exempt, exempt, tax' treatment for savings) "" the report has come, it's under consideration. We've not announced any change in policy, but we've answered questions in Parliament.

Dr Rangarajan committee (on petroleum product pricing) "" the report came seven days before the Budget; (there was) no time to take a decision on such a complex issue.

But you've introduced a petroleum cess...

The petroleum cess has been introduced only to give myself a certain amount of revenue that can be absorbed by the oil producing companies. The cess is in consultation with the ministry of petroleum and natural gas.

Coming to the fringe benefit tax, it was universally disliked...

No longer. I've just come from a meeting with the chambers of commerce and every one of them has accepted it.

Apparently, your party people were also against it and they wanted it scrapped. Your detractors say that it's not being scrapped only because of one man being stubborn. How fair is that?

Wrong. There's no country in the world that does not tax perquisites. FBT is intended to capture that income that went untaxed in the hands of the employer and employee.

But you haven't got much revenue from it.

No. It's exactly what we expected. About Rs 3,500 crore.

Rs 5,000 crore was the figure mentioned last year.

Figures are mentioned.

So far, the FBT has been a dead loss...

The only sticky issue was superannuation. But I called the three chambers of commerce and explained to them. I said, give me a justification why I should not tax a Rs 15 lakh contribution to the managing director's superannuation fund. It's not taxed in the hands of the company or in the managing director's personal income. There was no answer.

I thought the issue with FBT was business expenses.

Oh, no. Nobody has filed a return.

You said business expenses would be excluded, but they were included.

Which business expense? Please remember that FBT is a presumptive tax. If I do not have every head, they will simply classify the perk under another head. FBT is a tax that presumes this part of the income is really a non-business expenditure and, therefore, taxable.

In fact, if you readjust your pay structure, you can save with FBT rather than pay the normal tax.

You've made no provision in the Budget for any interim announcement by the Pay Commission. Why is that?

I don't know when the Pay Commission will be appointed. I don't know what their terms of reference are. And I don't know when they will announce interim relief. It may happen this year, it may happen next year.

Do you think a Pay Commission is required?

Well, that is a decision taken. The Pay Commission is there.

That means you're not happy with it.

It's not whether I'm happy or unhappy with it. All I say is "" I'm repeating the words of the Economic Survey "" we must learn the lessons of the Fifth Pay Commission and proceed with caution.

Are you enjoying being finance minister?

So far. As of this morning.