With the Budget presentation only days away, the Centre finds itself in a difficult situation. Yashwant Sinha, former finance minister and senior Bharatiya Janata Party leader, says correcting the fiscal mess should be a starting point; else, economic reforms will have no meaning. The situation, he tells Gyan Varma and Indivjal Dhasmana, is due to the wrong policies of the UPA government. Edited interview:
The Centre’s fiscal situation is not comfortable. On the other hand, the business chambers are asking the government not to raise excise duty or service tax rates. How should the Budget balance the two conflicting objectives?
It is now very difficult for the finance minister to balance his Budget. When demand is on the decline, a rise in excise duty, even if marginally from 10 to 12 per cent, is going to have an impact on prices. And, if he doesn’t do it or take other measures and not cut expenditure drastically, then the fiscal deficit will swallow all of us. Sometimes, the Budget is needed to displease people across the board and distribute the pain equally, not concentrate that pain on one segment. That is the starting point of economic reforms today. Once you have got the better of the fiscal deficit, then we should move forward on other issues.
But how can the FM balance the conflicting demands from chambers and tax experts?
The government has to deal with the fiscal deficit, which is definitely not sustainable. That is where the skill of the finance minister, the government of the day, comes into play. Obviously irreconcilable positions have to be reconciled; that’s what the Budget is meant for. If the FM doesn’t do anything to rein in the fiscal deficit, then all economic reforms will be brought to naught.
Should the FM raise excise duty or service tax rates to narrow the deficit?
I will not go into details. Why should I do it? The government knows what it has to do. It’s very obvious what needs to be done. But I am not going to prescribe specific tasks, except in saying that reining in the fiscal deficit has to be the starting point.
But, what went wrong in landing the Centre in this difficult situation?
We didn’t put a roof over our head when the sun was shining. We took it for granted that we don’t need the roof until the elections came and another global crisis hit us. Economic growth rate has come down to 6.1 per cent for the third quarter of this financial year. Clearly, this is not acceptable; the people demand nine to 10 per cent growth.
Exactly what went wrong on the fiscal situation?
We have to dig into our past experience to choose the course of action. If you look at the so-called era of economic reforms,of 1991 and even earlier, we learn that it is easy to take the growth of the Indian economy to higher levels by conspicuous government consumption but that is not sustainable.
The 1991 balance of payments crisis was the direct result of the unsustainable manner in which we dealt with our economy between 1984 and 1989. Then came the reforms but those were also stopped, because of political reasons. So, two years of reforms were followed by many years of non-reforms and the result was that we had a little over seven per cent annual growth for three years and then we collapsed; in 1997-98, there was 4.9 per cent or so.
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Most experts believe it will be a tough budget because 2013 will be the last before the elections and the government will then need a more popular budget.
I don’t think this government has the appetite for tough decisions. I can’t recall any of the last eight budgets where they have shown such an appetite.
Take one example: the minimum support prices of food material have been raised every year but the issue prices of PDS foodgrains were raised the last time when I was finance minister, in 2001 or 2002.
When the government took a tough decision on opening multi-brand retail to foreign direct investment, your party that opposed it.
I don’t call it a tough decision. We opposed it for good reasons.I would like to go back to 2002, when Priyaranjan Dasmunshi was chief whip of the Congress party in the Lok Sabha and he said,. I believe the government is going to open FDI in retail and it would be an anti-national step.
That is the charge against both the Congress and the BJP, that whenever their situation in terms of being a ruling party or the opposition changes, they change their stand.
You should ask the Congress party first. Why don’t they call it (FDI in multi-brand retail) anti-national now? Whenever we raised petroleum product price,s they demonstrated against us, they held morchas; why didn’t they support us then? If you take an unpopular decision, you are bound to face opposition. This is the process in this country.
What is your recipe to correct the fiscal deficit?
The recipe is that we should not take liberties with the economy. In 2008-09, we allowed the fiscal deficit to go from 2.5 per cent of GDP to six per cent, of which 4.5 per cent was the revenue deficit component — we started playing with fire. We say this was all stimulus, farm debt waiver was stimulus, 66th pay commission was stimulus, all the extravaganza of the government expenditure was stimulus. Even if we grant it was stimulus, of what kind? Two things stand out. One, it was consumption expenditure and not investment expenditure which was promoted. If, instead of giving Rs 70,000 crore of farm debt waiver, we had spent that money for rural infrastructure, that amount would have done enormous good. Money should have been used to create durable assets, instead of setting up factories of corruption. I am convinced that the 2008-09 massive increase in fiscal deficit was not so much on account of global crisis through a stimulus package but to create an atmosphere for electoral victory. That original sin has brought all the problems to the fore.
The ruling coalition needs the support of other parties to build an opinion to correct the fiscal situation.
Is any political party going to say don’t build highways, don’t build rural roads or state roads? So, can we have a massive programme of building roads, like we had in our (1998-2004) time? It is nobody’s case that we should not have more power in this country. Nobody, except the government, is responsible for the mess we see in that sector, with coal supply going haywire. If you set up more hydel projects, more solar energy, more thermal power plants, who is going to oppose this? These are all supply-side measures. Who has created an opinion with regard to land acquisition? Only this government, because they started misusing their power for land acquisition for special economic zones, which created the backlash in Bengal and then everywhere else.
ONGC auction was not a success. Is the government going in the right direction on disinvestment?
No. Disinvestment has to be properly thought out. We developed that policy until we came to what was called privatisation, where you are not selling only bits and pieces of equity. You are taking a policy step forward and actually giving the management of that enterprise to the private sector. Disinvestment in small lots doesn’t achieve the right price. This government is stuck on the fact that they will control 51 per cent and not give up management of the enterprise, so they will continue to sell in small lots. Selling like this always depends on the vagaries of the market, unlike selling in bulk and privatising.
Your (1998-2004) government is accused of proposing a bill that government equity in banks be brought down to 33 per cent. The treasury benches in Parliament have often said that had your policy been pursued, we would have been in a mess after the global financial crisis hit India in 2008-09.
They also say that Indira Gandhi was so wise that she nationalised banks in 1966, knowing there would be a global financial crisis in 2008. You have public sector banks where you say we will hold on to 51 per cent. This 51 per cent gives you the right to appoint the chairman and fulltime directors, executive directors, that’s all. The rest of the monetary policy is determined by the Reserve Bank of India. If RBI ordains that 40 per cent should be priority sector lending, even foreign banks have to obey. So, monetary policy is determined by RBI and not by the government. When I proposed 33 per cent, I said we will retain this power even with 33 per cent and banks will continue to have a public sector character.
I was doing it because international norms for banks are becoming more and more stringent. So, if you to agree to implement Basel-III or Basel-IV, then the capital adequacy ratio of the banks will have to be met. One way is what the present government is doing — we will continue to invest in the banks. On, the one hand, we are running a six per cent fiscal deficit and we are going to invest capital into banks from the budget. So, those who are criticising me don’t understand the nuances of the money market and the capital market.