Pranab Mukherjee admits the life of India’s Finance Minister isn’t easy. Few know it better than him. This Budget, after all, is the Congressman’s seventh, only one less than Morarji Desai and on a par with his cabinet colleague, P Chidambaram. But more than merely being an economic balancing act, this was also about walking the political tightrope, he tells Business Standard. Edited excerpts:
You are aiming for a sharp reduction in the petroleum subsidy bill at a time when oil prices have gone up. Does this mean you are going to raise petroleum product prices at some stage?
When I state that we have to peg the subsidies to two per cent of GDP and in the next three years it would have to be brought down to 1.75 per cent of GDP, the message is quite clear. We could do it through executive or legislative action. You have to do this, otherwise a situation will come when the macroeconomic fundamentals will be seriously distorted and it will be beyond repair.
The raising of excise and service tax will create some cost-push inflation, as will an increase in petroleum product prices, when inflation is already at seven per cent. Do you expect your inflation target for the next year will materialise?
If you look at the inflationary trend over the last 22 months, it was substantially due to supply constraints in some of the major agricultural products. Therefore, I have taken a series of measures in my Budget proposals this year and last year to remove those supply constraints, and it has started yielding results. But, the full impact is not felt because demand is also increasing.
Secondly, excise duty is not a new tax. In the pre-crisis period, it was 14 per cent and when we injected the stimulus package, we reduced it to eight per cent. From there on, I have raised it from 10 per cent to 12 per cent but I haven’t gone to 14 per cent.
I want to bring service tax on a par with excise duty at 12 per cent. The ultimate objective is to have the 12 per cent rate at the state and central level, so there is convergence and alignment.
It will never go back to 14 per cent?
I have no intention of going back to 14 per cent.
We have the highest current account deficit ever, exports are now flat and capital flows are not encouraging. Yet, I don’t find a reflection of the external sector risk to the economy in the Budget?
I have addressed this issue. Take the case of import of gold. Last year it was around $40 billion, next to petroleum and diesel, which is absolutely unacceptable. At the same time, I have to keep in mind that the duty is such that it does not encourage people to smuggle. We had to strike a balance but the message is quite clear. Secondly, in certain sectors I have put a cap, for instance, in the civil aviation sector. Thirdly, the rationale behind expanding external commercial borrowing is that I have been unable to address the corporate tax structures in DTC this year. So, to improve the business sentiment and investment climate, I wanted to provide them access to low-cost loans and borrowing.
It is true that to some extent I am taking a risk, but the trade-off is that I am hoping there will be an improvement in the investment climate.
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We have had a lot of reaction from India and across the world on the countermeasures on the Vodafone loss that the government faced. Will this impact foreign investment in the country?
These companies created structures for investment through tax havens, where they didn’t have to pay tax here or there. But the intention of the legislation is that if you pay tax in one country, you do not have to pay tax in another country. The intention of the legislation was never that you are not to pay tax at all. Retrospective legislation of income tax may not be very desirable but is not unusual.
Also, foreign investments do not come merely from the viewpoint of taxation. There are other aspects also, such as the size of the economy because of the chance of profitability and the scope of higher returns.
The RBI governor has made it quite clear that until inflation comes down and the overall situation is under control, he is not going to drop interest rates. Have you created an environment for interest rates to drop?
To some extent, the high interest rate has acted as a dampening spirit on investments. But, at the same time, we have to keep in mind that when there is inflationary pressure you cannot ease it too quickly.
So, you don’t expect a fall in interest rates in the next financial year?
There would be. But at what level and what point of time, that in consultation with the RBI, we will have to decide.
Coming back to the politics, what do you have to say about Dinesh Trivedi’s Railway Budget?
During the formation of a coalition, it is decided which party will get what portfolio. But after that, who will be the person to occupy that is left to the coalition partners.
Nowadays, the details of the Railway Budget do not come to the Finance Minister, though earlier they used to. Details do not come. Railways' likely income, improvement and broad general terms are used. But, we were advising the railway ministry and the Railway Board that there should be some adjustment to mop up additional resources.
What is your medium-term plan for further fiscal correction as next year will be the last Budget before the election, when there will be additional demands on you to provide for more benefits?
First of all, the traditional answer would be that you think of crossing the bridge when you get there. But we have to take certain measures, which I have elaborated in my Budget speech. Ultimately, we shall have to meet the target we have outlined in our Budget if we want to restore the macroeconomic fundamentals.
There is a perception that this government suffers from a policy paralysis. Are there steps you are going to take to remove that label?
We will and we are taking steps. The fact of the matter is, in the language of the Prime Minister, ‘‘Yes, there may be an occasion where we'll have to bite the bullet.’’
But, are you ready to bite the ballot?
I am ready to even bite the ballot as and when it is necessary. We are not shy of it, but I feel that the concept of policy paralysis was over-publicised.