A: On the growth side, we project continuation of the average of 7 per cent achieved in the last three years. The whole focus of the budget is to ensure that this trend continues. This requires a boost on investment, the right signals that would stimulate what appears to be a basically favourable investment atmosphere. There are medium-term constraints like infrastructure, but I think in the short run, they need not be binding constraints to get a growth of seven per cent next year. On inflation, the GDP deflator is projected to increase somewhere between six-and-a-half per cent. However, when people are talking about inflation, most of the time they have in mind the Wholesale Price Index (WPI). We always regarded five or six per cent inflation as tolerable and obviously we would want to do better than that. Right now, the WPI shows inflation above seven-and-a-half per cent. We definitely want to do better than that. So our inflation target is to bring the rate of inflation as measured by the WPI somewhere
around 5 or 6 per cent. This depends a lot on our expectations of supply response, prudent monetary policy and on the fact that the fiscal deficit will be held at 4.5 per cent. It is quite possible the GDP deflator may be somewhere between 6 and 7 per cent, but then it normally shows faster growth than the WPI.
Q: The minister and perhaps you have described this as a growth-oriented budget. What are the growth impulses in the budget?
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A: There are many. The whole thrust of continuing the tax reform gives a very big signal on the investment front. Indian industry has done extremely well in these years of reforms. They have tackled the increased competitiveness extremely well. They have frequently said that in order to be able to reinvest, in order to be able to mobilise resources from the capital market, in order to create a climate in which funds flow into the organised sector, we should have a regime of taxes that is comparable to what exists in the rest of the world. Otherwise there is too much of a tendency for income to be suppressed, and even at times for income to flow abroad, which really means income doesn't flow into organised industry. What this budget does in a very bold way is to align the direct tax structure pretty much with the levels prevalent in East Asian countries. The finance minister has outlined on several occasions that it is our objective to bring our tax structure, both direct and indirect, in line with Asian
levels by the year 2000.
Q: But is that a growth impulse?
A: It is a growth impulse. Remember, East Asian countries are high growth and high investment countries. So their tax structure is something to learn from. Where as in indirect taxes, we made changes gradually, in direct taxes it has been a very bold move taking income tax and corporation tax together. The present position is that on corporation tax we are a little bit higher than Asian countries. On personal income tax, we are as good as the best.
Taken together, we believe it provides a kind of tax structure which would give maximum incentives for savings to flow into the organised sector. This tax reform is combined with an effort to bring the fiscal deficit down to 4.5 per cent of GDP. The finance minister has also said he would aim to bring it below 4 per cent next year. In a growing economy, the pressure that the fiscal deficit will put on the capital markets, in terms of raising interest rates, is therefore being reduced. We are also trying to improve the market for government debt. That government debt market underpins the efficiency of the rest of the debt market. Several initiatives have been taken by the government in the last few months. We had allowed gilt mutual funds to come up, but they couldn't really take off because the tax deducted at source (TDS) on government securities was creating a problem in the trading of government securities. That's been removed in this budget. Foreign institutional investors have also been brought in as
additional players in the government debt market. All these developments point to lower interest rates and improved flow of savings to the capital markets.
Q: Going back to inflation, you have a situation where it has gone up from up from 4.4 per cent to 8 per cent now and if you are going to see POL prices increase at some point and if you are seeing the other factors in the economy like monetisation of the budget deficit and the 16 per cent M-3 growth that the RBI governor spoke about, then do you really think you can bring down the rate of inflation?
A: The finance minister is very concerned about keeping a lid on inflation. We are keeping a very close watch on what are the kinds of fiscal and monetary parameters that can keep inflation down. From the macro point of view, if we get 7 per cent GDP growth, then 16 per cent M-3 growth is quite consistent with bringing inflation below 7 per cent.
Q: With the cost-push factors that come through...
A: Cost push factors affect one particular price and, in the short run, it will show up as an increase in the price index. But as long as the money supply remains on target, it means other price increases will be moderated sufficiently so that the aggregate price level would not rise. I am talking about the inflation target for the year as a whole.
To my mind there are three or four key elements in keeping the inflation situation under control. One of course is the general supply situation