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Budget proposals on TRC spooked markets. Should there have been better coordination between the capital markets division and the revenue department?
The Finance Bill is a very large Bill and which section and which wording would spook whom is very difficult to predict. I don't think there is any lack of coordination between the departments. The Department of Revenue is also on board with the entire process of creating right environment for investors. However, tax laws are difficult in any case to frame because many times intentions are something else and could be seen something else by investors. The revenue department clarified very quickly that the intention was not to create any new provision for creating any barrier or any difficulty for investors. The finance minister has already said that in case there is any need for reworking the wordings, then during the course of discussion the revenue department will consider it. For now, investors have realised this was not the intention. I don't think there is any issue with TRC anymore.
Would you agree that in an attempt to 'please all', the Budget has disappointed many?
As far as markets, the corporate world and agriculture stakeholders are concerned, everyone feels this is a balanced budget and it has taken care of their concerns, without compromising on the issue of fiscal consolidation. In the four or five months after the finance minister gave a fiscal consolidation road map, there have been questions about the credibility of the path. Now, that the Budget showed it (fiscal deficit) is 5.2 per cent, they doubt whether 4.8 per cent will be achieved next year. There is a need for people to sit back a little and do a sober analysis of the Budget, rather than looking for some big-ticket excitement. It's not a sizzler with loud noises; it's a very sumptuous, wholesome meal for everyone to eat.
But the markets have remained more or less flat in the last few days...
In the last four or five years, markets have always remained flat post-Budget, because most of the times they factor in the changes. What they are looking at is some big-bang idea. Don't think that when you are reaching a certain level of maturity, the Budget should actually be seen as something providing a big excitement; it's not a Bollywood movie which is a blockbuster on Friday evening. It's a sober statement of government accounts. Everyone says it's a serious Budget. I think markets will again begin to look up. There is also a bit of concern about latest securitisation in the US. There is a large chunk of money going to be cut from spending. It's impacting markets all over the world.
Do you see expenditure cuts by the US drying up capital market inflows into India?
I don't think that will dry up capital inflows to India. In 2008, there was a marginal dip, but in 2009-10, despite the Euro zone crisis, the flows did not stop. The issue today is where would you get the kind of returns you get in India? The rupee is stronger and we expect to have it in the same region it has been in the past. Even if you hedged against any depreciation, your returns still are higher than the returns you could get anywhere else. The investors are coming to India because they find it more profitable and the economy is now mature enough, government policies are not knee-jerk.
The finance minister spoke about taking some measures outside the Budget. What kind of steps can be expected and how soon would the announcement be made?
In every area (measures would be taken). As the finance minister said, the Budget is the first step. We will take whatever measures are needed to strengthen the Indian economy, to strengthen investor sentiments in the capital market as well as real economy. We will do everything it takes to increase the investment rate, to increase the savings rate, to bring inflation down, and to reduce the supply-demand mismatch.
Have you factored in a rate cut by RBI in next year GDP growth projections?
We have done a growth projection of 6.5 per cent because the sentiment is improving. An investment allowance has been introduced in the Budget and this is in addition to the normal depreciation you get. So it's a huge advantage. It's not that we are just looking at the benevolence of God to do the growth. There is a very clear policy indictor in the Budget. So, we expect investments would happen and growth will come riding on the back of investments. As far as the policy action is concerned, all indicators points towards RBI taking a very hard look. We believe it will vote in favour of growth.
What is your cash position and would you be able to restrict borrowings as the Budget estimates?
The borrowing target is as per our requirement. We are not going to borrow more. The cash balance as of today is Rs 1 lakh crore, but at the end of March, it should be something around Rs 70,000-80,000 crore because there will be a lot of payments. You need that much cash because in April, there are a lot of payouts, but the revenues don't start flowing in that quickly.
Is the distinction between foreign direct investment (FDI) and foreign institutional investment (FII), in terms of percentage of investment, correct? Should it not be on the basis of volatility of capital flows?
How do you determine volatility? The question is only in terms of your share in management. If you have less than 10 per cent, you will not have a voice. If you have more than 10 per cent, you can demand a voice. What will be the finer nuances and how it would be operationalised? For that, a committee will be set up. It's in terms of cleaning up the conclusion in the minds of investors. We have both FDI and FII caps.
In the second quarter of the current financial year, current account deficit was recorded at 5.4 per cent. There was a marginal drawdown from foreign exchange reserves to fund it...
But you would also see that after that there is also a buyback into the reserves. It's not a one-way drawdown.
The Budget speech said CAD would be $75 billion in the current financial year and the next financial year. In a situation when global economies, particularly the Euro zone, is not improving, and banks in Europe are expected to pay $1.3 trillion to its creditors in 2014-15, don't you think funding of CAD will become difficult?
The issue will still be that it's not just the banks which are buying into the capital markets. There are intermediating funds from pension funds, sovereign wealth funds and private equity funds. So, the question is would the need for long-term funds diminish next year. If you are sitting over a trillion dollar of pension funds, which you have to service, you need a certain level of return on that. That will not go away. As long as investors have faith in India's economy, I don't believe the fund flow will decrease. And there is absolutely no reason for people not to have faith in the fundamentals of the Indian economy.
Do you foresee any opposition from the regulator on allowing insurance and pension funds in the exchange-traded debt market segment?
It's always a question of balance. Obviously, you can't put pension funds and insurance into a situation where they become high-risk funds. But there is certain amount of it you need to invest to get higher returns. The regulators will keep looking at that balance. I don't think there will be a complete opposition to any investment other than government securities. All over the world, it's done that way.
