While defending the finance minister’s intentions and policy direction in the recent Budget proposals, Montek Singh Ahluwalia, deputy chairman of the Planning Commission and a top government policy maker, makes it clear that many of the things that need to be done are well outside the financial document. A serious and ceaseless effort at sensible political consensus is a must, he says in an interview with Karan Thapar on the CNN-IBN television channel’s Devil’s Advocate. Edited excerpts:
The Budget has been called ‘a missed opportunity’, that ‘it has no vision’ and ‘has little things that don’t add to very much’, and, the second-worst Budget in India’s history...
We spend too much energy focusing on the Budget. We are in a difficult situation and there is an expectation that a Budget could somehow tackle all the problems. This is wrong. You do need the Budget to do some important things right, but most of the things that need to be done are outside the Budget.
What are the three important measures announced by the Budget?
Number one, it clearly acknowledges that the fiscal deficit went out of line. The finance minister (FM) deserves a lot of credit for coming out with what it is like and then laying out a sort of road map for the next three years. He came upfront and put together the fiscal deficit number and a fiscal deficit target, not only for the coming year but also for the next two, which is more realistic than what was there earlier.
The other two?
Second, he has given a very strong signal on the infrastructure sector, which needs support and investment.
The important step here is to increase the Rs 60,000 crore of tax-free bonds in particular and permission to borrow from abroad?
Yes, those are Budget-related, plus the fact that the infrastructure debt fund, an initiative worked on over the last year, is now done and the first of these have taken off.
Third?
The very important signal related to tax reforms. He (finance minister) brought in a concept of a negative list on the service tax. And, given a signal that look at the things we control, i.e., service tax, which is central tax at the moment, we are willing to take the steps necessary to go ahead. If you see that as a credible guide to the fact that the GST (Goods & Services Tax) will happen, that would be a big step.
You gave the FM credit for being upfront and admitting boldly just how bad the fiscal deficit is. In fact, it turned out much worse than most expectations, when he announced 5.9 per cent. The first question people ask is, can he really reduce it to 5.1, given that he was so wrong last year? He has no control over oil and those prices could easily climb to $150 a barrel.
Any Budget is always made on the basis of some assumptions about things beyond one’s control. Yes, if you see a huge change in oil prices, Budgets everywhere would have to be reformed. I am hoping this fear will abate and oil prices stay roughly where they are now. He said, I am going to cap subsidies at two per cent, and this is a very important step.
His gross borrowing requirement is Rs 5.7 lakh crore this year, almost Rs 60,000 crore more than last year. His expenditure has risen 22 per cent and if he cannot achieve the 7.6 per cent GDP growth he has predicated in the Budget, he is not going to achieve the 5.1 per cent target on fiscal deficit. Given the external and internal situation, people question whether 7.6 per cent growth is possible.
The Budget is always based on a projection of growth target. I think this year’s 6.9 per cent will get revised to seven per cent when the full data come out. Let’s ask, will the seven go to 7.6 per cent? Tough, but it can be done, assuming you don’t have some huge explosion externally, which disrupts everything.
One of the most important things holding back investments in the country is that in the energy, power, coal, gas areas, big projects are stalled. These are not the things we can sort out in a Budget but efforts have been made separately to take care of it. The evidence of progress is there and you need to give it another three to four months to see if what we now know as steps being taken would actually lead to a successful outcome.
Let’s come to your second reason of confidence that 5.1 per cent on the fiscal deficit can be met, that he put a cap of two per cent on subsidies. The problem is, he has no road map to indicate how that will happen. Many say this is a hope, not a realistic target.
Again, this is a reason why one cannot do everything in the Budget. For that cap to be strictly observed, it depends on what happen to prices, both in case of fertilisers and petroleum, for some adjustments to take place. The Prime Minister said on television this is a bullet we must bite, very clearly saying government policy requires some action to be taken.
You’re talking about very steep increases in petrol prices and even in urea. Are you prepared to face Mamata (Banerjee)’s wrath when those increases happen?
They will have to consult, discuss and persuade people and the public in general and, indeed, the opposition.
The Budget is based on the assumption the price of oil will be some where between $110 and $115 a barrel. It’s already over $120. Second, the FM only set aside Rs 43,000 crore as the oil subsidy, 36 per cent less than last year’s figure of Rs 68,000 crore.
The assumption is that the difference between global prices and the domestic price will be narrowed. If you subject the government to scepticism on the ground that there is no way any sensible policies can be passed with a consensus, then not just the Budget but everything else also falls.
Everything else that Mamata objected to, the government had to give in. She objected to FDI in retail and the government gave in. She objected to oil price increase in November and the government gave in. She doesn’t like the pension Bill, it’s stalled; she doesn’t like the Lok Pal Bill, that’s stalled. So, when you push up petroleum prices to the draconian level required, she will object and the government will fail.
The only thing I can say is this is a bullet they have to bite and they have to do the consensus gathering that is necessary. It always looks difficult in a politically difficult situation. Nobody quite says they are going to agree something unless they agree or until they are ready. So, the real question is, will these consultations be useful or not? I hope they will be able to get an agreement, that’s all I can say.
You are saying the uncertainty will linger and perhaps get worse, until the actual bullet is bitten.
Correct.
A second reason why people are doubtful of this two per cent cap on subsidies. Where in this cap does the Food Security Bill, which could cost Rs 1,00,000 crore itself, fit in? People say either it is not on the anvil for this year at all or the two per cent cap is not sacrosanct.
The FM made that very plain. He said the food subsidy would be fully funded. How exactly the Bill will be passed, made operational, I can’t guess.
But if it is fully funded and you still stick with the two per cent cap, the money left for petroleum and urea is reduced to so little that the increases will be so steep that Mamata will...
Substantially correct. The more we do by way of commitment on food subsidy, the less will be available within the cap for the other subsidy. But I do think an FM who makes a commitment means it. If there is a political consensus that two per cent is a reasonable limit, then he has some sort of method to get it done. People say don’t make it two per cent, make it 2.2, but I think this is the right way to go. Let’s agree on what the cap is, let’s agree that food is the most important, and let the rest take the hit.
You depend upon a consensus that is elusive at the moment. Another reason why your 5.1 per cent fiscal deficit figure might be questionable. The increases in indirect taxation to bring an additional Rs 45,000 crore revenue is going to kick up inflation. Whatever happens on petroleum and perhaps on urea will further kick up inflation. Therefore, it makes it very difficult for RBI (the Reserve Bank) to reduce interest rates, so growth will be stifled. And, so, your revenue projection could go wrong.
I don’t, by the way, accept that logic. People say if you raise indirect taxes, inflation will go up. An individual price on which a tax is borne in a short run goes up. But, remember, he is raising indirect taxes and reducing the fiscal deficit. The latter step has a lot of other impact which tends to moderate inflation.
But the reduction in the fiscal deficit depends upon 7.6 and that is stifled because inflation is high and interest rates remain high.
The news on inflation is good.
It will get worse because of the excise duty and service tax and the petroleum prices.
The increase in the excise duty in an environment where the fiscal deficit is being brought down will raise some prices but need not lead to an overall increase. It is a fear caused by far too many taking heads on televisions screens, making intense comments within a tense environment and not keeping macro economics in mind.
Let’s come to what many consider the worst part of the Budget, the decision to retrospectively amend the Income Tax Act, 50 years after it was passed, to overturn the Supreme Court judgment on Vodafone, making it possible to tax overseas transfer of shares in Indian companies by Indian authorities. I put it to you this is unfair, possibly immoral.
What they have done is to change the law. That particular change is not only appropriate, it is something they have signalled in the DTC (Direct Taxes Code under consideration).
Why retrospectively?
As a general rule, I agree one should avoid retrospective amendment. But, this is not something where nobody had any idea and you go and amend something retroactively. This issue;s been discussed in the courts, the government won at the High Court. Yes, we lost at the Supreme Court but the court also said, I don’t know enough about it and in a way I shouldn’t be commenting.
The SC said the government should clarify but not retrospectively.
This is an ongoing issue. No doubt, the court will take it up.It’s a complex legal issue I really don’t want to comment on.
Deepak Parekh, a leading businessman who is very close to your government, has gone on record to say that this totally retrograde. He said the impact on India’s credibility and reputation will be extreme.
I am aware there has been a very negative reaction. I am sure the FM is also aware As I said, most people tend to regard retroactive amendment as undesirable.
What impact do you think this retroactive amendment will have on foreign investment? Won’t it put them off?
I think foreign investors should have absolutely no doubt in their mind that the government of India does not intend retroactively to change some of the basic conditions.
You need to give that as an assurance. rather than just a comment in an interview.
I am not in a position to give that assurance but all tax matters are always very complex and I think foreigners would look at the total experience they have with the Indian tax.
Would it not help if the finance ministry were to announce that although this is a retrospective amendment, they will not reopen the Vodafone case on the basis of amending the law?
I am sure it would. But the point is, I don’t know what the thinking of the ministry is. I have no doubt, by the way, that it is very important that prospectively this change is quite sensible.
