Chidambaram promised to provide equivalent liquidity to banks.He said the government will find ways and means to find ways to refund banks.

The government has an obligation to provide equivalent remuneration to banks, he added.

Chidambaram said the contours of package to banks would be finalised after the waivers and the one time settlement, or OTS, is completed. The government has a number of options to get funding to reimburse banks, he said. The FM assured that the farmer relief programme will not spur reckless borrowing by farmers.

Excerpts from the exclusive interview with P Chidambaram:

Q: I was looking for a phrase to describe your Budget with. The best one I could come up with was “Heads I win, tails you lose.” You seem to have taken all the advantage and left the problem for later Finance Ministers?

A: The next Finance Minister also will be from the Congress Party.

Q: You have taken the entire advantage of this. You have taken one-third of the liability and left it for the other Finance Ministers?

A: It is completely wrong. I am not going to do what Mr. VP Singh and Mr. Devi Lal did in ’89-’90, leave the problem to the next government. We have a plan and we will go through that plan.

Q: What is the plan? Since yesterday we have been hearing you say, leave it to me. I am not unintelligent. You said trust me…

A: I said allow us some intelligence that we have done our homework.

Q: What is that homework? Why don’t you share it with the people?

A: I can’t share it with you. I have to share it with Parliament.

Q: But give us a sense as to how you wish to provide for this funding?

A: You have to be a little patient.

Q: But that is the critical point, isn’t it?

A: It is not. The point is, this money has already left the banks and it is with the farmers. The banks may or may not recover the whole of that money. Some of it is perhaps already NPA. In fact, all of it is overdue and some part of it may become NPA.

Therefore, we say we will write-off these loans and find ways and means to provide equivalent liquidity to the banks over the period during which they would have recovered.

Q: Are you in any position to share at least some details of the package?

A: I can’t share the details of any package. But we will find the resources, non-tax revenues, resources and other ways to provide the liquidity.

Q: By when do you think we will know the contours of this package?

A: Let me first implement the package by June 30. Let me first do what I have undertaken to do - namely, write-off the loans of small and marginal farmers, and then get into an OTS arrangement with other farmers. Once this part of the exercise is done, we will have an exact idea, an exact number and then we will address the issues of how to provide equivalent liquidity to the banks.

Q: There has been some talk about the fact that could you have enlarged this offering by including not only bank loans to the rural poor, but also the village money lender or the non institutional form, is there any mechanism of doing that?

A: If there is one, then let me know; nobody has told me a mechanism.

Q: Any analyses being done of the fact that what is the ratio of money that indebtedness happens with the village moneylender and happens through commercial banks?

A: No one knows that.

Q: Is there any study that you would have consulted?

A: There are only surveys. But these are not exact numbers that can be relied upon because people borrow from moneylenders for variety of purposes and they use the borrowed money partly for agriculture and partly for non-agriculture. How can you make an estimate and how do you know who has borrowed from whom; how are these numbers reliable?

Q: What about the 'moral hazards' argument that a lot of people are putting force, including you and your Prime Minister? When the whole issue of free power was being debated, the PM as well as you felt that this kind of economics is not something that’s going to work.

A: When the farmers were committing suicides, when there was a clamour that there should be debt-relief, when the MS Swaminathan Committee suggested that farmer’s debts must be relieved - why did nobody raise this issue of moral hazard? In the run up to a decision, no one raises the issue of moral hazard. When a decision is taken, it suddenly becomes a hazardous decision. I think that’s a very cynical way of approaching the problem. Today there is a problem.

There is a clamour all around that the debt of framers must be relieved. In fact, all political parties seem to agree that debt relief must be given and therefore, government has done what I believe is the right thing. We have granted them debt relief. Indian farmers are quite honourable. Nine out ten years - they have repaid their debts. In that one-year when there is a natural calamity or drought or a famine or whatever, they are unable to pay debt and we have reached a situation where a large number of farmers who would have gone out of institutional credit and that would have seriously affected agriculture.

Q: Any assessment of the kind of if there is any threat of any dislocation or imbalance - I’ll go back to the free-power argument there have been some studies, which have shown that the water table has receded and there has been reckless use of power - do you think the waiver of this sort could lead to any kind of perhaps reckless borrowing in the second round?

A: I don’t think so. In fact, farmers are honourable people. As I said, nine out of ten years, they repay their debts. It just happens that from time to time, due to variety of reasons, this debt accumulates and a large number of people are in danger of going out of institutional credit system and therefore we intervened. But I don’t think this will happen year after year.

Q: Let me move to the fiscal deficit - even though they are below the line, you are putting them in the Budget-at-a-Glance document. What’s your assessment of what your total fiscal deficit would be when you put all the off-balance sheet and on-balance sheet items together?

A: You don’t put all, you only put only that year’s because the fiscal deficit is that year’s. I have given the number in the Budget-at-a-Glance and as on the day of the revised estimates are published you will find that it adds upto another Rs 18,757 crore that’s about 0.3% of the GDP; so my 2.5% would have been 2.8%.

Q: But that still doesn’t take in account the entire oil deficit because we haven’t fully compensated the oil companies yet?

A: These are the bonds that have issued so far. So, when we issue, we will bring it over the line.

Q: What is the estimate? Some estimates are that it could be even 2 percentage points.

A: No, I think that’s highly exaggerated.

Q: Even when you put the oil and food subsidy and the fertiliser subsidy together and the Pay Commission?

A: Why assume the Pay Commission would have to be paid for by bonds?

Q: No, not by bonds. The fact is that consolidated it becomes a part of the fiscal deficit?

A: I don’t think so. I can only report what bonds have been issued.  It’s for Parliament to vote the bonds. When the bonds are voted and we have an exact number, we will show that in the documents.

For the first time, we are showing it. In all these years, nobody showed it and nobody asked questions. When I am showing it, people are asking questions.

Q: They will because its now visible.

A: No, these numbers were available but they were not on a Budget document.

Q: You have recognised the bonds that have been issued. But is there also a contingent liability to cover up?

A: That will show up.

Q: Are there any estimates that you have?

A: When we issue the bonds, we will know. That will show up in the accounts put out by the Comptroller of Government Accounts.

Q: Why is it that the Railway Budget makes a provision and you don’t?

A: But, I do in a sense because there is a normal increase in 2008-09 - that has been factored in. The Pay Commission's award will subsume the normal increase. So, I have to only provide for the increment over the normal increase. We have no idea about that increment at the moment. Therefore, when the Report comes, we will have an idea. But I have left headroom for myself to borrow if necessary. But I don’t think that will be necessary. I think the revenues will take care of that.

Q: The headroom that you have is about 0.5%, which should be what about Rs 40,000 odd crore?

A: No, 0.5% is about Rs 25,000 crore.

Q: That will have to take into account the farm-waiver bonds, if they are bonds.

A: You are again going back to the same issue. Farm-waiver will be handled in a different manner. This headroom has been provided, in case I have to borrow. But even here, I am confident that the revenue buoyancy will take care of the Pay Commission requirements. 

Q: Well let’s come to the revenue buoyancy argument. I mean clearly you’ve had two very good years. Also, the first signs of deceleration are there and your real interest rate structure in the economy is very high. 

A: Real interest rate is not very high.

Q: It’s about 7%.

A: No.

Q: How do you say that?

A: You are looking at the PLR. But bankers will tell you that a very large part which they have lending was sub-PLR. In fact, virtually their loans to industry are at sub-PLR.

Q: But that as it may, a lot of borrowing is happening at about 12%. Your inflation is about 5% …

A: That’s not correct. Agriculture lending is taking place at 7%. Exports sector gets it at less than PLR. A large number of industries get it at less than PLR. This is the reason why the benchmark PLR remains high. If all loans were being given at PLR; bankers have told me, PLR will drop immediately.

Q: What's your estimate then of the real interest rate?

A: I don’t know. Real interest rate depends on the category of borrower. For the farmer, the real interest rate is only 2.5%. For the exporter, it’s about 3%. For the industrialist, I think the real interest rate is only about 3.5-4%.

Q: I would disagree but then we would quibble. The fact is that at 4% or 5% even, you have got a very high real interest rate structure.

A: But then that’s necessary for monetary management, for containing inflation.

Q: But that also could dislocate growth, which is everything that your revenue buoyancy predicated on?

A: I said in my speech that they are limits to monetary accommodation and therefore I will take fiscal steps and I have taken fiscal steps to stimulate growth and demand.

Q: Are we saying that we are then stuck at this real interest rate level?

A: We are not stuck on anything. We don’t want to be stuck on this question either. It is RBI that manages the interest rate. RBI consults the government and we convey our views to the regulator privately, as we should. But since the RBI is a monetary authority, it has the right to decide interest rates. I am sure they factor the need to provide interest rates that will not hamper that growth. The Governor has said it more than once; he has said growth with price stability - the Prime Minister has said it. I am sure the Governor fully recognises that. It is important to ensure growth takes place with price stability.

Q: There has been a lot of focus in your Budget on stimulating consumption. The sub-text there being investment demand in the economy is now something that is stable and pretty much a given. But there could be early signs of investment demand also slowing in the economy?

A: Not the figures we have. The Economic Advisory Council places investment to GDP as over 36%. My own economics division places it slightly higher. We will have final figures much later from the Central Statistical Organisation, or CSO. But assuming that investment to GDP is 36%, that is a very high investment.

Q: It is. I am just saying that it is the first signs of deceleration. Your credit growth is slowing.

A: No, that was a conscious, deliberate attempt to slow down non-food credit growth.

Q: Also, the fact that you have, whether it is admitted openly or not, but in practice, a quota system where FCCBs and ECBs are not really getting approvals. When was the last big FCCB or ECB that got approved?

A: USD 500 million is automatic?

Q: But you are not seeing capital inflow? The government has openly said that we are not very comfortable?

A: The FDI, FII, and ECB numbers for 2007-08 are higher than 2006-07. For 2008-09, we will have a policy. But the numbers clearly show that these three heads are higher than 2006-07.

Q: So, you are seeing no signs at all of deceleration?

A: I am forewarned; there could be a slowing down in consumer durables. We are taking steps to stimulate demand. We have cut excise duties, project imports, customs duties, and have also left more money in the pockets of consumers.

Q: How do you intend to insulate the economy from a global recession? We didn’t seem to hear too many steps in that direction? What is Plan B?

A: There are no ready answers for this. We will have to respond, as I said. We will have to be prepared to respond swiftly as the situation evolves.

Q: What kind of responses would those be?

A: Monetary, fiscal.

Q: Monetary would be a cut in interest rates?

A: I don’t know. Monetary response is a standard textbook response. So, supply side responses are there.

Q: What about food? We had a problem last year.

A: So, we will import food if necessary.

Q: Is there a plan in place to do that?

A: Yes, of course. If necessary, we will import food. But the idea is to increase production. I have disclosed in my speech that the Ministry of Agriculture expects all-time record at least in five crops. There are some that are not doing so well. But if necessary, certainly we will import food.

Q: The one measure that sort of went against the grain of the feel good Budget was this change in short-term capital gains tax?

A: Who is affected?

Q: People certainly get affected as they are paying short-term capital gains tax.

A: The persons who are buying and selling in the short-term, he is making a gain. He is not making a loss. If he is making a loss, he doesn’t have to complain; he is making a gain. In many countries, they don’t make a distinction between capital gains and income. In many countries, there is no distinction between short-term capital gain and long-term capital gain. For historical reasons, we have got this difference between gain and income. We have got this difference between short-term and long-term. And they were paying 10%. We have equated it with a DDT rate.

Q: But the question really is that three years ago, you yourself put in this structure?

A: Did I put in this structure? This has been there for many years. I abolished long-term capital gains tax and brought this down to 10%.

Q: And the markets and the international community and everybody thought that this is now a stable regime?

A: The context has changed; three years ago the markets were virtually dead. We had to revive the capital market; we had to bring back retailer interest in the capital market. Today the Indian market - at least as long as it goes to 20,000 or 21,000 (levels), it is extremely attractive. It is giving returns higher than in any other kind of assets.

And therefore, at this point of time, to equate the Capital Gains Tax on a Short-term Capital Gain with the Dividend Distribution Tax makes sense. If I hold a share and receive a dividend, I pay 15%; if I sell the share and make a gain, I should pay the same 15%.

 Q: What it has done is brought into the question the regime that you put into place - now people are also saying that now you will also get a Long-term Capital Gains Tax next year or from any other Finance Minister?

A: The point is that these are not carved in stone. All that we offer to the investor is moderate and stable tax rates. But that doesn’t mean that the tax rates will not be jigged; in which event, I should not have changed the slabs of income tax either.

Q: The expectation was that we now had a system in place and with change, that expectation gets into question?

A: One should now expect that DDT and capital gains will bear the same rate of tax.

Q: My last question and this is on five-years on managing the economy, one expectation had was that when we have people like Prime Minister and people like you who are very experienced economic administrators, when you exit, you would leave us with that not that much big government - we still seem to see a big government a lot of macro management that is still getting done of the economy?

A: The Central government looks bigger because the State Government wants the Centre to bear the burden of many programmes - agriculture, primary education, primary health care under the Constitution - these are subjects reserved to the State Government. But because States are not willing to bear the responsibility as much as they should, in my view, and because there is uneven progress in the States and some States are falling behind very badly, the Centre had to intervene and that is why we have over thousands of schemes which are going to be funded centrally. Therefore, the Government looks big. But if the State Governments are willing to take more responsibility, I’ll be very happy to shed this responsibility.

Q: But does the government also, in a sense of a government, still wants to micro manage? Look at the plethora of rates you have on FDI and FII, that you will be allowed 20% here, 26% there, 38.5% somewhere?

A: Life was indeed simple when we banned FDI, when we closed the door to FDI. The point is, we had a closed-door regime. We are opening the doors and the windows. We are opening it as fast as we can. But there are problems. There are political objections, there are domestic sensitivities. There is a need to protect domestic industry. So, when we open some doors, we cannot open it fully. When we open some windows, we have to open it partially. That looks to you like micro-management.

Q: But do we need so many slabs?

A: We don’t.

Q: You don’t have one more than 51, less than 50?

A: I agree we don’t. But I am trying to convince people that there is no difference whether there is 26% or 49%, because 26% and 49% puts you in exactly the same position, regardless of whether you have 26% or 49%.

Q: What is the objection?

A: The objection is, 26% is okay, but 49% is not okay. The point is we are a coalition, we have to carry our allies and colleagues with us. We have to be sensitive to their concerns.

Q: When do you think we are going to have the elections now? Everyone is talking about a September-October election?

A: May 2009, I am told.

Q: Is the scheduled one. But a politically correct or opportune time could be the last quarter of this year?

A: I don’t decide this matter. I am not the leadership of the UPA or the Congress party.

Q: But you are an important voice in that leadership?

A: I am only doing my job as a Finance Minister.

Q: Would you rather have a winter election than a summer one?

A: I’d rather have an election, which takes place regularly every five years. In fact I’d rather have elections for states and centre to take place together so that we can focus on governance for four years. Unfortunately in India, every year is an election year. 2008 is an election year, 2007 was an election year, 2006 was an election year. If Finance Ministers were obsessed with elections, they can never present a Budget.