The finance minister P Chidambaram ended the first leg of roadshows to showcase the potential of the Indian economy to foreign investors in Singapore and Hong Kong. In an interview with CNBC's Sri Jegarajah, Chidambaram emphasised that the Budget would not be populist, but responsible.
He added that the rupee was plagued by the underlying causes of inflation, the fiscal deficit and the current account deficit and that the government has started to address the underlying causes. "If the world and the market players feel confident that we are addressing the underlying causes, there is no reason why the rupee should not be reasonably stable over a period of time."
The finance minister concluded that he had no Prime-Ministerial ambitions and viewed Rahul Gandhi as the future leader of the Congress party.
Below is an edited transcript of the interview on CNBC-TV18
Q: Record current account deficit in India- can you sketch out the roadmap for us on how public finances can be stabilised?
A: We will shrink the fiscal deficit. As far as the current account deficit (CAD) is concerned, it is a function of the trade deficit. We are a trade-deficit country, about a USD 110 billion. Some of it is offset by invisibles and services. Yet there is a hole. There are number of factors contributing to that hole - one of which is gold imports.
Last year, India imported USD 57 billion worth of gold. The current account deficit can be shrunk only when exports increase. Invisibles give us a greater positive and remittances continue to be high as they are today. Since the trade deficit is very large I don't expect the current account deficit to be wiped out in the near future. So, the challenge is how to finance the current account deficit.
Fortunately, we have been able to finance it so far through foreign direct investment (FDI), through foreign institutional investors (FII) and through external commercial borrowing (ECB) without dipping into reserves. So, that is a measure of satisfaction. Without depleting our reserves, we have been able to finance the current account deficit. But we can shrink the current account deficit only when we improve our exports.
Q: The import tax on gold has been increased in a bid to reduce the deficit. When will it begin to have a positive impact and how much will it contribute to deficit reduction?
A: I have appealed to the people of India to moderate their demand for gold. You know the South Asian passion for gold. In 2011, India spent USD 57 billion on gold imports. Until December 2012, India already spent USD 38 billion. There has been some moderation, but not enough. If there is significant moderation I have assured that the tax will be reviewed. But I don’t know when the moderation will kick-in.
Q: Given the fiscal reforms you announced, does India deserve the credit rating that it currently has?
A: Of course, it does. India certainly doesn't deserve any downgrade. There are many economies in the world whose fiscal position is worse than India's. We are growing at 5.7 percent and only four or five countries are growing at a faster rate. India has a healthy foreign exchange reserve of nearly USD 300 billion. Our savings ratio is very high.
Even when it hit a low, the low was 32 percent of gross domestic product (GDP) and the high was 36 percent of GDP. We want to increase the savings. Our tax collections are still robust even in the current year, the gross tax revenues are to grow by about 17 percent. We have chalked out a path of fiscal consolidation to bring the fiscal deficit down to 3 percent over four years.
We have taken a number of small steps which, when put together, are significant reforms - reforms in FDI, the electricity sector and the capital market. We have cleared some of the uncertainties surrounding some tax measures. So, what we have done in the last four or five years should reassure rating agencies.
Q: In other words, is the threat of a downgrade to ‘junk’ status less likely now because of all the reform momentum in India?
A: I said on August 6, 2012 that I don't believe any rating agency will downgrade India. There is no case for a downgrade. And today on January 22, nearly six months later, I believe there is absolutely no case for a downgrade.
Q: What would warrant an upgrade to a ‘negative’ outlook? Is that possible?
A: It is possible. If I show on February 28 that the fiscal deficit has been kept to below-5.3 percent, if my Budget estimates show that next year’s fiscal deficit will be below 4.8 percent and I can show a healthy growth in revenues over next year, that is the time when rating agencies should consider improving the outlook and then improving the rating on India.
Q: More of a long-term question in terms of fiscal management, when will India return to a surplus?
A: Surplus? Of what?
Q: Return to a Budget surplus?
A: Not in the near future. We have a huge revenue deficit. We won’t return to a surplus very soon. However, in a growing and developing country, we can afford a small fiscal deficit of below 3 percent.
Q: India still enjoys investment-grade status. Is now a good time, in your opinion, to consider sovereign bond issue to raise more foreign exchange or is it not necessary at this point in time?
A: That is an idea is doing the rounds. There are a number of arguments in favour of a sovereign bond issue. The central bank has pointed out some downsides. We will have to weigh and choose the time to go for a sovereign bond issue if we take a decision in that regard.
Q: Do you plan to launch one this year?
A: I don't know, I can't say. There is also the option of a quasi-sovereign bond issue. We haven’t taken a decision yet.
Q: Can India have a sovereign wealth fund to invest in assets abroad even without a large Budget surplus?
A: We don’t have those surpluses. The demands for investment within India are very large. We have created a National Investment Fund (NIF) a few years ago where we could deposit our disinvestment receipts. But then in the last three years we modified that rule and used the disinvestment receipts for current social sector expenditure.
But again we have gone back. Last week, we decided to deposit the disinvestment receipts into a National Investment Fund which will be used to capitalise India's public sector banks and other companies. There are huge claims for that fund. I can't see how we can spare any money for overseas investments using the wealth fund.
Q: I get the sense that the finance ministry feels that it is done its bit to try to kill the deficit and the ball is now in the court of the RBI which meets on January 29? Is a 25-bps cut guaranteed?
A: I don't know. The ball was always in the court of the RBI. The finance ministry or the officials of the finance ministry express their views. We are naturally biased in favour of growth. The RBI has an obligation to contain inflation. They are not necessarily contradictory positions, they can converge and when they converge the governor will take a call.
I think the governor is sensitive to the fact that just as high inflation penalises people, low growth also penalises the people. Low growth means fewer jobs, lower incomes and fewer self-employment opportunities. I am sure the governor will bear all this in mind when he takes a decision.
Q: India is a net oil importer and this has a bearing on the deficit. So, if Brent crude oil, the market I believe you look at, rises and stays elevated maybe USD 115-USD 120 a barrel, what are the implications? Can you absorb that as a nation?
A: The implications will be serious. We will have to pay for the oil. We will have to conserve oil, we will have to cut back some other expenditure - what choice do we have? Oil-producing countries should not immiserise oil-importing countries. I made this appeal some years ago in a conference in Saudi Arabia, but it fell on deaf ears.
Just because some countries are blessed with oil, while they should certainly expect reasonable profits because that is an asset and resource they have to sell it at a price that will benefit their people, I think they owe an obligation to the rest of the world too. They owe an obligation to all the people of the world. You cannot price oil in a manner that piles misery upon the people of oil-consuming countries.
Q: Should it be offered at a concession to developing countries?
A: No. I am not asking for concession. I suggested at the conference that we have a band with a floor and a ceiling. Oil-consuming countries will guarantee that the price of oil does not go below the floor and oil producing country should guarantee that the price of oil does not go above the ceiling. I put forward that the price of oil should be allowed to fluctuate within that band. Unfortunately there were no takers for that suggestion among oil-producing countries.
Q: Lets talk about the growth outlook because the Prime Minister has said that the Five -Year Plan target for 8-percent growth on average was "ambitious". Does that suggest that India is in for a period of sustained sub-par growth?
A: Last Plan, we achieved very high growth and nearly reached our target. For this Plan period of 2012-2017, we started out by setting a growth target of 9 percent. We have scaled it down to 8 percent which is challenging and therefore the Prime Minister used the word "ambitious".
I think we should be able to achieve 8-percent growth in the third year of the Plan and then going forward in the fourth and fifth years. But that is the potential growth rate of India. If we grow less than 8 percent it means the economy is performing below potential and something is wrong with the way we are governing the country. We should continue to aim at the potential rate of growth which is 8 percent and do everything that is within our power to achieve that growth rate.
Q: Is the Indian rupee looking a bit more stable now or is it in for more volatility?
A: I don't like volatility and the Reserve Bank of India (RBI) intervenes when it turns very volatile. But Indian rupee is market-determined. If inflation in India is higher than inflation in partner countries, it will be put pressure on the rupee. If the fiscal deficit balloons, it will put pressure on the rupee. If the trade deficit balloons, it will put pressure on the rupee.
I don’t think we should look at the value of the rupee at any given time. We should address the underlying causes. The underlying causes are inflation, the fiscal deficit and the current account deficit. And we are addressing the underlying causes. If the world feels confident, if the market players feel confident that we are addressing the underlying causes, there is no reason why the rupee should not be reasonably stable over a period of time.
Q: Large industrial groups are now allowed to acquire banking licences and I have been hearing that the frontrunners appear to be Infrastructure Development Finance Company (IDFC) and L&T Finance, is that correct from your perspective?
A: We haven't even invited applications yet. The RBI will publish the final guidelines shortly. The government has given its views on the draft guidelines. When the RBI publishes the final guidelines, it will invite applications. Who will apply and whether they will qualify and whether they will be selected, I cannot say.
Q: Does there appear to be a conflict of interest between large corporates acquiring banking licences? What sort of eligibility criteria are you going to set?
A: These licences are essentially for the private sector, for private sector banks. Now, who will apply and who will qualify will be known only when the final guidelines are published.
Q: Is raising taxes on the rich a necessary part of fiscal reform or something counter-productive when the economy needs to be revived?
A: The tax rates that I announced in 1997 remain and survived four governments and four finance ministers. I believe in stable tax rates. However, I must concede that there is an argument, underline the word argument, that when the economy or the government requires more resources, the very rich should willingly pay a little more. That is not to say that tax rates should not be stable.
We should have stability in tax rates, but we should consider the argument whether the very-rich should be asked to pay a little more on some occasions. But that is not a view that I am expressing, that’s simply an argument that I have heard and I repeat.
Q: Will you impose an estate tax?
A: That's a suggestion that has come from some economists. We have taken no view on it yet.
Q: Should dividends be taxed?
A: Dividends are today taxed at the point of distribution because it’s a simpler tax, it’s a neater way of collecting. There can be no avoidance of dividend distribution tax (DDT). However there is an argument that it is alright to have a DDT when dividends were small amounts, but when there are some people who earn millions and millions of rupees of dividends, should they also be taxed at the DDT rate or should they be taxed at the marginal rate? That’s again an argument.
India is a free country and anyone can put forward any argument and each argument acquires a life of its own and it is repeated and debated and that’s what makes it lively. As the finance minister, I sit back to read these arguments and educate myself.
Q: A majority of the Indian press have raised concerns of the Budget being populist. At the same time there is a lot of pressure to reign in the deficit. So, how do you think these two seemingly conflicting factors can be reconciled? How would you characterise the Budget on February 28?
A: You will know on the 28th, it is not very far away.
Q: Perhaps, you can give us a preview?
A: No, I can't. Even if I can, I won't.
Q: But is this going to be a populist Budget?
A: The beauty of the Indian media is the views expressed in one section are cancelled out by the views expressed by another section. As I said, I sit back, read them and educate myself.
Q: But we cannot ignore that there is going to be an election in 2014. Surely this is going to be a populist Budget?
A: It is 15 months away. I don't think a Budget is drawn up keeping an election in mind. The election is a good 14 months away from the Budget. The Budget will be a responsible one.
Q: Is it now a good time to restart the divestment process since capital markets are picking up?
A: We have restarted it.
Q: Are there any more state-assets?
A: There are six companies lined up for disinvestment before March 31. The dates have been tentatively announced and we intend to stick to the schedule. We will disinvest in these six companies.
Q: How much are you looking to raise?
A: All together a little over USD 5 billion before March. We have already raised about USD 1.7 billion.
Q: Recently IKEA made the headlines as one of the first few single-brand retailers to come to India following the FDI reforms. When will we see a similar announcement in multi-brand retail?
A: The multi-brand retail policy was announced only a few weeks ago. There was uncertainty regarding our capability to stay the course. There was a debate in Parliament which ended in our favour and therefore put to rest all uncertainties. Now, I think investors will begin to examine the policy and tender applications to enter the Indian market. But it will take some time. Now that the uncertainties are behind us, I expect that multi-brand retailers will evince an interest in the Indian market.
Q: You have garnered a lot of respect domestically for some decisive policy action and also overseas as well amongst investors. Will you put yourself forward as a Prime-Ministerial candidate in the next general election in 2014?
A: I am only amused by that question. I know my limitations. I live and conduct myself according to my limitations. I also wish to conserve a few years of my life to do some other things that I want to do. As far as the party is concerned, we are all unanimous in our view that while Sonia Gandhi is a leader of the present generation, Rahul Gandhi will be the leader of the next generation. We appointed him as the vice-president of the party only a couple of days ago.
Q: But if I interpret your comments correctly, is that a 'No'?
A: Of course it is. I am doing a job. I want to complete this job to the satisfaction of my party and the people of India. And I look forward to doing a few other things in life.