Speaking about the Union Budget 2016, presented by Finance Minister Arun Jaitley on Monday, minister of state for finance Jayant Sinha said the thrust on rural economy is because of two consecutive draught years and not because of upcoming state elections.
"The urban economy is doing much better than the rural economy and in fact GDP growth of 7.6 percent is primarily on account of the urban economy. The Budget has tried to take steps to improve the rural economy," he told CNBC-TV18.
Sinha also said the government has not only adhered to the fiscal deficit target, it has also increased public investment in a significant manner.
As far as PSU bank recapitalisation is concerned, there was an expectation that the government will provide atleast Rs 30,000-35,000 crore for the same. But the finance minister has instead provided for just Rs 25,000 crore in the Budget, and said the government is willing to provide much more. Sinha too said rather than the number, the market should look at the commitment made, which in effect says that the government is willing to provide more to PSU banks (more than Rs 25,000 crore).
On the topic of 'bad bank', he said that his government has never said anything about it. "We have in fact always said we will have a stressed asset fund than a bad bank," Sinha clarified.
He also feels the GST Bill and Bankruptcy Bill will be passed in the second half of the Budget Session.
Below is the verbatim transcript of Jayant Sinha’s interview with Shereen Bhan on CNBC-TV18.
Q: Let me start by asking you about the area that the Budget has decided to focus on and which is the rural development area. The rural development allocation is at the tune of Rs 87,765 crore. And this clearly, seems to be an acknowledgement, a] that the government’s intervention so far has not been adequate or appropriate and b] you have got elections coming up across state governments. So, with an eye on that, this has got the attention of the government.
A: I would say that that is in fact a mischaracterisation. What we are really responding to is that fact that we have had two drought years and of course, as a result of that we have had significant rural distress, farmer income has come down and because some 50-60 percent of India’s population is linked to agriculture, that has of course, depressed aggregate demand as well, and so, it is very important for us to ensure that the rural economy flourishes. It really is a big driver for so many other sectors of our economy as well such as tractors, it is for consumer goods, it is for housing, it is for steel and so on.
So, it is very important for us to ensure that the rural economy is doing well. If you actually look at the numbers and you look at the urban economy and urban consumption, those have remained strong, in fact if gross domestic product (GDP) has been 7.6 percent; it is because the urban economy is doing well. So, we need to make sure the rural economy does well also. So, that was one very important priority, we have fully delivered on that.
Second very important priority was public investment. And if you look at the numbers in public investment, those have gone up dramatically. Rural roads, irrigation, highways, railways, you add this up, it is an astonishing number. Just simply in roads and railways, we have gone to Rs 218,000 crore of public investment going in. So, that was the second very important priority.
Third very important priority was obviously prudent fiscal management which we have demonstrated with the 3.5 percent fiscal deficit. But more than that, if you go back and look at what we are doing in this current year as well, in the current year, whatever we said in terms of the numbers that we wanted to achieve as far as actual expenditure is concerned, we have achieved that and in fact we have exceeded that. In past years, by and large, if you said you were going to do a 100, you pretty much did 80 or 90 of expenditure. So, there were big cut backs towards the end of the year which actually hurt aggregate demand, so we have stayed away from that. So, very accurate fiscal management, obviously, the fiscal deficit, quality of fiscal management, quality of expenditure also has gone up. So, that was the third priority.
Fourth priority was to ensure that a number of sectors, financial sector, gas, transport, the deep structural reforms that were required there to put those in place as well.
Q: The one big disappointment let me address that and that is as far as the bank recapitalisation number is concerned. Rs 25,000 crore and I know the Finance Minister has said we will provide more if needed. The expectation was at least Rs 30,000-35,000 crore. Why have you decided to hold back and how much more can we expect?
A: I think in the markets everybody gets fixated on a number. It is really not that important to worry about the number. What is important is the commitment and not the number. The commitment is that we will provide the banks whatever is required. The first tranche, the front loading is Rs 25,000 crore, whatever else is required thereafter we will provide that as well. You have to understand one very important factor that is changing which we have announced; the bank board bureau has been established. Vinod Rai is going to be the chairman of that, very experienced senior official. He has been banking secretary and is going to be supported by a really outstanding group of people. We have also said that there will be a consolidation of the public sector banks.
Q: That has been said in the past as well, not by you but by the previous government. So, can we expect a roadmap as far as this consolidation process is concerned?
A: The roadmap is going to come from bank board bureau and until we know exactly what the roadmap for consolidation is, it is impossible to put a number on how much more money we should put in to the banks. The commitment is there and the commitment is rock solid and that is really what people should recognise. We also have a commitment to consolidation, we have shown that with IDBI where we have already begun the process of the transformation. We have said that we will drop below 51 percent as and when things evolve.
Let me remind you that we are going through three very important stages of that. This is what we had said in Indradhanush and before people are too disappointed and dejected and start getting in their usual irrational approach towards this, we have followed a deliberate measured approach. First we said we are going to change governance and management, we did that. Second thing we said was, we would attack the NPAs, we are doing that. This is all good news that we are dealing with the NPAs in the way we are.
The third part we said was, going to be consolidation, that is what is starting now.
Q: There is confusion, bad bank - is it on the table, not on the table, the Chief Economic Advisor (CEA) in the economic survey says this is an option on the table. You told parliament not on the table.
A: You should not worry. We have never said we will do a bad bank. I don't know why people constantly keep talking about it.
Q: It is in the economic survey.
A: The economic survey is a set of perspectives and opinions that come from CEA. That doesn't mean that is government policy. Government policy is very clear, we have a consolidation process, we have an asset quality review that is going on. At the same time we have said that we have created National Investment and Infrastructure Fund (NIIF) with stressed assets capability to be able to look, add some of these stressed assets and take them over. A number of those stressed assets are in fact being analysed right now. We have never spoken about a bad bank. We have always said that we will have stressed assets fund. We have talked to global experts, we have done a lot of thorough evaluation of this and everybody's opinion is we are far better off with a The Troubled Asset Relief Program (TARP) like facility, a stressed assets fund rather than a bad bank.
Q: One of the other suggestions made in the economic survey when it comes to recapitalisation of banks, it is for the government to leverage its equity in the RBI. Is this an option on the table; is that something that you would look at?
A: There are many alternatives that are being considered, that is certainly one of the alternatives that we are considering right now. However, as I am saying you have to understand we have 27 public sector banks. Can you imagine how different the world is going to be once the consolidation process start?
Q: From 27 what would be the right number?
A: That is where we have an eminent bank board bureau that is in place. They understand the competitive landscape, they understand the forces it work, we will see what their advice is, but you have to look around the world to see what strong stable financial sector looks like and it narrows down to handful of really globally competitive banks.
Q: The Finance Minister in his previous Budget speech last year had articulated a roadmap to bring down the corporate tax rate to 25 percent. This year on we have seen no cut with the exception for companies with a turnover of Rs 5 crore and that too from FY18. So, that roadmap stands altered, does it not?
A: It doesn't because the exemptions have clearly been laid out. We have said exactly how the exemptions are going to be applied, that is in the appendix. What we have also said is that if you are setting up a new manufacturing unit you are going to get 25 percent right off the bat. So, all that is in place right now.
You have to understand fiscal space is limited. You can't have it both ways. You can't have the fiscal deficit and lots of relief on the corporate tax side. So, we have had to balance that. It is still our stated position; we have said all along that there is going to be a roadmap on the corporate tax side. We are going to take it in stages, this is the first step we have taken and as time goes on we will obviously take further additional steps.
Q: So, it is basically on account of fiscal constraints because I understand that the outgo would have meant about Rs 15,000 crore if you had announced a 1 percent corporate tax rate?
A: Those are very substantial numbers as far as corporate taxes are concerned. So, we have to be prudent as to how we put it in. Obviously as we have said before we have laid out the roadmap by which exemptions are going to be grandfathered and so on, we have done that. We have opened the door through the 25 percent for new manufacturing units and let us see how all of that proceeds.
Q: We think the imposition of a new cess and this is the Krishi Kalyan Cess of 0.5 percent across all services. So, you haven't hiked the service tax rate which people took positively because the expectation was it would go to 16 percent but you have brought in this cess on all services. The government's attempt was to cleanup all of this and you keep adding on one cess after another?
A: We have cleaned up a tremendous amount; there is no question about that. With respect to this particular cess, you have to understand that GST rates are certainly going to be higher than the service tax rate is right now.
We have already said GST has been spoken about endlessly. Everybody knows exactly where GST is at. You have remember that that this was a long Budget speech.
Q: No timeline, not even intent?
A: Intent is to pass it as soon as possible for that we are of course dependent on what happens in the Rajya Sabha. We have said, Finance Minister has said our expectation is that we will be able to in fact pass it during the second half of the Budget session when that is convened. So, obviously as far as GST is concerned we are very hopeful that we will be able to pass it then and that has been a commitment and that has been a long standing commitment of ours and still is in place.
Q: Bankruptcy code are you going to go through with pushing it as a Money Bill?
A: No absolutely not. We have clearly said that, that is not how we are doing it. We have established a joint select committee of the Lok Sabha and the Rajya Sabha. What we have clearly said as far as the Bankruptcy code is concerned that again along with GST we want to pass it in the second half of the Budget session.
Q: I also want to ask you about Voluntary Disclosure of Income Scheme (VDIS) scheme that the government has announced and this seems to be a departure from the government stated position on this matter, because if I remember correctly – and again, we have had barely any time to go through the fine print at this point in time – the government had told the Supreme Court that it would not resort to a tax amnesty scheme. Is this again an acknowledgement that the previous measures that you took to try and get black money back into the country have failed and hence this one time amnesty scheme.
A: Let me correct you facts on this. This is not a voluntary disclosure scheme. We have said very clearly, this is an income disclosure scheme. It is not an amnesty. It is in fact, a sort of opportunity for people who have undisclosed income to pay 45 percent tax plus surcharges.
Q: That is lower than what the bill recommended – 60 odd percent.
A: That was for the foreign money which is obviously, something that has been even more punitive. Here we have said for domestic black money. You have an opportunity by paying 45 percent tax, plus surcharges to be able to convert your hidden income, undisclosed income into legitimate income and so you have an opportunity from June 1 to September 30 to do that. Of course, we are working, as far as black money is concerned, very vigilantly, both on domestic as well as foreign black money and this is our effort with respect to domestic black money, to bring it into the tax net, by paying these penalties and these higher taxes, so it is not an amnesty.
Q: I know you have not accounted for it in the Budget, but what is the broad estimate if one at all?
A: No, there is no estimate. We do not know and we have chosen to be conservative in this regard. But, of course, you have to understand what happens next which means that if you do not disclose during this compliance window, then essentially, our ability to come after you becomes even more stringent and that is effectively what we are going to do. So, like we have said for foreign black money, you have a compliance window; please disclose during this time and thereafter, it becomes very punitive. Similarly, with respect to domestic black money, we are saying please disclose your undisclosed income right now and thereafter, again, we will be very stringent when it comes to pursuing all those that have undisclosed income.
So, we are offering this compliance window because we are very determined, very vigilant when it comes to black money.
Q: Let me also ask you something that the markets have of course been waiting for clarity on. The Finance Minister, in his speech has said the long-term capital gains window has been reduced to two years from three years as far as unlisted securities are concerned. I know there has been a lot of debate on listed securities. So, finally it seems to be that the revenue department’s point of view has not prevailed or is there any nasty surprise lurking somewhere?
A: I think you are really enjoying what short sellers have been doing in the market clearly, because you are really highlighting it.
Q: I do not care one way or another.
A: I think there were all these rumours spooking the market about long-term capital gains coming down, changing from one year to three years. We are crystal clear about it. It is not happening. It is exactly where it was and that is where it is. In fact, what we have done is we have done on unlisted securities we have changed long-term from three years to two years to reduce the disparity that we have between listed and unlisted right now.
Q: Is it because you felt the timing was not appropriate?
A: We have to obviously take into account where the markets are at, where the global environment is at, but we believe that this is a good measure.
Q: Then why the decision to hike the Securities Transaction Tax (STT) on Options?
A: That is because there is a disparity between shares and derivatives right now. And right now, if you look at STT on shares, that is much higher than it has been with derivatives and that is obviously creating an imbalance in the market and we wanted to balance that out.
Q: Let me also ask you as far as your strategic stake sale plan is concerned that the finance minister has said that the Niti Aayog will select the China-Pakistan Economic Corridors (CPEC), that the CPEC will be encouraged to monetise land and other assets and so on and so forth. Rs 56,000 crore is what is budgeted between disinvestment as well as strategic sales under the total disinvestment receipts as far as this particular Budget is concerned for FY17. When do we see movement on this front?
A: We will see movement as soon as we start getting the recommendations from Niti Aayog and the disinvestment.
Q: So, not just loss-making public sector undertakings (PSU)?
A: Strategic disinvestment means transfer of management control. Which ones we do, how we do them, those are areas that the newly named disinvestment department which is now going to be called the Department of Investments And Public Asset Management is going to take under advisement. We are going to work through that. We are determined, we are resolved, we have been absolutely crystal clear about this that we are going to pursue strategic disinvestment. We have shown that through our resolve.
We have shown that through our resolve with IDBI which is very valuable entity. You also have to recognise the very notable announcement that was made which is that we will list the general insurance companies as well. So, we are actually moving forward and being very resolute when it comes to both disinvestment and strategic disinvestment.
Q: And not just loss-making companies?
A: Not just loss-making companies. The general insurance companies are not just loss-making companies.
Q: No, that is a listing. I am talking about strategic sale. Let me ask you as far as the retrospective tax window opportunity that you have opened up to try and address issues like Vodafone, Cairn, etc. Once again, fine print we are yet to go through, but broadly it seems to be that companies like Vodafone. Cairn Energy can come to the government, pay the principle amount, you waive the interest and penalty and the settlement can be done.
A: Yes, this is a very important announcement. We had already said that as far as the retrospective taxes are concerned, we as a government were never going to do anything prospectively, not at all. There were a set of cases that were languishing and were sub judice and we needed a way to resolve them. Our expectation was, as the Honourable Finance Minister said that in this time period, we would have found a way to resolve them. Unfortunately, they have not yet been resolved through the arbitration and judicial process.
So, what we have done now is open the door to conciliation and closure of these pending cases. What we have said in effect is that for all these retrospective cases, if indeed there is a settlement around the payment of principal, we are willing to accept that. So, that really opens the door for closure of these retrospective cases.
Q: But they will have to withdraw any possibility of going through the Bilateral Investment Promotion and Protection Agreements (BIPA).
A: It means complete settlement which means that they have to withdraw all of their actions that they are taking, all the legal actions that they have undertaken in all the different judicial and arbitration procedures.
Q: And if this were not to be availed of, then the arbitration proceedings continue as is.
A: Would obviously continue. So, we have now opened that pathway for closure and we very much hope, and we have been in fact, negotiating in good faith, with all of the people that have these retrospective cases to close them. We want to be very clear that really this is something that we would like to get settled, we are negotiating in good faith, here is an offer on the table to be able to close this out.
Q: I also want to ask you for clarity on the medium-term fiscal review that the finance minister has spoken of and reviewing the Fiscal Responsibility and Budget Management (FRBM) Act, he says a committee will be set up. And I understand that this was the recommendation made by the panel of secretaries to the Prime Minister in the run up to the Budget as well, it should not fix the government to an absolute number. The Expenditure Commission Chairman, Bimal Jalan has also said that it should be a range that the government should work with, so it gives you a flexibility basis your revenue collections, expenditure commitments, so on and so forth. When can we expect all of this to be crystallised?
A: We got a lot of opinions on how to think about FRBM going forward and some of the issues associated with FRBM which has just one number, essentially the 3 percent number, because there are times when you have to take account of cyclical action. There are times when you have to really step up spending to deal with global crises like happened in 2008-2009. And so, the notion was that we should really examine comprehensively, what are the best practices around the world, what best suites India’s requirements. And then establish a more dynamic and more flexible approach going forward.
So, we will constitute a committee of imminent experts in this area and then let us see what their recommendations are. But, it is clear; that we need a new approach because the FRBM was very important which has imposed sorely needed fiscal discipline in India, has in fact been breached year after year. So, it is clearly not working well.
We have of course committed to fiscal consolidation and being prudent managers and we have demonstrated that, but we do need an approach which everybody can agree on and which will enable us to create appropriate expectations.
Q: But, what happens to the 3 percent number then?
A: Let us wait for this committee to see what they have to say about it.
Q: So, the 3 percent number is not necessarily sacrosanct?
A: I think we will have to consider and see exactly what the committee says and let us see, it may not be a 3 percent number, it may be a range. We will have to see what the alternatives are that people suggest on.
Q: So, given the fact that at least for this year, as well as FY17, you are sticking to your fiscal consolidation roadmap and your fiscal deficit target. Do you believe that it is now the turn of the RBI to deliver on a rate cut promise?
A: If you really look at where the space is, where the policy space is, you look at the fiscal space on the one hand and you look at the monetary policy space on the other hand, it is very clear that there is a lot more space on the monetary side than there is on the fiscal side. Remember when you asked me this question last time, you said the ball is in our court, I said, remember, I am a good tennis player and I have a pretty wicked forehand, I put the ball somewhere pretty interesting right now.
Q: So, when you say that there is a lot more monetary policy space, what kind of a number would you expect?
A: It is very clear that we are living in a world right now of very weak aggregate global demand for sure, living in a world where policy rates have become negative as well. So, if you look around the world, you even look at the inflationary pressures in India right now, of course, there is some on the food side, but if you really look at inflationary pressures right now in India, they are very subdued; certainly subdued around the world. So, if you have bullets to fire, those bullets are more on the monetary side than they are on the fiscal side.
Q: But do you feel confident of being able to deliver on the fiscal math that you have put together, given the divergence that we are seeing as far as nominal GDP is concerned? I mean you were budgeting 11 odd percent. It is nowhere close to that.
A: We are very confident, we have run the numbers, we have done our scenario analysis, we have a number of cushions that we can fall back on. For example, we talked about the income disclose scheme. We have not assumed any numbers for that. We have the litigation part, the dispute resolution part which is a real game changer in this Budget. We have not assumed any numbers there. We have got a way in which we can reduce penalties and settle cases there. We have not assumed any numbers there as well.
Let me remind you of the numbers. We have 3 lakh disputes that are pending right now which amount to Rs 5.5 lakh crore of tax revenues that are in dispute right now. So, let us see how all of this plays out. We have a lot of cushion when it comes to the fiscal side. So, overall the math works and the numbers hold up. The most important aspect of it is our credibility which we have demonstrated through two years of manoeuvring the economy through some very difficult fiscal waters.
Q: The Finance Minister when he was talking about the pillars to try and revive growth he said that we must create a firewall so that the external situation doesn't impact us as much the domestic situation is given a further fillip and a boost. Do you believe from the back of the measures announced today whether it is the PMGSY, the higher allocation as far as the irrigation schemes are concerned. Rural rectification and so on and so forth. Enough has been done to revive growth as far as rural economy is concerned and do you believe that the 7 to 7.75 range that the economic survey has held out as far as growth is concerned, do you believe that this then puts you in a comfortable position to be able to achieve that number given the fact that you are clearly betting on domestic buoyancy?
A: You said a lot of different things. Let us not go round and round in circles. Let us try and focus on what we need to focus on which is that there are four or five areas of the economy that you need to make sure get the support that they need. That is the rural economy, public investment, structural reform in certain areas, obviously the recapitalisation of banks.
Honourable Finance Minister said that very clearly in his speech, that is what we are focussed on, on the one hand. On the other hand is the whole fiscal management side. The fiscal management side we have been prudent with our numbers. We have held back some of these things that can come forward and will be there in reserve. So, that combination of being able to do what we need to do as far as investment and rural consumption is concerned plus conservatism and prudent management on the fiscal side and the tax side that combination gives us a lot of flexibility, a lot of cushion and in the final analysis the ability to be able to follow through on our fiscal consolidation.
Q: Do you believe the bankruptcy code will go through in this session, has there been conversation with opposition on that front before the recess, is it likely that we will see it go through?
A: We are very hopeful that we will be able to pass the bankruptcy code as well as GST in the second half of the Budget session.
Q: The GST bill included?
A: Yes, indeed.