With days to go before the Narendra Modi government presents the second Union Budget of its tenure, the economy continues to poised at a delicate juncture: recovering all right but at a frustratingly slow pace.
Amid this backdrop, CNBC-TV18's Shereen Bhan reached out to former Finance Minister P Chidambaram, who was critical of the government's handling of the economy so far, especially the rural sector.
"There is acute distress in rural India. I don't think the government has even woken up this fact," Chidambaram, who said the government should focus on some of the erstwhile UPA government's flagship schemes such as the MGNREGA.
He also spoke about the upcoming Budget, saying it would be a "terrible mistake" for the government if it misses its FY17 fiscal deficit target of 3.5 percent, as is being speculated by some.
"If the government wants to spend more, it should earn more by way of tax revenues etc," he said.
Below is the verbatim transcript of P Chidambaram's interview with Shereen Bhan on CNBC-TV18.Q: Let me start by asking you about the top of mind issue, which is the Budget. There are several issues that the finance minister is grappling with; the big one at this point in time is what you do with the fiscal deficit. 3.9 percent is likely to be met, there doesn't seem to be any issue on that front. 3.5 percent for FY17 is the question. There is a divided house. Some believe that to try and stimulate growth if you need to slip a bit - that's okay about 3.7-3.8 percent. The others and that is the camp lead by Reserve Bank of India (RBI) Governor Rajan believes that 3.5 percent in the faster fiscal consolidation must be met. In your term as finance minister, you set up the Kelkar Committee; you batted for fiscal prudence, fiscal discipline and austerity. Do you believe that at this point in time if 3.5 were to become 3.6 or 3.7, it would be okay?A:
No, it won't be okay. They paused for one year, which was a mistake. I pointed it out last year. If they do not get back to the path next year, that will be a terrible mistake.Q: You believe that at this point in time to try and stimulate growth. I won't use the words 'pump prime the economy' but stimulate growth, if government needs to spend more on things like infrastructure, which was the case the previous year as well but because we haven't seen private capex spending pick up. If it needs to do that - to stimulate growth minus slippage - not allowed.A:
If you want to spend more, raise more tax revenues, raise more non-tax revenues, tap into the savings of other countries. The way to spend more is not through borrowing.Q: So 3.5 percent must be sacrosanct?A:
In fact you should have achieved 3 percent in 2016-17. 3.5 percent is you are putting it off by maybe a year maybe two. Q: Since we are talking about raising revenues, let me also ask you to comment on the speculation at this point in time whether the limitation for long-term capital gains could be changed from one to three years. Do you believe it is a good idea? Should it be done at this point in time or do you believe that the government would make a big mistake by tweaking that at this point?A:
Tax decisions are contextual. Whether you want to impose capital gains tax or not impose capital gains tax, whether you want to impose securities transactions tax (STT) or relax STT. These are contextual.Q: So in this context?A:
I do not know. I don't have the full facts. Unless I have all the options; tax options before me, all the non-tax options before me and the final numbers, I do not think it is possible to take a decision. However, that information is available only to the finance minister and the prime minister. Q: But conceptually do you believe that this is the way to go?A:
Conceptually capital gains must be taxed but for variety of reasons largely contextual, we do not tax capital gains otherwise in most countries of the world the capital gains is taxed. Q: So given the market volatility and investor mood and sentiment, you think that the timing perhaps would not be appropriate even though conceptually it might make sense?A:
I doubt if the government will summon the courage to tax capital gains this year.Q: If you were in Mr Jaitley's position today, what you would do, what to your mind should be the priorities that the government address in this Budget. We were at conversation in November or December last year, where we talked about the priorities that you believe the government should address. You have said in the past, in your columns as well, which are now part of this book that you are releasing, that a lot of what the government has said is rhetoric, its hot air and now it must be back that up by action. In this Budget, what is it that you would like to see the government to achieve?A:
First, I look for the fiscal deficit number and what their plan to do for the next year, what is the target. Second, I will ask have they acknowledged that there is acute distress in rural India. When I say rural India, I mean agricultural and non-agricultural but in rural India where the majority of the people live and the majority of the working class is dependent on the rural economy.
I do not think this government has even woken up to the fact that there is acute distress in rural India. So, I would like to see what they would like to see what they do, how are they pumping money into the rural economy. I am going to look at Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), Pradhan Mantri Gram Sadak Yojana (PMGSY), the integrated action plan in tribal areas, the irrigation projects.Q: So higher allocation on all of these counts?A:
Allocation and where they are going to spend it and then whether they are going to address the issue of minimum support price (MSP). I think they have deceived farmers in this country by giving miniscule increases in MSP. Those are the things I would look for as far as rural India is concerned. Third, I look to what it plans to do to get stranded and stalled projects off the ground. However, what businessmen tell you in private and what businessmen tell you in these events, is very different.Q: What are they telling you in private?A:
They tell me in private that nothing is moving. I asked them, "why you are not investing?" They say, "what about our earlier investments; they are stalled or stranded." I say, "Are you borrowing from banks." They say, "no, we are not going anywhere near banks."
Now, if you do not invest, if you do not borrow and if you are quite happy managing what you have without getting deeper and deeper into problems - that is not animal spirit, in fact for the first time I see the animal spirits have been killed in this country.Q: But aren't the animal spirit also constrained by the broken balance sheets. Private sector is sitting on debt burden across industries, across sectors. Isn't the animal spirit also being constrained on account of their lack of ability to be able to spell? A:
We must understand why it happened. The global financial crisis of 2008 sent the global economy into a tailspin. Most of the world has not recovered; in fact some countries have got deeper into debt and deeper into recession. It is only the US, Germany and one or two other countries which have been able to keep their head above the water.
Export demand is low, domestic demand is low. All firms, if you take them, net sales has dipped 6 percent this year, the manufacturing firms has dipped 11.5 percent. So in such a situation non-performing assets (NPAs) are inevitable, but NPAs have to be classified into wilful defaulters and victims of a downturn.Q: Which is what the banks are starting to do now, Punjab National Bank (PNB) has put out a list of 904 wilful defaulters.A:
I am not sure all of them are wilful defaulters. Many of them or some of them could be victims of the downturn. I believe that most micro, small and medium enterprises (MSMEs) are not wilful defaulters, they are just victims.
In the case of wilful defaulters, you can read the Riot Act. However, in the case of victims, you must hold their hand until the economy turns around.Q: Let me get you on this debate because there is again different points of view on whether the Reserve Bank of India's (RBIs) approach at this point in time is the best way to try and address the crisis that the banking system is faced with. Deepak Parekh believes that you will end up with comatose banks. Yesterday we spoke with the former deputy governor of the RBI who said that there should be no distinction between wilful defaulters and defaulters. A defaulter is a defaulter, where do you stand on this issue?A:
I told you I think you must read the riot act to wilful defaulters where they must do some handholding for victims.Q: How do you address this problem, is the bad bank a way of addressing this problem which is what is being talked about at this point in time? A:
You have to address this sectorally, you will have to look at loans to agriculture, loans to small industries, loans to medium industries, education loans, loans to the weaker sections, loans for infrastructure projects and then work out a time table in which the NPA problem of that sector can be addressed. While I agree with the governor that the NPA problem must be fixed quickly but I think he is taking an impractical approach when he says all NPAs must be fixed by March 31 2017. I think that is quite impractical.Q: So, you do agree then with Deepak Parekh that we will end up with comatose banks?A:
I don't know what we will end up with, we will certainly not end in a happy situation. We need to take a sectoral approach to these NPAs, not put all the NPAs in one basket and say this whole basket must be thrown out.Q: The parliamentary standing committee has also put out its report on how to address the ills of the banking sector and criticism for both the government as well as the RBI on how they have handled NPAs. However NPA is the symptom but how do you actually address the core to prevent this from happening. It is happening now but it has happened in the past as well, it has happened in the time of the UPA. How do you transform public sector banking in this country without giving them autonomy, without empowering them, without political interference which seems to be the big problem?A:
These are words that are thrown about. I have in all the years that I was there I can't recall a single case where political instructions went to a bank chairman to give a loan or to recall a loan. I did not do it in any case nor do I know of anyone having done it in any case. Maybe if something had been done without my knowledge, that is a different matter. However I can't think of any case.Q: So, you don't believe political interference has to do with the crisis that we face year after year in the banking system?A:
Public sector banks have a different mandate to lend. Don't compare them with private sector banks. Public sector banks lend to sections which private sector banks do not lend. So, you can't compare. Public sector banks have had low NPAs in many years. They have had very strong balance sheets, they have made huge profits. Now public sector banks are saddled with large NPAs and the problem has to be fixed. However the problem cannot be fixed by a one size fits all approach.Q: So, beyond looking at the NPA situation sectorally, sector by sector, industry by industry, SME by SME, what else would you like to see the government do to try and address the problem. Recapitalisation of course is just one part of the solution. A:
Even if the NPAs were not there you would have had to recapitalise the banks. If the banks book has to grow, it has to be provided more and more capital every year. We have appointed boards, we have allowed minority shareholders to elect members to the board, directors to the board, we have given longer terms to chairpersons, that is all that a government can do. You can only appoint Indians to the board. However if those who are appointed to the board don't function as a board or do wrong things there is nothing a government can do. You can only ensure that such bad elements are removed and proper boards are appointed.
We can think of some measures, you can have a board of supervision that supervises the board of directors, you can promote younger people as chairpersons so they have a longer tenure and therefore a greater stake in the bank. You can link remuneration to performance, these are things which can be tried but I don't think there is a political consensus if that is what you are driving at. There is no political consensus both among the political class as well as the people of India that public sector banks must become private sector banks. I don't think that consensus is there. You can't move it to this column to that column.Q: We are in the middle of the Budget session. We don't know whether the GST is at all going to be taken up in this session?A:
This question can be answered by the Finance Minister in a matter of seconds.Q: I understand now that the congress party has said that one condition of the three major contentious issue that you had raised, one is non-negotiable which is the cap. On the other you are willing to sort of cede ground?A:
I don't know. I am not in parliament. I am not in the loop. What I do is I express my views mainly through writing and it sometimes happens that the party and my views are entirely congruent. On these three issues the bill is flawed. These flaws have been practically endorsed by the Chief Economic Advisor. The one percent is a retrograde tax, which has to go. The dispute resolution mechanism must be in truly independent dispute resolution mechanism. It can't have the disputants sitting with the mechanism. So, those two issues there is no controversy. They should readily concede that.
On the cap I can argue with anyone why a cap is absolutely necessary. Therefore it is for the government to respond to the question of a cap.Q: Do you believe that in this session perhaps even post recess the likelihood of the GST bill going through is at all something that we should hope for?A:
The advice council prevails in the government, government will see its opportunity and pass the GST bill after accommodating the three objections by suitable amendment.Q: Let me ask you about reforms and the unfinished agenda as far as the reforms are concerned and you write about it in your columns, it was on May 24 that you said that Swachh Bharat and Jan Dhan don't qualify economic reforms, that Make in India is a mere slogan, it is a clever slogan, it is a copyrighter's dream but you don't believe that this government had at all walked on the path of reforms.A:
I wrote a column and I don't know if you read that What is reform and what is not. What I had listed in that column is reform and I had identified 10 or 11 items over a period of 10 years.Q: That is right, of the reforms undertaken by your government?A:
I even mentioned one was undertaken by the NDA government of Mr Vajpayee, but Swachh Bharat is not reform. Jan Dhan is only a technology driven tool.Q: A promise to bring the corporate tax rate down to 25 percent that would qualify as a reform.A:
Making a bold statement that indirect taxes being regressive taxes and tax revenues will come out of direct taxes will be reform. So many of you are batting for reducing corporate taxes. Why are you not batting for reducing excise duty. That is a regressive tax, it falls on the poor and the rich. Those who have the capacity to pay taxes must pay taxes. Piketty was here. Inequalities are expanding. Therefore those are the matters which will qualify as reforms, whether this government has the courage and the numbers to push through (interrupted..)Q: It has the numbers.A:
Well they will say because of the numbers in the Rajya Sabha.Q: Maybe not in Rajya Sabha but it has the numbers in Lok Sabha.A:
I don't think they see or behave as a majority government. In all my years as Finance Minister I didn't have a majority in Lok Sabha, I wish I had.Q: What would you have done if you had majority? Top three things that you would have liked to do which you couldn't do?A:
The first thing we should have done is address growing inequality. We should have introduced some kind of inheritance tax in this country. You can't allow wealth to accumulate in people's hands while 20-30 percent of people are abjectly poor.Q: Would you advice Mr Jaitley to do that?A:
There is no point in my advising. He won't do that. His constituency is the business and trading class. They won't do that. In fact in the last 20 months they have turned their back on rural India. They have turned their back on the poor. They had Rs 75,000 crore cut on social welfare programs, they cut funding to key programs like the integrated action plan in Naxal areas, in the Crime and Criminal Tracking Network & Systems (CCTNS), police modernisation, they are paying a price for all that today. They are paying a price, they have weakened the security apparatus. They have weakened the social welfare program. They are paying a price for that. I am just giving an example. Whether my party would have endorsed it, whether parliament would have passed it, I don't know?Q: I am asking you what you would have liked to do if you had the numbers?A:
I am talking as an individual who is thinking in terms of progressive, reform oriented policy. We can't allow inequality to grow. Thomas Piketty was here for several days, he spoke so eloquently and people must heed such advice. That is one example. There are so many other things that can be done with a majority.Q: Speaking of majority and I remember the last conversation that you and I had. You said that if you had the numbers you would have been able to settle the Vodafone matter and the retrospective tax matter. You again believe that this government doesn't have the courage?A:
I offered to Mr Jaitley please repeal that section, modify to make it prospective and I am sure the congress party will support you.Q: What was his response?A:
Well, he didn't respond, he said he will consider it but he didn't do it. They can do it even now, the finance bill will be introduced in five days. They can make that provision prospective. They should.Q: What do you make then of the move that had been made by the government to try and sort of simplify ease of doing business, try and resolve what they see as legacy, tax related issues through the Shah Panel, through the Easwar committee recommendations and then you suddenly have tax reminder being sent to Vodafone which is already a matter that is under arbitration where the CBDT itself came out last year and said that they were looking at the possibility of conciliation which you had looked at as well. What do you make of this?A:
The left hand does not know what the right hand is doing. I don't know where the signals are coming from, perhaps the PMO and the Finance Minister's office are not on the same page. I don't know.Q: But for conciliation to happen we will need to amend the income tax act?A:
No. That was not the sequence. The sequence was government of India and Vodafone appoint once conciliator each. The conciliator comes up with a mediated solution. We take that solution to parliament and then tell parliament this is one way to resolve the matter, please amend the law. That was what my agenda was because I did not have a majority in the Lok Sabha. But with a majority in the Lok Sabha you simply have to move a bill and amend that section. You don't require conciliation.Q: Which is what you believe that the Finance Minister should do?A:
Yes, I still believe he has an opportunity, four days from today to do it.Q: Let me now ask you about what we are seeing happen in parliament. You have written about that in your book when you talk about the chapter on the Prime Minister where you believe that "Speech is Silver but Silence is Golden" is what you headlined that chapter as. What do you think is the strategy at this point in time. I don't want to get into this business of the Congress versus the BJP. However what we saw in Lok Sabha for instance by way of the debate on the JNU issue, on the Rohith Vemula issue, political parties across the board do they not need to rise above scoring brownie points and address an issue. This is a country of young people. Do you believe that we are squandering an opportunity whether it is the Congress or the BJP to address these constituency?A:
I don't know who said what but if I was speaking in parliament I would unhesitatingly and in a loud and clear terms said that free speech is free, free speech is not sedition. As a student, I am at an age when I have the right to be wrong. University is a place where as a student I don't have to be profound all the time. I can even be ridiculous at some times. University is a free space, dissent, debate, discussion, even wrong slogans, none of that is punishable and certainly not punishable as sedition.Q: It is not that the Congress did not use the sedition route.A:
I don't know of any case where the Congress pulled up free speech in a university and charged those guys with sedition.Q: Let me ask you this question as a former Home Minister, how would you have dealt with this situation?A:
I did go to JNU immediately after the Dantewada massacre. There the left wing or the extreme left wing was celebrating what happened in Dantewada and the NSUI has invited me to address the JNU. I did go to JNU, there were some black flags, there were some slogans but there was a packed hall. I spoke to them for nearly an hour, we took questions and answers and then the whole protest died down in a day or two or the celebration of the Dantewada massacre died down in a day or two. We have to engage them. I told them, I said that I don't care what you speak, what you say. You can say long live naxalwadis, I don't care. However if you incite violence, that is punishable. As long as you are only speaking you are free to speak. I cannot condone incitement to violence.Q: That is the charge that is being made by the government. In fact the parliamentary affairs minister speaking in the Lok Sabha today said that universities and places of education are for academic excellence and they should not be about politics and they certainly should not be about propagating the views of the likes of Afzal Guru.A:
He is completely wrong. Universities are the place to propagate right views and wrong views. Debate will show up which is the right view and which is the wrong view. He is completely wrong.
If he thinks universities should become monasteries he is wrong. It is a university not a monastery.Q: Do you think that the reaction has been disproportionate?A:
The reaction has been abominably disproportionate. They have no business to send the Delhi Police into the university. For the Delhi Commissioner to say, you students come out and prove your innocence is turning the law on its head. Is that the law in this country, each one must come and prove his innocence? An incompetent police force cannot prove the guilt of anyone, you are calling upon people to come and prove their innocence.Q: Do you support Shashi Tharoor's decision to move a private members bill to modify the sedition law?A:
Yes absolutely. The sedition law, the wording of the law must be brought in line with the interpretation placed by the Supreme Court. The law is clear, the law declared by the Supreme Court is a law, not what Section 124(A) says. The literal meaning of 124(A) is not the law. It is the interpretation placed by the Supreme Court on those words it is law under Article 141 of the constitution. If Shashi Tharoor's amendment, I have not seen it brings the literal words, the words of the law in conformity with the meaning of the sedition, I think he is absolutely right.Q: Let me move back to economics and I want to address an issue which you have talked about in one of your columns where you talk about exports or perish. The situation has actually gone from bad to worse on the export front. You say that it is not just about the global turmoil and the lack of global demand but you blame the government squarely for failing on the export front, on what counts?A:
On the count that they are clueless, where is the commerce minister? I was commerce minister when we liberalised trade. It was a difficult time. People did not understand what free trade was. People in fact wanted import restrictions but we said no import and exports shall be free. How did we deal with that? Changed the mindset. We sat with industry by industry. In fact I sat with export house by export house. I sat with large industrial groups and talked to their export divisions, you need to engage them every day to find out what the problems are. Where is the commerce minister, where is the activity? I hear the commerce minister speaks more about politics than about trade matters.Q: What would you do at this point in time to stem the fall?A:
This is the one question to ask people in the opposition.Q: I am asking you because you have been in that position.A:
I need full information. I am not running a proxy government here. I am not running an advisory service here.Q: You have been able to identify a problem and write about it. So, I would imagine that you have thought about the solution as well?A:
Give us the full information which they have. If I have the full information and we have the opportunity to talk to every stakeholder, every player surely we will come up with solutions.Q: Do you think that this is going to be an area that the government should focus on facilitating trade in the light of the fact that we are now seeing so many of these regional sort of trading blocks, we have got the TPP that has just been signed. Also the fact that there seems to be confusion on what the government wants to do with free trade agreements - go ahead with them, pause, review, what is the sense that you get?A:
I don't think they quite understand what free trade is and how global trade moves. They have a constituency which wants to be protectionist they don't know how to deal with that constituency. I don't think they have the clout today which the UPA had and UPAs commerce ministers had. Both Kamal Nath and Anand Sharma enjoyed great clout among their colleagues in world trade negotiations which I don't think the present commerce minister has. So, they are simply unable to grasp the enormity of the problem. 14 successive months we have had negative exports, who is speaking on it, do we hear the Prime Minister speak on it? No. I have not even heard the commerce minister speak on it. Is there a group which is looking the problem and finding small solutions which will add up to a big solution? No. Where is the action on the export front? Show me one action taken by this government to address this unprecedented situation of 14 successive months of negative export growth.Q: Since we are talking about exports and the kind of difficulties we are faced with there in that context then 8 percent or 8 percent plus kind of growth number doesn't look achievable?A:
I don't think we are growing at 8 percent.Q: No, we are not growing but I am saying it doesn't look achievable?A:
Of course. If global demand doesn't pick up, if domestic demand doesn't pick up we will not achieve the growth. In a sense you see the 7.6 itself, I am not questioning the CSO, because I have defended the CSO in the past. But there are many economists who are beginning to question the CSO. There is also Mr Surjit Bhalla who defends the CSO. The deflator is the problem. The nominal GDP growth is about 8.6 percent. We have never had a deflator of one. For the last 40 years we have not had a deflator that is so low. That deflator is giving you a 7.6 percent growth. But on the ground do you get the feeling that the Indian economy is growing at 7.6 percent. Somebody said, they must spring in your steps if you are growing at 7.6 percent. I can't see any businessmen, small or big, who has a spring in his steps when he is talking about the Indian economy.Q: So, in terms of the road ahead now and I would ask you this again to take us through what you would have done. Given the context of the global demand situation and the volatility that we are seeing of whether the Fed will hike or not hike and those are questions that we will have to grapple with. But from a domestic demand point of view, from a domestic consumption point of view, domestic investment point of view, to get the private sector back into the market what would those two or three priorities be?A:
First address the distressed rural India because without rural demand overall demand will not pickup. Rural demand is an important component of overall demand. Overall demand is depressed today because rural demand is very depressed. You talk to consumer product companies they will tell you that. Three tractor companies are reporting decline in sales of between 12 to 23 percent.
Secondly pump more money into the rural economy. I have given you several heads under which you can pump more money into the rural economy. Thirdly, don't get frightened by what economists tell you about Minimum Support Price (MSP). Price is the best signal for any producer. Whether he produces cars or computers or grain. MSP is a good signalling mechanism to keep farmers engaged in farming and to produce more.
What is the harm if a farmer becomes a little richer, what is the harm. Balram Jakhar used to say you imagine industrialists wearing a suit and a boot, jacket and trousers and tie. Why shouldn't a farmer wear a jacket and a tie, why not. We have got this image of a farmer who always must be poor. We have got the image of a businessman or an industrialist who must always be rich. It is a completely wrong image. We must address issues of the rural economy, number one.
Number two, while there is some positive action on the road sector all other infrastructure sectors are languishing; railways, ports, airlines. Where is the action there, where is the growth there, where is the reform there. Where is the new technology there. Only in the road sector I can sense some activity on the ground. All others are languishing. There are several things that can be done if you devote full attention and full time to the problems of the economy. But I can't see anyone in this government devoting full time to that.Q: They are distracted?A:
Well the Finance Minister has to do many things. He has to run the Information and Broadcasting Ministry, he has to address legal issues, he has to write blogs in defence of the government. He has to speak in parliament on a variety of issues. The Prime Minister of course has to do many things as the Prime Minister has to do. We must have three or four people in the government spending the whole of their time to maters concerning the economy.Q: Standing Guard: A Year in Opposition, that is the title of your book. What has it been like for you outside parliament. You are back in the courtroom but what has this year been like for you?A:
I am enjoying myself. I always wanted to have this freedom. Freedom to speak, freedom to write, freedom to pursue my profession, I do it in a very selective way. Freedom to travel, I intend to travel more this year. This is the freedom I enjoy.Q: Not missing parliament?A:
I don't miss parliament in that sense although I believe if I was in parliament I could be useful but there are many others who are very useful in parliament. There are very competent people from my party who are in the Rajya Sabha and Lok Sabha. I only wish they speak up more and become more active.Q: Do you see the signs of some sort of a resurgence of thought, activity regrouping of any kind within the congress party?A:
I can't speak for the party. I am not in the decision making group or even the discussion group in the party. I am a member of the party. So, I can't speak for what organisational changes are being brought about, I can't speak for that.Q: But Rahul Gandhi spending in parliament, addressing current issues. Do you believe that that gives you that perhaps directionally (interrupted..)A:
You guys accused him of doing the disappearing act.Q: It wasn't for no reason.A:
And if he now appears and now he is very visible every day, that can't be a fault. That is a welcome makeover of his public persona and people used to say that he doesn't speak much on issues. Now, he is speaking on every issue. It is a welcome makeover of his public persona.Q: And a welcome makeover for the congress party as well?A:
Clearly if you ask 100 congressmen 98 or 99 or maybe even 100 will say he is our next leader. Whenever Mrs Gandhi decides to step aside - mark my word - I don't think she will need to step down. Whenever she steps aside an overwhelming number of congressmen will elect Mr Rahul Gandhi to take that place and if that happens sooner it is better. Therefore since we have accepted him as the next leader of the congress party we are happy that there is a change in his public persona and how people perceive his public persona.