Finance Minister Nirmala Sitharaman charted out the pitfalls that had to be avoided and the challenges presented by a series of unprecedented events while drawing up Union Budget 2023, in an exclusive interview with Network18 Group Editor Rahul Joshi. She said that government has tried providing a thrust to a more ecologically friendly economy given its net-zero commitment, explained the move to tweak the personal income tax slabs, and laid out the reasons why India is still one of the best destination investments. Edited excerpts:
This is your fifth Budget, you are navigating epochal events in the last couple of years. One was the COVID-19 pandemic and the other was the war in Ukraine. What I would like to understand from you is, what was going on in the mind of Nirmala Sitharaman, and how she was dealing with policymaking in these last five historic years?
Starting with a very difficult question, difficult not for any other reason but to capture the experiences, and also to look back at it when you are probably slightly out of it, is difficult to describe in a short answer.
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You make a very important point. I think you never gave up on reforms in the last so many years, come what may, the pandemic or war in Ukraine. I remember many experts and economists at that time said the government was not doing enough for stimulus in the COVID-19 period, comparing the response to that in Western economies. In hindsight, do you think that it was good to ignore that advice? And, you know, be tight-fisted?
Yes, that is why in answering earlier your question, we had to do our homework for every such input which came in at that time. We could have always said, no, this is what appeals to us, and we would have gone ahead. But we had to consider every such advice which came in and also go through the depths of what it would mean, how will it help, how will it be executed, whether it can really bear results, and so on, because whether we choose one way or another, we should know why we have not chosen a particular way, and be able to justify it. Today, I have the advantage of looking back at it and say, good that I didn't take it because the results would have been very different. But the fact remains that we went through every one of the suggestions with equal open-mindedness and rigour.
If executed well, if the states and the Centre work together, I expect tourism to really see a sea change with a flow of people coming in both from other states and also from abroad. It should actually be a good way of keeping the economy active. I also see the momentum that the PM Vikas Scheme is going to come up with. Because what it does, at least from the way in which I've done this work on understanding that scheme, and to see how best it can be tailored, it touches that segment that is self-employed, which has skills, which may be traditional skills, but which are very productively used. And that itself has a huge niche market of its own.
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By launching the PM Vikas Scheme, we will be able to touch upon a large section, not confined to any particular few castes… We are including everybody who produces things. That's a huge layer, which doesn't get covered under A scheme or B scheme or C scheme.
Now we are actually giving that material difference of receiving better attention, better raw materials, better marketing, and better professionalised way of aggregation with better credit from banks and so on. I think that layer which has remained unseen, untouched till now, but very recognised because of the quality of products that they produce will now make a big difference to us.
And the final but most important point is the way we are going to shake up and also give life to self-help women's groups (SHG) in the rural parts of the country. Some states have done extraordinary well on SHGs in the last few decades. Some 81 lakh of these groups exist and it is they who we are now trying to aggregate, bring them together like clusters, see what they want to do in terms of production or services. For instance, I just bring in a very private sector example, Lijjat Papad, which after all, was a women's SHG. Look at the kind of product, the quality, the branding, there's never a compromise on it. And people seek it even though the pricing is slightly higher than the general 'papad'. Thus, depending on the skill sets, the raw material available, we want to make sure that SHGs benefit from government policy, and also through digital marketing, and are run professionally.
Your budget was very well received by the markets. In fact, while you were speaking, the markets were really going up. But the rout in the Adani stocks somewhat spoiled the party. With a general nervousness in the market, how does your government see this?
I look at the budget for having covered all the sections of the society. And it was the detailing which has consumed a lot of time in preparation of this budget. Therefore, if it's being received very well, I'm glad. But of course, that motivates me to be able to now take it upon myself to better implement it down to the last person. So I would think about the immediate impact of the budget and subsequent to whatever reason it traded back before closing, I think in the next few days the budget's impact will still continue to hold the markets high.
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The Opposition is saying that banking and insurance companies have large exposure to Adani stocks and investors and the broader market is looking to you for some direction on this issue. Is our banking and insurance system resilient to take this shock?
Coming from the horse's mouth has greater credibility. Both the State Bank of India (SBI) and the Life Insurance Corporation of India (LIC) have issued detailed statements. And I know the chairperson and the CMD have come out and explained how they are not overexposed and said that we are sitting over profits for the exposure that we have, which is well within the limit. That's what I understand. They have very clearly said that their exposure is very well within the permitted limits and that even now, with the valuation falling, they are still sitting over profit.
But in general, we meet both with the Reserve Bank of India (RBI) and financial stability boards once in six months. I can only very clearly say that both the RBI and we know that the Indian banking system, having gone through the twin balance sheet problem, is today at a comfortable level. With their non-performing assets (NPAs) coming down to absolutely low levels, recovery is happening and their position is very sound, which gets reflected when they go to raise money in the market. The entire macroeconomic analysis also highlights the fact how comfortably Indian banks are placed.
India remains, as before, an (economy with an) absolutely well-governed stable government, and also a very well-regulated financial market. As a result, I think the investor confidence, which existed before, shall continue even now. Our regulators are normally very stringent about certain governance practices… One instance however, much talked about globally as it may be, I would think, is not going to be indicative of how well Indian financial markets are governed. So many lessons have been learned over the decades. And, therefore, I think our regulators have kept a market in a prim and proper condition.
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Is the current recovery due to pent-up demand, or do you think that this will be sustained?
I think it will be sustained, because the pent-up demand argument nearly four-five quarters ago was right when we were recovering post the Omicron wave. People thought the 2022 festival season was driven by revenge shopping, pent-up demand and so on, but such pent-up demand won't stretch itself for more than one season. The 2022 festival season was in the normal course of things. So I think it has now reached a level where it will sustain itself.
Rural demand is still tepid, looking at the commentary coming from FMCG companies in India. Also, if we look at the work under the MNREGA scheme, and the FMCG results, can aggregate demand be more robust?
Demand doesn't remain stable. It does come down sometimes and does go up some other times. In fact, that that time during the pandemic, even during the lockdown, most of us felt rural demand was very high. And what could explain it was the farm outputs were very good and, as a result, they were having quite a bit of money in their hand. That happens soon after the harvest. But in terms of the people who are in farm equipment, manufacturing areas, they are quite comfortable with what is going on in the rural market. It's not as if demand has affected them. Secondly, the goods and services tax (GST) revenues going up is not purely on rural, it may be urban and rural, but it means that it cannot be maintained at a sustained level if one of these two segments fall drastically.
The RBI governor says that the worst of inflation is behind us. Can the RBI then take a more relaxed view of tightening and support growth?
Well, I realise that if I do comment, it will look as if I'm guiding the RBI. However, yes, the way in which inflation has come down, both by RBI action and by the government's action, I expect since the fall in the inflation doesn't seem to be just a momentary or a one-month affair, it should sustain itself in the process of coming down, and therefore there shouldn't be that much pressure on the central bank to keep the pace of increasing the rates. But the monetary policy committee (MPC) will take a call.
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Any concern on the twin deficit problems?
It's not as severe as before. Yes, when exports come down, you're going to have the current account deficit. But it's also now suddenly going up as it was a couple of months ago. Secondly, imports are going up slightly sometimes, but it's also coming down. If these two factors are primarily the ones which we have to concern ourselves with, I say the fluctuations should not worry us. But if every month there is a steady decline, and there doesn't seem to be a sign of increase or uptake predicted in the next few months, then I think I should worry, but monthly fluctuations need not be a serious worry.
Next year, the Centre and states will spend Rs 13.7 lakh crore in capital expenditure. By any account, it's a phenomenal number. Capacity utilisation in the manufacturing sector is at about 72 percent. When do you think that the private sector will enter this virtuous cycle of capital spending?
They are in it already. India's industry, the old India industry as well as the new, which is the IT-related industry, are transitioning with energy-related matters. So the investment that they make is not to create one more unit of what they already have, but the conscious decision that they have to take of not just expanding existing capacity, but also looking at bringing high technology, Web3, robotics, 3D printing and so on. That, together with moving towards more renewable energy, will help in making a green product of what they're making. For instance, the steel industry is facing huge barriers in Europe. Now, their business of having to invest and expand would be not to just produce more steel, but produce green steel. So the investment there has three new dimensions that have never been a consideration earlier: invest and produce green products also with the efficiencies of technology. When all this comes into play, your decision-making takes time and more resources. So I would want to give that advantage to India's private sector. That yes, the process is going to be somewhat more complicated in terms of taking the decision. But I think the atmosphere is conducive for that on all grounds, technology, green and so on.
I'm kind of curious that while you've given a boost to capital expenditure and increased outlay to PM Awas Yojana, you've also cut the MNREGA budget by almost 33 percent or 30,000 crore. Why have you done that?
Actually, the answer lies in your own question. PM Awas Yojana is also to be done by workers in the rural areas who normally would have gone for the Mahatma Gandhi Rural Employment Guarantee Scheme. That's one answer, because even this has got to be done by people in the rural areas who are looking for jobs, just as Jal Jeevan Mission also goes through rural works. They have these opportunities as well, which are coming in 6 percent increase, Rs 79,000 crore for PM Awas. Jal Jeevan is also getting a huge allocation.
Second, MNREGA is a demand-driven scheme, the more people come saying we want the job, we give them work. So what is stated at the budget estimate tends to keep adding to its resources or demands, based on what comes from states. If you see the last three to four years, inclusive of the COVID-19 year, naturally, the budget estimate (BE) and the revised estimate (RE) numbers are so different. In theory RE is much higher. But if you now go back to the last two years, where the actual numbers are available, you will see the actual numbers are a lot more than the BE and in some cases exactly as much as they are, or even better than the RE. So you end up spending a lot more. Now, I'm a bit worried that this is becoming a stale question. Just see the pattern for the last three years, it starts with a number of the BE, keeps going on because it's demand-driven and when the supplementary demand stage comes, it's actually a lot more.
What is the realistic and desirable growth rate for India, if it were to become the third largest economy in the world by the end of this decade?
Desirable is one thing. But that desirable number will have to be tempered down by the global realities. I don't think any one economy is so immune, that the global volatility didn't affect them. So every economy is affected, particularly for a country like India, which, for at least two critical items (fuel and fertilisers) entirely depends on imports. So when you're looking at importing that many big ticket items, your uncertainties are more pronounced. But even provisioning for that and building a budget, we have definitely ensured that we will not be as affected by such uncertainties as would any other country be. And, therefore, the numbers that we've given for the growth are very realistic.
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One thing that struck me this time when I was listening to your budget speech was the absence of any mention of disinvestment or asset monetisation. Why has that been taking a backseat in the last year or so?
It is still there in the budget documents. It still may not have been a part of my speech, but it is in the appendix to the speech. It's also in the rest of the documents, where we give the actual numbers, the activities which are going on and so on. See, the Cabinet takes a call that certain companies will have to be privatised and that motion has to have the approval of the authority concerned. So the process goes on. But of course, we will have to also see when's the best time for it to be done, given the fact that we've already done the homework. Post that is, when we literally watch out for the market and then put it out. So both the factors, preparation and best time in the market, influence when you put it out. The process is on for many of these items.
Absolutely. Particularly on those where the cabinet has already given the go-ahead.
Last year you'd spoken about the privatisation of two PSU banks, what happened to that? Have you identified the banks, is the process on?
The process is on, the amendments will have to happen in the (respective) act and then look at the market before it goes through.
The export sector is suffering because of a slowdown in major markets. What are the options to mitigate the impact of weak international economies for us today?
It is a two-sided problem. One, you have to make up for those handicaps that Indian exporters face, whether it is in logistics, whether it is the cost of electricity or whether it is any other inherent handicap that they may have in terms of labour or in terms of where they are located and so on. So, for these inefficiencies, it is necessary to give them some kind of redressal, in the sense, give them some incentive.
But it's also the usual way in which you would say, if a market is difficult, look for newer markets, or if a market is difficult, see what you want to do about making yourself attractive for that market. You will do roadshows or you spend money in branding yourself, or you appoint such agents who will tell us about the tastes and preferences in that market, and so on. But today, the typical problem that you face, not just Indian exporters but many face, is the lack of demand in those markets because of recession, whether it's your textile, your diamonds, your gems and jewellery, your tea, your basmati rice, etc. So I'm taking those which are symbolic of India, there are other components such as auto components, electronic parts, which you manufacture today. So when the recession has hit these economies, the problem gets even more compounded. And we will have to work together with the exporters to see how best we can help.
India's trade deficit with China hit $100 billion in 2020, $200 billion in 2022. Imports keep rising, exports to China are falling. Is this situation acceptable to us? How do we really reverse this trend?
No country would want its exports to languish and imports to balloon with any trading partner. But we should be conscious not to have to consume things which come overly from only one destination. But that doesn't mean I'm imposing any view, we should also be conscious of buying it from elsewhere if it is necessary at all. And for India's exports, it has to also look at ways in which markets can be expanded in that territory or in any other geographical jurisdiction. So it is always a twin game. It's like a pair of scissors. You have to look at both sides.
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What do you make of this growing clamour, especially in some Opposition-ruled states like Chhattisgarh, Madhya Pradesh and Rajasthan, to bring back the old pension scheme (OPS)? In fact, the deputy chief minister of Maharashtra, Devendra Fadnavis, has also spoken about this.
When I talk about the government's view, I don't want to speak as though it is this government view or that government's view. Who implemented it for the first time? After the decisions were taken at different layers of officialdom, the political dispensations which brought this in were not just NDA (National Democratic Alliance). UPA (United Progressive Alliance) was actively those who brought it forward. The entire question of introduction of OPS, new pension scheme, was during the Congress' period. They didn't at that time talk about a rollback, they didn't talk about bringing the old system back. So now, if without adequately looking into what it means, are we paying the current generation of pensioners by loading it onto the future generation? Will we look at what is it that we are leaving for generations to come? Yes, you will have to have an economy running, you will borrow to a certain extent. But unless we have a complete understanding of this, the fiscal implication, the fiscal health of the state, not just today but for the next few decades, to rush to a conclusion may not be good. And I was glad to hear in one of the book release programmes that I attended, former Planning Commission deputy Shri Montek Singh Ahluwalia talks about it. When asked, publicly, he did respond. So it's not as if now we are talking on political lines, we have to talk on the Indian economy, its strength, not just the Indian economy as the government of India, but every state's economy, and then take a call on it.
Let's move on to the personal tax front. You obviously want people to move to the new tax regime. By when will you then look at phasing out 80C and 80D deductions? Because you know, that's really the core of investments, healthcare. When will this happen? What is your time frame to move to the new tax regime entirely?
I have not given myself a time frame, I'm more looking at it to make sure every Indian citizen makes his/her own choice. It's one thing for me to say I'm bringing in a better system, which is going to be less complicated, in fact, least complicated, and make it attractive for compliance, but it's another thing to have a system which is going on where unfortunately, the impression is I (the citizen) have so many exemptions given, which incentivises me to save for insurance cover, for medical cover, for even saving for better interest earning that I can have, and so on. I don't want people there to think that I've denied them that. But it's not just one government or the other. In general, the philosophy that governed it was you'll have all those exemptions and you (the citizen) will feel tempted to give yourself insurance cover or savings or whatever, but your tax rates were so high. So it's nice to give you some incentives, but good enough for me to have a big return in terms of the tax that I collect. This was introduced two years ago and the prime minister was very clear that taxpayers should know what they are paying and exactly feel comforted that they're not paying much. So we've brought that in and steadily we're making it attractive, but not forcing anybody to get out of the exemption regime.
I am more talking about the layers that are covered by these beneficial tax rates. I would think in that layer, at least 50 percent will.
You've been extremely successful in widening the tax base. As the base widens, the tax slabs tend to go down. Could you consider, in the long run, bringing the top tax slab to 25 percent, in line with your top corporate tax rate?
Eventually, the take on tax rates is to be absolutely low. Citizens cannot be burdened with taxation but that is when I have widened my base sufficiently. It can't be that few people pay and they pay huge amounts, and I have to run the system. It should definitely be wider the base, lower the tax and, therefore, achieve both the objectives of collecting your tax from those who can pay it, but collect enough so that you're able to run your schemes.
I'll give you the logic. I can always incentivise you to go for insurance, go for savings and come up with a fantastically high rate and say, alright, I've given you discounts, but I need my money. Instead, I prefer a completely acceptable and lower tax rate. And for people to feel that, alright, I'm not being burdened, there is no real reason for me to avoid or evade the tax.
And you have the choice of deciding your own saving instrument, right?
I belong to that school of thought which says, if the taxpayer is left with more money in his hands, I would think that he is the best judge to decide where he has to put his money. Why do we want to underestimate our citizens?
Some experts feel that it was a rather bold move for you to reduce the rich tax from 42.7 percent to 39 percent in what is an election year. But is it that you've given some and taken away from the other hand as well? And it's a zero-sum game in a sense?
Where have I taken away?
In real estate. Earlier you could move money to real estate, now the cap is Rs 10 crore...
That's not taking away, that's like saying you have a house beyond Rs 10 crore, why do you want to also expect favours for a second or the third or the fourth. And there have been instances, I might say, without revealing any names, of people who bought a house and sold a house, made immense profits out of it, but will still enjoy the Rs 10 crore house and I should still get my benefits from the government. I've not taken away anything.
That's a bold move in election year because people don't expect you to do it.
No, but if you're referring to the surcharge which I brought down, and which, therefore, is going to give benefit to some of the upper middle class and high net-worth individuals (HNIs), it's because the Indian tax system should be seen as not being so harsh. With a 30 percent surcharge you were reaching a total tax of 42.7 percent. That doesn't make a system look fair. Therefore, we brought it down.
MNCs are looking at a China plus one strategy. We've seen that the manufacturing and exports of mobile phones from India have really gone up. Which are the other sectors in manufacturing that could benefit out of China+1?
The production-linked incentive schemes (PLI) that we've given out with 13 sectors is definitely China+1 list, which are sunrise sectors, important sectors for India to have its own strength.
There is a funding winter in the start-up ecosystem. In fact, some start-ups that were doing really well have come off their valuation highs. What is the government planning to do about this, keeping in mind that it has done a lot for the start-up community in the last few years? What next?
I think the funding is also waiting to see more innovative start-ups in the next stage. It's not as if it's a funding winter or if it's a scarcity of funds. It’s more about funds looking at the opportunities available for them.
You will be meeting the G20 finance ministers and central bank governors later this month in Bengaluru. What is your message to them? And what are the main items that you will highlight?
The agenda, of course, is by now fairly well determined. We will be talking about the debt situation globally because many countries, which were even middle-income countries, have suddenly got into debt traps. Those traps are vicious traps, they're not able to come out of it.
During the pandemic, there was a plan that had come—debt servicing. Many of these countries were borrowing for a certain period because of the pandemic and there was a call for extending it, and it got extended. However, we are also making sure that enough money is available with these institutions, these multilateral institutions, so that they are able to better respond to situations and have better leverage over the funds. These are the matters of discussion at the meeting, which include debt servicing, debt financing, multilateral finance institutions and their reforms about which the honourable PM has spoken several times—IMF (International Monetary Fund) reform, WTO (World Trade Organisation) reform, World Bank reform and so on. We'll also look at a global SOP (standard operating procedure) to be agreed upon for regulating cryptocurrency assets while providing central bankers the authority for issuing cryptocurrency, and recognising the rest of the assets which are being created that are using very useful financial technologies. These will be discussed because regulation cannot be done by any one country. It has to be a collective action because technology doesn't brook any borders.
You have to answer this specific question. You have presented five budgets so far, which has been the most memorable one?
Very difficult to say. Each one had its own challenge, but well, each one has its own charm.
Now, one last question. How does Nirmala Sitharaman unwind?
Well, I listen to a lot of music.
What music do you listen to?
Classical Indian music, both Hindustani and Carnatic. Umm, I sleep well, every day.
We should be in a happy place that the finance minister of the country sleeps well.
Absolutely. Because we have a good prime minister with that kind of a vision and the strength of leadership he brings along which helps the country.
Thank you, Nirmalaji for your time. Thank you for the first interview with a private channel in a streaming service. And more importantly, congratulations on a very well well-delivered budget.
Thank you, thanks for giving me this opportunity.
