See 8% growth by 2015; can absorb $50-bn FDI annually: FM

After selling the India story to investors in Hong Kong, Singapore and Europe, finance minister P Chidambaram is in Japan on a roadshow to attract foreign investment. On the first day, he met with the representatives of various trade and industry bodies such as Japan International Cooperation Agency (JICA), Japan Bank for International Cooperation (JBIC), Japan External Trade Organization (JETRO) and the Japanese Prime Minister Shinzo Abe.

In an exclusive interview to CNBC-TV18 in Japan, the finance minister reiterated the potential for India to grow at 8 percent thanks to a strong savings rate, a regulatory framework based on rule-of-law and a government keen on implementing reforms that will address the various concerns regarding infrastructure and taxation. Also Read: Govt ups tariff value of gold by $5 to $512/10 gm “There is room for the RBI to cut reforms with a fall in headline inflation.However consumer price inflation is sticky and the governor has to keep the current account deficit (CAD) in mind before lowering interest rates, “ he said. Highlighting the need to tackle the current account deficit, Chidambaram added that a high current account deficit has forced the government to redouble effort to attract foreign investment. "For example, last year we had nearly USD 46 billion of FDI. I said in a meet yesterday that India can easily absorb USD 50 billion of FDI annually. Nevertheless, the CAD will be high for quite some time. The answer to the reduce CAD is to increase exports." The finance minister also empahsised the increased role allocated to the private sector in contributing to the setting up of India’s infrastructure. Chidambaram revealed that he did not have to much to sell the investment opportunities in India. “The Japanese know India and many Japanese companies’ have been in India for nearly 100 years. All I have do is a bit of handholding and explaining.” Below is an edited transcript of the interview on CNBC-TV18 Q: You have been around the world to tell investors that India is open for business. After spending a day in Japan, what have the investors told and which group of investors do you think are eager to invest in India? A: I have met with the Japan International Cooperation Agency (JICA), Japan Bank for International Cooperation (JBIC), Japan External Trade Organization (JETRO) and Prime Minister Shinzo Abe.  Though there is a larger meeting with investors and industry leaders later in the day, I did meet a few investors and industry leaders yesterday. Pension funds, insurance companies and large asset management companies are some of the investors very keen to invest in India. There is also a great deal of interest among banks and insurance companies to gain a footprint in India. India has very transparent rules and in the financial sector has a lot of room for new participants. And the impression I received is that they are extremely positive about India  a safe investment destination and offering attractive returns as compared to returns in Japan. Q: Japanese companies have been consistently investing in India and senior representatives of the Japanese corporate world say that India is particularly attractive at this time as a counterweight to China. Is this the feedback you received from Japan Inc? A: They haven’t told me in such explicit terms, but I also read and observe what is going on in the rest of the world. Japanese companies and investors would like options other than China for a variety of reasons and India offers a huge market that is governed by rule of law and that makes India as attractive, if not better, than China. Q: Investors love to hear from you because you have been such a strong proponent of reform. At the same time investors have expressed reservations because your government relies on a coalition and are concerned about the legislative process. How do you address these concerns? A: We know how to manage a coalition. In Europe, every country has a coalition government. In Japan, there have been coalition-governments in the past. So, coalition-governments are not novel or unprecedented. We have managed the coalition for over nine years now. In these nine years, we have enacted many important Bills. None of the important reform measures have been reversed. Managing a coalition is something that we are getting used to in India. Investors should look to the government as a whole and not worry about coalition. _PAGEBREAK_ Q: Investors have expressed concerns regarding tax reforms. Are they widespread or confined to particular entities? A: These concerns mostly rest with a few western companies. There is a concern among many of my counterparts across the globe about erosion of the tax base. The Organisation for Economic Cooperation and Development (OECD) has also made a statement to that effect along with UK’s Chancellor Osborne and German finance minister Wolfgang Schäuble. So we are as concerned about the erosion of our tax base. It is a matter of concern that multi-national companies with bases that make profits across different regions of the globe are taxed at various rates by different governments– no one jurisdiction taxes their profits. This is being addressed by making rules and some of these will hurt multinational company which doesn’t want to pay taxes. I don’t think Japanese companies have expressed any concerns about our tax policies. We are learning from other governments about protecting our tax base. You can be in India, do business and make profits. But you have to pay taxes. Q: If I understand the Budget correctly, an amount of USD 1 trillion has been set aside for infrastructure. Japan is very interested in selling the Shinkansen technology worldwide and particularly to a country like India. Is this bullet-train diplomacy, so to speak, going to be one of the cornerstones for the Prime Minister’s visits to Japan to meet Shinzo Abe next month? A: We don’t have USD 1 trillion for infrastructure in the Budget for the current year yet. What we have said is that over the next five years, there would be a requirement of an investment of USD 1 trillion in infrastructure. The Japanese Prime Minister is very keen to sell the bullet-train to India and I told him that it is an attractive proposition especially for the cities with very dense traffic like Mumbai, Ahmedabad, Chennai, Bengaluru, Delhi or Agra. In course of time India must go for high-speed trains. Q: One of the hurdles foreign investors face while investing in India is inadequate infrastructure and the speed at which implementation of infrastructure projects has progressed over the years. Would the bullet-train address these concerns? A: India’s infrastructure needs are more than trains. We need roads, bridges, ports and airports. There is also the need for huge investments in infrastructure-support industries like steel, power and mining. Q: How much of a challenge is it for you to get all those infrastructure projects off the ground at the time when there is a need to exercise a certain degree of fiscal discipline? A: According to our estimates, 47 percent of this USD 1 trillion will come from the private sector. Private sector has the capacity to raise resources within and outside India and many organisations are sitting on piles of cash. So, we are trying to leverage private sector resources for infrastructure. For the rest of the required investment, over a period of five years we will raise or allocate funds in the Budget. _PAGEBREAK_ Q: How critical is it for India to attract more foreign direct investment (FDI) at a time when current account deficit (CAD) is at high levels? A: Both go hand-in-hand. It is because the current account deficit is high that we have to redouble our efforts to attract foreign investment. For example, last year we had nearly USD 46 billion of FDI. I said in a meet yesterday that India can easily absorb USD 50 billion of FDI annually. Add to this there is the venue of foreign institutional investment and to that extent our companies’ can borrow abroad. We also encourage companies to borrow via the external commercial borrowing route. So, the fact that we have a large CAD impels us to create a regime that is friendly and attractive to foreign investment. Q: Japan, faced with a weakening current account, has tried and was successful to some extent in re-engineering the value of the currency. Is this a similar option for India at this time? A: Depreciating the currency is not the first option. The Japanese situation, as I understand, is very different. You have had a trade surplus for many years. It is only last year that you had a very small trade deficit which, with a very power manufacturing sector, you will convert that into a trade surplus. We have a trade deficit. Add to this there are imports that could be avoided such as gold imports due to Indian’s particular attachment to gold. This is followed by imports of defence equipment. So, all this makes the CAD very large. The answer to the reduce CAD is to increase exports. Nevertheless, the CAD will be high for quite some time. By depreciating the rupee, imports will slowdown and may not work in a country dependent on oil imports. We import some coal, capital goods, cooking oil or edible oil, and pulses – these are very essential imports. The fact that the rupee depreciates may not slowdown these imports. Infact, it may lead to the exact opposite, namely, our import bill will go up in rupee terms. So, I am not sure whether depreciating the currency is answer to a reduced CAD. Q: What would be the answer to temper the demand for gold? A: I continue to appeal to our people to give up this craving for gold, but gold is also a safe investment for the poor and acts as hedge against inflation. Q: Will higher tariffs on gold imports help? A: We raised the tariffs in January. But if you raise the tariff to prohibitive levels, it will increase smuggling which could become difficult to check because India’s has a long coastline. _PAGEBREAK_ Q: So you feel that the gold tariffs at this current time are at an optimal level? A: Yes. In fact from 4 percent, I have raised it to 6 percent. Evidence points out that if you raise tariffs too high it will increase smuggling. Q: Is there more that the central bank can do to encourage stronger growth in the country in tandem with fiscal reforms? A: Core inflation - that is inflation minus food and energy prices- has indeed come down. Headline inflation- wholesale price index- that also has come down. But the consumer price inflation is still very sticky at double-digits and that is what adversely affects the people. So, the RBI has to consider the fact that headline inflation has come down though consumer price inflation is sticky and keep the current account deficit (CAD) in mind before lowering interest rates. The government always supports growth and will always argue for lower interest rates. But it is the RBI’s monetary policy advisory committee and the governor who will have to take the ultimate decision. I hope they take the right decision. Q: Do you think there is room for rates to decrease further? A: I think so. There are signs of economic recovery with more enquiries for loans, surge in project proposals and sustained effort to revive projects that were hitherto stalled. At this time perhaps there is still room for cutting interest rates, but let me add that’s a decision the governor has to take. Q: What do you think is the potential and probable timeframe for India to grow from 4.5 percent to 9 percent? A: It is universally acknowledged that India’s growth potential is 8 percent. And I will tell you why. In 2007-2008 our savings was 36 percent of gross domestic product (GDP). In 2011-12, which was termed the worst year, savings declined to 30 percent of GDP. That is not a statistic that can be dismissed easily and is a very high rate of savings. Given an ICOR (Incremental Capital-Output Ratio) of about 4, 4.1 or 4.2, India can easily grow at certainly more than 7 percent and close to 8 percent, which is why I say India’s potential rate of growth is 8 percent. It has been achieved in the past and it will be achieved again. In 2013-14, India will post growth of over 6 percent and in 2014-15, we growth should be at 7-8 percent. Q: There seem to be a lot of bilateral trade agreements or trade agreements between various companies, for example the Trans-Pacific Partnership Agreement (TPP) and often cases, exclusive of China. Is this an avenue that India should pursue given the way of interest in Asia at this time and the need to expedite these relationships to foster investment? A: The nature of the game today is to enter into as many bilateral, plurilateral, and multilateral agreements. For example, the TPP will rope in Japan and Korea though we have bilateral agreements with Japan and Korea. We have a Comprehensive Economic Partnership Agreement (CEPA) with Japan. We have an India-Association of Southeast Asian Nations engagement. Brazil is part of the US Latin American engagement, but Brazil is also part of BRICS (Brazil, Russia, India, China and South Africa) and IBSA (India, Brazil, South Africa). So, there are a lot of strands running across the globe tying 3 -7 countries. We will find our way through the strands because each one of us will try to enter into as many bilateral or plurilateral agreements. Q: And at some point, it will go full circle and return to the WTO (World Trade Organisation)? A: Ultimately, we should have a WTO that rule is based on rules and universal. But short of that you will find more such engagements taking place. We accept that as the nature of the game. Q: What you ultimately hope to accomplish on this trip to Japan? A: I hope to be able to convince investors and industry captains that India is open to business and to explain some concerns may have arisen in the last couple of years after Lehman collapse. Some of them have been addressed while solutions are being devised for others. India’s potential growth rate is close to 8 percent and we think the economy can grow at that rate for the next 20-25 years. Few countries can make that claim and therefore it is in the interest of Japanese industry and investors to look upon India as an attractive destination. The Japanese know India and many Japanese companies’ have been in India for nearly 100 years. So, I don’t have to do much hard selling. I simply have to do a bit of handholding and a bit of explaining to Japanese companies.