'There is room for a 50 basis point rate cut' that's the word coming in from P Chidambaram, one of the two former Finance Ministers who have lashed out against the government on the state of the economy, the other being Yashwant Sinha. CNBC-TV18's Shereen Bhan caught up with P Chidambaram to discuss more on this issue.
Below is the transcript of the interview.
Q: You find yourself with some unusual and unlikely allies in the form of the former Finance Minister Yashwant Sinha. The fact that there is a problem with growth is now widely acknowledged and documented. GDP coming in at 5.7 percent at 13 quarter low, GVA at 5.6 percent. The question now is, can we spend our way out of trouble?
A: I don't think so. I don't think the government has that fiscal space to spend its way out of trouble. If they relax the fiscal deficit target, that would be an admission that revenues are under pressure or that expenditure is gone out of control or that they don't care about interest rates rising or they don't care about inflation rising. Every one of them would send out bad signals. The answer is not to spend your way out of trouble.
Q: There is a view that let us not obsess about the fiscal deficit. Yes the target is 3.2 percent but even if there needs to be a little bit of leeway, if we need to deviate by even 0.5 percent, if that is what is the need of the hour today, then so be it. What would be your argument against that because if I were to look at the data going back to the UPA times, FY09 fiscal deficit was 6 percent, FY10 6.5 percent, came down to 4.8 percent in FY11, FY12 5.9 percent, so you have seen the perils of profligacy. What would be your argument against a deviation?
A: Just what I said. I think it is a wrong answer to the problem just as the repeated stimulus packages in UPA 2 were wrong, I am on record having said that. If you continue with stimulus packages you will breach all fiscal discipline, deficit will go out of control, inflation will go out of control and to bring the economy back on track will be a difficult task. This is exactly what I faced when I came back to the finance ministry in 2012. However then we had to set a new path for fiscal deficit reduction following the Kelkar Committee recommendations. As long as we were there we adhered to the path. I have complemented this government on more or less adhering to that path except for one year.
If they now go back and instead of 3.2 percent set the target at 3.5 percent or 3.7 percent that will be a terrible mistake.
Q: What to your mind has gone wrong, what would you attribute as the single biggest cause for why we have seen this kind of a slowdown? To be fair and to give credit where it is due, when this government came to power there was a return of confidence specially business confidence whether it was liberalising the FDI regime, drawing back in foreign direct investment, Make in India, Digital India, so on and so forth, there was a lot of flourish with which the government moved on economic matters, what do you believe has gone wrong?
A: I think the confidence started returning in September 2013. I don't agree with you when you say it retuned only in May 2014.
5:13-5:24 no audio. These were simply announcements of various things which did not address the underlying weaknesses that were visible in the economy.
What are the underlying weaknesses? Of the four engines of growth two were sputtering - private investments and exports were sputtering. Public investment was propping up the economy and private consumption was helping. After the two engines more or less shut down, the third engine also started sputtering, private consumption declined. However the government seems to have failed to notice that three engines were not running. It was only focusing on one engine - the public expenditure engine. When we cautioned them the economy is slowing down, they went and did demonetisation. When we cautioned them again that the effects of demonetisation will take 8 months to work itself out of the system, they went and rushed through a flawed Goods and Services Tax (GST).
So, an economy that was slowing down because three engines were almost dead, you do demonetisation, then you rush through GST, so this is what you get.
By the time they woke up, when the numbers came out on August 31 2017, one full quarter had gone by and two months of the second quarter had also gone by.
So, unless they now acknowledge that three of the four engines are not running and take steps to restart those engines, exports have restarted, so restart those engines. Spending your way out of trouble is not the answer.
Q: What would be the way to address the problems that you have just articulated for us? How do you revive these engines of growth? What is it that needs to be done today?
A: Yashwant Sinha in his article yesterday declined to make any positive suggestion. So, you can't ask me the question which even Yashwant Sinha declines to answer.
I will tell you why. Unless you have full information - I don't have full information about the net tax collections. I don't have full information about the CBDTs estimates of direct tax collections for the rest of the year. I don't have full information about the CBECs estimate of net indirect tax collections. I have no access to how the Reserve Bank of India (RBI) sees the foreign exchange reserves moving up or down. RBI is also accumulating reserves, it is taking forward positions, so I don't have all that detail. The only person who has all that information is the Finance Minister. So, the person sitting on that chair should answer. He can try out suggestions and we can respond to those suggestions.
Q: I am not privy to all of that information either, but let me ask you about the ideas that are being talked about. One is PSU bank recapitalisation and the kind of money that will be required, they do not have that money. The possibility of recap bonds on the table at this point of time, now the clamour that the government should actually do something bolder and look at bringing down ownership in public sector banks. Of these three, do you believe that higher recapitalisation is probably going to be a way to try and alleviate some of the pain?
A: I think this government messed up the NPA problem. They created an enormous scare about NPA. We had an NPA problem in 2002. We had another in 2007 or so, but we dealt with the problem by empowering the bankers. Here they have scared the bankers out of their wits. Having messed up the NPA problem, they do not know how to deal with it because it is becoming worse every week, every month. Please remember, they have sent 40 of India's top companies to bankruptcy, to bankruptcy resolution.
I read that they are lining up another 50 companies for bankruptcy resolution. All that will add to the NPAs, not lessen the NPAs. So I do not even know whether this government has a plan of action. The answer to the NPA problem is to empower the bankers to go and collect the money. Quietly, if you simply send those instructions, they would have resolved it substantially, as they did on the last two occasions. Anyway, that is something they will have to deal with.
Now what is the answer to capitalising banks? They do not have the money. Now you are talking about raising bonds, who will raise those bonds? Who will guarantee those bonds? Will there be government bonds? If they are government bonds they will add to the fiscal deficit.
And the third is privatise the banks. Assuming that you are willing to buy a bank, have they created a climate of opinion in the country that public sector banks can now go from government controlled to private controlled. They must first educate the people of this country, create a climate of opinion where the people accept because to them, if you take a vote among common people, majority will say, no we must have government banks. We have no objection to a private person starting a bank, but why should government banks be handed over to private hands. So they have not done that either.
So, they are between a rock and a hard place. Let them tell us what they are choosing, the rock or the hard place.
Q: So do you believe, as does Mr Yashwant Sinha that even if there were some measures to be taken for instance public spending, higher expenditure in whatever form the stimulus package.
A: No, Mr Yashwant Sinha is not recommending those things.
Q: No, he is not. He is saying that even if they were to go down that route, the impact of that will not be visible in the short to medium term. The impact of that will probably be closer to 2019. Do you share that pessimism?
A: This government seems to have woken up only after August 31 when the numbers came out. On that day, five months of the current financial year had gone by and we are another 27 days into the sixth month. So whatever they do now will have no impact this financial year. So the financial year, March 2018 will end on a sour note. Now whether you get the beneficial impact in 2018-2019 I cannot say. It will depend upon the measures they take, it will depend upon the effectiveness of those measures, it will also depend upon the global environment.
Today, foreign portfolio investors (FPI) are pulling out their money. Why? Because they have lost confidence in the economic management of India and they think that interest rates in the US will rise sufficiently.
Q: And now you have got a corporate tax cut as well in the US that has been announced.
A: Yes, rise sufficiently therefore, they can make their return for their investors by putting more money in the US. Money flows into India largely because of the interest rate arbitrage opportunity and if that window narrows, if that interest rate differential narrows, money will flow out.
Q: Since we are talking about interest rates, the clamour is that there should be a drastic reduction in interest rates. CII asking for a 100 basis point cut in interest rates. We have got the Monetary Policy Committee (MPC) meeting on October 4. Do you believe that there is room for a rate cut at all?
A: Yes, there is. There is a room for rate cut. RBI is behind the curve. They should have cut it on the last occasion. They should have cut it on the previous occasion also. But whether they will cut 100 basis point at one meeting, I doubt.
Q: How much room is there for further cuts?
A: I think they should cut at least 50 basis points. There is enough room because inflation is still low.
Q: So you are batting for at least a 50 basis point cut in interest rates?
A: I have always argued for that. Even now. I have been saying it for the last year and a half that interest rates must be cut.
Q: But will it translate into a pickup as far as private investment is concerned because while we have seen repo coming down over the past two years, we have not seen the commensurate pick up as far as private investment goes.
A: I am not confident private investment will pick and I will tell you why. One, they have unleashed a raid-raj. This is tax terrorism. The kind of notices that are going out of the income tax department are unbelievable. They have slapped huge notices for humongous amounts of money on international companies, Cairn, Vodafone.
The major disputes are locked in arbitration and no one knows when those arbitrations will be resolved. They have sent 40 of India's large companies to bankruptcy resolution. Two bank chairmen have told me, one told me that power sector is the one that is most affected. The other said no it is telecommunication that is most affected. But between the two, the message is telecommunication and power are most affected sectors. They are in deep distress. Construction is in the doldrums. Mining, despite the intentions of the government, mining has not picked up because there is too much litigation on the mines that were auctioned. So where is the private investor going to put his money today in this atmosphere of uncertainty, litigation and unleashing the tax departments after them.
Q: Let me ask you whether it is what Mr Yashwant Sinha says or what Mr Swamy says, the blame is being apportioned to the Finance Minister. As a former Finance Minister, do you have more empathy for the position that Mr Jaitley finds himself in because a lot of these decisions whether it was demonetisation or even pushing forward with the GST were not necessarily entirely his decisions.
A: That is a very radical statement. I do not know if it is true. No one sitting in the chair of Finance Minister can say demonetisation was not my decision or the GST design was not my decision. If a Finance Minister will say that, it means that rather than the Prime Minister losing confidence in the Finance Minister, it is a case of the Finance Minister losing the confidence of the Prime Minister. Therefore, you cannot say that. It is the collective responsibility of the government.
But just as when there is a railway accident, the Railway Minister is the one up front there and taking the flack, when the economy is in a mess, the economy is in a downslide it is inevitable that the Finance Minister has to stand there on the front line and take the flack.
Q: That certainly is the case. You have faced many of those occasions yourself.
A: My Prime Minister and I, we are on the same page.
Q: Are you suggesting that they are not on the same page?
A: I am not saying that. I said my Prime Minister and I were on the same page. There was no decision of the Finance Ministry which was taken without my knowledge or without my concurrence.
Q: There were decisions that when you were not in office that you did not necessarily agree with.
A: When I was in office as Finance Minister all the decisions pertaining to the Finance Ministry were taken with my full knowledge and concurrence.
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