Demonetisation: One should expect 'good things' from Budget, says Goyal

In an attempt to manage the excess liquidity in the system, banking regulator Reserve Bank of India Saturday announced that it would absorb a part of this extra cash by applying an incremental cash reserve ratio (CRR) as a purely temporary measure. All deposits from September 16-November 11 must be kept with RBI as CRR. Banks will have to deposit Rs 3.25 lakh crore with RBI at 0 percent. The issue will be reviewed on December 9, said RBI.

Goyal also confirmed that the RBI measure to withdraw liquidity was temporary and that the banking regulator was looking at MSS bonds and is waiting for government's nod. The government is working on getting Parliament nod for the MSS bonds, he added.Below is the verbatim transcript of Piyush Goyal’s interview to Shereen Bhan on CNBC-TV18.Q: There is a no question of a rollback, the government has made it absolutely clear that you will stay the course despite the hardships, despite the problems, despite the challenges, but I could ask you to introspect today and tell us how this could have been done differently. The former prime minister has called it a monumental mismanagement, your own party colleague Subramanian Swamy had said that there was a lack of a contingency plan. As you sit here today, a fortnight after the demonetisation move was brought in through a notification, what could you have done differently?A: To my mind demonetisation and the real word would be probably cancellation of the Rs 500 and Rs 1,000 notes as legal tender, because the demonetisation part will happen a little later is an important element in a continuing stream of actions that this government under Prime Minister Modi has taken over the last two and a half years. It is not as if it was a sudden action, it is not as if it is decided on the spur of the moment.Q: When was it decided?A: I came to know at 8 pm on November 8.Q: Now that the decision has been taken, now that the fact is that it is out in the public domain, please explain to me when did the preparation for this start, because there are all kinds of reports some suggest that the preparation started 10 months ago. We do know that the printing has obviously happened post September because that when Urjit Patel has come into office, so when did this planned sort of start being put together?A: I didn’t know, because these are matters of state which of extreme importance and have to be kept very secret. I am a very junior minister in the government in any case and I am sure this must have been a decision taken at the highest level between the honourable prime minister, the finance minister and the Reserve Bank of India (RBI) governor. I wouldn’t know the timing except what I have heard from the prime minister’s various talks at different forum, but I would suspect that this is a decision which should have been in the planning stage for many months, but to answer your point about the preparation.I don’t think more than a handful of people you can count them on your fingertips could have possibly known about this, because if it was something which was discussed in great detail with too many peoples, to many experts it could never have remained at the kind of secrecy that we have witnessed in this and I will tell you since you asked that question we were all in the cabinet meeting about 7 o’clock or so on the November 8, the honourable prime minister was recording his address at 8 o’clock, so he came in about 20 minutes later and the honourable finance minister was sitting right across me in the cabinet and he looked at me and raised his fingers and he made a face at me, so my colleagues sitting next to me, Nirmalaji was there. I think Vijay Goel was on the other side and they started asking me what’s happening I said, I don’t know the last we heard was the 3 chiefs of the arm forces meeting the honourable prime minister.See we were speculating on what could be the cause and at that point of time when the prime minister came and started talking about it, I can tell you we were as shell shocked as anybody else in this room would have been. I think the country seems to like it, a few leaders are worried maybe.Q: In terms of the economic cost that it is going to have at least as far as the short term is concerned, forget the long term for now. Whether it is Fitch, its Moody's, its CMIE, its Ambit, it is a whole bunch of other people who have put out and I would broadly say that these are guestimates at this point in time. Fitch says there is likely to be a temporary delay in consumption as well as investment. We could see disruption as far as supply chains are concerned. CMIE has put a number, it says Rs 1.28 lakh crore is the cost to the economy till December 30 and Rs 61500 crore will be borne by the enterprise sector alone. So, that is just the business impact that they are talking about in the short term till December 30. It has been about a fortnight now, is there some sense that the government has that in the short term what is going to be the cost to the economy?A: Short term cost could be any number which any of these eminent economists suggest. I have no way to know, I have no way to calculate. It is not even a subject that I am an expert at.I think this nation is a group of smart people. People have welcomed this initiative to kill corruption, to help black money get out and serve the people rather than staying in people's lockers at homes.The short term pain, this nation, whether it is the common man on the street, whether it is the farmer, the artisan, the worker or the industrialists and businessmen who has been yelling to see GST happen but GST would have been a non starter if the value chain was captured entirely in the books.Q: But the question on the goods and services tax (GST) is a serious one because you do need the states to come on board. Once you passed the draft law as and when it does get passed, hopefully in the winter session you need the state assembly to pass it through?A: Well, states assemblies have already approved it more than 50 percent and as it is there is a map of India going around on WhatsApp, which shows that it almost saffron all over.Q: You still feel confident of the GST rollout on the April 1?A: Of course, we are very committed to making GST happened by April 1. We will continue to persevere and pursue this with all parties. I do hope good sense will prevail and if you look at the history of parliamentary politics in India, we always had very good action in the last 2-3 days of parliament.Q: Let me try and get a sense from you, I had a conversation with Commerce Minister, Nirmala Sitharaman on Friday and she said that she is being speaking with exporters, she is being talking to the MSME sector and all of them while they support the move have said that they would like further relaxations as far as withdrawal limits are concerned. A large part of the constituency continues to be paid in cash from the textile mills in Tirupur to Surat it is the same demand that seems to be coming in. This is a country where 45 percent continues to be in the informal sector. What is this going to mean as far as short term impact is concerned?A: This is move is not only about this fight against corruption and black money, terror financing. It has a very important dimension about moving India into the digital world, towards a cashless society and cashless is like infinity, you are looking at less cash society. People ask how will the corruption reduce, corruption will reduce because now people will be scared hopefully to generate money in the first place, to hold money in that form and obviously this is one amongst the series of steps - - but now people will know that please take the Mann ki Baat Prime Minister Modi gives out every month more seriously because you will find hidden messages in everyone of his Mann ki Baat. You could almost have predicted this if somebody had listened to his Mann ki Baat carefully over the last 17-18 episodes.In one sense as we move towards a digital world and world is moving towards that Sweden I am told is almost 98 percent digital. A country like Kenya has used M-Pesa very effectively where people in the deepest villages of Kenya tribal are now connected to mobile banking, why can’t India and believe me the advantages of that are so deep and so large for the Indian economy. So, one of the collateral advantages and benefits that we see out of this move is going to be moving more and more towards digital banking world. That will be the day when we will truly be able to look at a financial inclusion reaching the bottom of the pyramid.Similarly, taxes, we all know that everybody is not integrated with the tax economy and does not pay his taxes fully and very often it is not out of choice, it is out of compulsion. So, if in a particular industry, two or three people start cheating the system, even the honest players when they cannot withstand the competition of pricing, tend to move towards an illegal transaction or short circuiting the tax structure.If at all we want India to progress, we will have to look at lower interest rates, we will have to look at lower taxes, whether GST or whether personal taxes. To my mind if everybody gets a level playing field, this country and the way to do business in India will be terribly exciting, it will be a new world to live in.

Q: Since you spoke about low interest rates, let me pick up on that because we saw the Reserve Bank of India (RBI) announce some measures to suck up the excess liquidity from the market and we have been speaking with bankers, so I will just quote to you what Arundhati Bhattacharya has told us on the channel. They had approximately Rs 80,000 crore in deposits as on November 11 and she says that the RBI will actually need to come out with some other measures to compensate banks. She thinks we will now think a 100 times before the next rate transmission. So, one is the assumption that the CRR hike is a temporary measure announced by the RBI.

A: I am sure everybody will realise that nearly Rs 300,000 crore has come into the banking system quite suddenly. The banks do need avenues to deploy that and for that one of the avenues is an instrument that the RBI needs the Government of India’s permission -- the market stabilisation scheme (MSS) bonds. Now, parliament is in session, so, we cannot even issue an ordinance. The government will go to parliament; government has to get it approved by parliament to issue more MSS bonds. That process is underway.

Even the RBI announcement says it is for this fortnight until December 9 or earlier, if you read the notification. So, it is a temporary mop-up and clearly at zero interest, we are not going to cause the banks distress. Having said that, RBI is the final authority on monetary policy, they have to also calibrate Indian interest rates, look at the international, global scenario, what is happening in American interest rates, so, I think we should leave that function best to them.

However, I do see that with more and more money coming into the formal economy, and with inflation being at pretty reasonable levels, interest will be a factor in spurring growth in the days to come. It will help us to increase particularly the affordable housing segment. So, if anybody here is looking at affordable housing it is going to get a big boost in the days to come with lower interest rates, more people like you and I can afford a house.

Q: Let me then ask you because you are talking about the need to pump prime the economy, we were going in with the assumption that the Budget that would be presented on the February 1 would in a sense be the GST Budget, that it would set the stage for the rollout of the GST on April 1 but it now looks like it is going to be a demonetisation Budget and that seems to be very clear. So, what should we truly expect with the Budget being advanced to February 1, with this decision being taken, December 30 what should we truly expect when you say pump prime the economy, when you say that we need to stimulate the economy given the fiscal deficit where it is and the compulsions on sticking with the fiscal deficit line. You have also got the Fiscal Responsibility and Budget Management Act (FRBM) giving in its report on what you should do with the fiscal deficit, whether there should be some flexibility given to the government and that report is now going to be submitted in a post demonetisation world as well. So, what should we expect on February 1?

A: You should expect good things on February 1. Finance Minister Arun Jaitley, if you see over the last three Budgets, July 2014, February 2015 and February 2016, has consistently worked on a series of measures. Very clearly Finance Minister Jaitley focused on a sustainable framework for India’s development. He never tinkered with rates, in minor changes here and there. He looked at structural improvements so that India can move towards a economy which maybe like China sees two or three decades of consistent high level growth.