• Budget 2011

Finance Minister Pranab Mukherjee announced the Union Budget 2011 amidst hopes of fixing the three ‘D’s—fiscal deficit, current account deficit and government deficit. In an exclusive interview with Network18 founder and editor Raghav Bahl, Mukherjee admits that he “could have done better with the budget.” Excerpts from the exclusive interview.

Q: The first question is, you came at this budget with a very buoyant revenue, but with also a fairly depleted political capital for the Government. Did that constrain you in any way?
A: Not really, because as a political activist, I have sometimes seen that there may be situations where ruling parties or governments face a lot of problems and criticism from different quarters. So it did not affect me that much. My undivided attention was on addressing the economic problems we are confronted with, and how best I can address them through the instrumentality of the budget.

Q: As you know more than anybody else, as you have been in politics for so long, a crisis is actually an opportunity in politics because you sometimes push through much more difficult policies than you could otherwise have in good times. In that sense, do you think you have used the crisis in the best possible manner or could you have wasted this crisis, in a manner of speaking?
A: I am a person who always believes that I could have done better, because I believe in the philosophy that even the best can be improved. So from that point of view, I will respond to your question by saying, yes, I could have done better.

But at the same time, I have given a clear direction towards tax reforms, and a clear direction for the need of fiscal consolidation by reducing the fiscal deficit. Reform does not always mean that it should attract headlines. Real reform is a change in the functioning of the Government, a change in the policies and its implementation that will affect the lives of the aam admi.

Those are the types of reforms we require, and I’ve indicated it. If we can have the Direct Tax Code after the Parliamentary Standing Committee give their recommendations, which they are examining right now, perhaps it would be possible to implement it from April 1, 2012.

Q: But what about goods and services?
A: The Goods and Services Tax (GST) requires political consensus, because without the support of all the major political parties of the parliament, we cannot have a two-thirds majority to amend the constitution. Without the support of the state governments, it would not be possible to implement it. Therefore, it is a challenge to bring consensus among political parties. I may exercise the entire period of this year to narrow the divergences of views so that we can reach [a consensus].

Q: This is exactly what we had spoken about last year as well. If someone like you, who possibly has the largest amount of cross-party relationships and respect with other political leaders, is finding it that difficult, then this doesn’t give too much confidence to people that it will be done even in the 12-month period you are speaking about.
A: Sometimes it appears that from our attitude or approach that we have reached a stage where positions cannot be reconciled. When the entire winter session was washed out, many people thought that it is again going to reflect in the budget session. But then the same people later sat together for days and we have now been able to find a mechanism through which we can resolve the issues.

Q: Picking up from that, since the mechanism was such that the government agreed to what the opposition was asking for, are we therefore saying that you, as the central government, are now going to come at this negotiation with a far greater sense of accommodation of the states’ demands?
A: I always say that I am ready to cover an extra mile to achieve the objectives that are in the larger interest of the people.

Q: What is it that you can do? Because if I could just embellish my question, last time when we had spoken and I had asked you whether you have a plan B, in case there is a logjam, you smiled and said that there is a plan B. But we didn’t see that plan B in operation today.
A: But what I have done, if you analyze it, is that I have aligned the rate—the merit rate of the state VAT is 5 percent. I have gone to 5 percent. The exempted list in the state VAT is 99 items, nearing 100. There are 370 items, which were in the exempted list. As far as the Centre is concerned, I have brought 130 items this year within the tax net of 1 percent.

Q: You didn’t do anything on CST, though?
A: I am working on CST. Please remember that CST was temporary. It was expected that GST will be operational earlier. Therefore, it was there to cover that period. And something was to be done by the states, for instance, the adjustment of the VAT. For example, they have adjusted it from 4 percent to 5 percent largely in this year. On CST, as for the compensation, even in the Thirteenth Finance Commission they have indicated that about Rs.50,000 crore will be available to them.

If it is required for more money, I would not mind providing that. I can assure the states that there would be no revenue loss—but certain other things are also to be done. The IT platform is very important. Several chief ministers and ministers told me that unless the IT platform is ready, it would be very difficult to implement it. There has been substantial progress in the IT platform. NSDL is going to start the pilot projects with eleven states. These are not big tickets or something that captures headlines, but real work is being done in those areas.

Q: Can you lay out a timeline for us?
A: It is very difficult to lay a timeline even for the constitutional amendment, which I am going to introduce. It is not that there will be no further discussion. It will be discussed in the standing committee. It will be discussed in the parliament when it is passed. As I mentioned, without the support of the principal opposition parties and others, it cannot get passed. So we shall have to come together.

Q: So April 2012 is also not likely to happen, or are you quite confident that you will use all the political capital that you have to push it?
A: Let us not take an extreme view. We are trying with the hope that we will be able to succeed. But there may be some problems. The short point that I am trying to drive at is that it is not what appears to be positioned is reconcilable. It is not like that. Yes, there are divergences of views, but convergence is also emerging. Gradually, more and more states are coming around.

Q: I just want to switch from the GST now and try and understand some of the budgetary arithmetic. It is one of the few budgets where we are seeing the subsidy level in your arithmetic coming down, but we want to understand how this is happening. Clearly, the only way that it can happen, to my simplistic mind, is if we move towards free pricing of diesel and cut petrol subsidies. Is that something you that have factored-in in your calculation?
A: What we have done is we have decided that certain petrol prices will be market related and it has been done from last June onwards. For diesel, we have decided that it will be done at the appropriate time, which has not yet been decided.

Q: But the level of subsidy you have shown seems to suggest that the appropriate time is going to be very soon.
A: Let us not prejudge at what point of time we are going to do it or when we are going to do it because on oil, it will be too premature to make any comment since the situation is so volatile. Nobody can say at what level it will settle today. Therefore, if I say x amount today, it may be x + x + x. If I say that it is a substantial quantum I may gain, it can depend on the international situation. I will give you one example between August 2008 and January 2009. In August 2008, prices per barrel went to as high as $147 (Rs.6,615). In January 2009, it came down to in the neighbourhood of $50 (Rs.2,250) per barrel. Therefore, it fluctuates so much that any assessment would be too premature, particularly at this point of time. Therefore, my direction is that subsidies are to be reduced. In kerosene, fertilizer and LPG, I would like to go directly to the consumers.

Q: But you have only got a task force that has been constituted, isn’t it?
A: That is why I have fixed the deadline. By June of this year, they will give their recommendations. And I have also stated that I am hopeful that by March 2012 I will be able to implement them. As for the person who has been entrusted with this job, everybody in the country has great faith in his competence and capacity to deliver.

Q: But are we saying that by March 2012 there will be direct cash transfers all across the country in these three items, or are we talking about a task force whose recommendations will be with us and we will begin to act on them in some pilot or phased manner?
A: It depends on what type of recommendations come. But it is very simple. You just now juxtaposed it with the release of the Aadhaar numbers, which are also being done. The number will be generated to the extent of 10 lakh per day at some point of time. So with the help of this number plus the recommendations that they make and the sentiment that is prevailing right now, everybody agrees that kerosene is highly misused and the concession is abused. It is diverted for other purposes and not meant for consumers for whom these subsidies are based. Therefore, it would be easier to implement.

Q: The move will be radical and, as we have seen, radical moves don’t happen in our country. Therefore, are you saying that subsidy in all these three items will be directly cash transferred to all of the targeted beneficiaries by March?
A: I will be able to do a substantial number, because the number is also limited below the poverty line (BPL).

Q: But the Aadhaar cards, even at the rate at which you are saying (10 lakh per day), will be about 20 crore out of 120 crore people. So, just the Aadhaar cards, even if everything happens according to the numbers that you have given…
A: I will be able to cover it, at least partly.

Q: That’s what I am saying. So will it be a phased rolling?
A: Because a number is required, mechanism is required. Even if I take the number, the Planning Commission will give me the final number of the BPL families. It will go by the Tendulkar Committee’s number, 8.5 crore families. That, multiplied by five, is about 42.5 crore people.

Q: As I said, that would be a radical thing if it happens, it will be a fundamental reform. So we keep our fingers crossed on that. Another thing that did not find as much political mention in your speech, as one would have imagined it would have, was inflation. You talked about it, but it did not find front off, top-of-mind space in your speech. I know there is lot of talk today about what’s causing this inflation—is it structural, is it on the supply side, is it on the demand side? I was quite surprised at a statistic, that in the last two years, nominal GDP has grown only about 40 percent, but government borrowing has gone up nearly four times. So, there is a cause of inflation lying right there in front of you.
A: That is why the emphasis has been on fiscal consolidation and to reduce the government debt. I have given the percentage as well.

If you look at the budgetary figures, you will find that, in absolute terms, the quantum of borrowing next year will be almost at the same level of the current year, which is flat. That is the objective. And it is not merely an objective—we are reaching there, we are trying to do it.

Take the case of fiscal deficit. I indicated in my last year’s budget speech that it would be 5.6 percent. But when I found that I can manage—when I got unexpected revenue from the non-tax side, when there was revenue buoyancy—I said it can be reduced. I did not hesitate, I did not squander that money by going for some other programs that could have made me popular politically. I did not indulge in the populist approach for the utilization of that money; I utilized it to reduce the fiscal deficit. The signal is quite clear.

Q: Any windfall that you can visibly see this year, like the 3G licenses that were Rs.100,000 crore almost, nearly 1.5 percent of your GDP, came from that? Anything that you can foresee, or are you going to rely entirely on the correct implementation of the budget?
A: I would like to wait for that correct implementation and I will not indulge in guessing or just announcing it prematurely. In the 2009-10 budget, I indicated that I should get Rs.35,000 crore through the auction of the 3G spectrum. When we were moving towards the end of the budget, I was advised by my advisor that we can wait, and that we can manage this year’s financial situation and let us wait for good times in the next year.

I listened to that advice and waited for the next year. Even in the parliament, there was some criticism that you had promised and not made any moves. I said I will make a move, but not by March 31. I will make a move after March 31, and this little rescheduling has paid me dividends.

This year also I have done it, and I have no hesitation in telling you that. My target was Rs.40,000 crore—I have done Rs.22,000 crore. It was not very difficult for me to go another Rs.10,000-15,000 crore, but I thought that perhaps I can wait for better times when this will fetch that real amount that I require.

Q: As for the absorptive capacity of the Indian economy, and that’s also related to inflation and structural inflation… We have come close to 9 percent GDP growth three times in the last decade, and see what happened. Inflation spiked to double digits, interest rates went up to 13 percent and 14 percent, all three times. So now, three times cannot be a coincidence. Clearly, the economy today doesn’t have the absorptive capacity to grow at 9 percent without creating these imbalances in the economy. There was a great expectation that you would talk about this. The FDI, for instance, a much more liberal FDI policy also in retail—these things will enhance the absorptive capacity. In both these things, you just did not talk about your budget.
A: On the FDI, I have spoken, of course, in general terms because many things are to be done. That’s why in my approach towards reforms, I said that you should not run after the big tickets that will capture headlines. Much more work could be done silently by changing the guidelines, changing the policy formulations that will inspire confidence. I am trying to do that for the FDI.

Q: Is that why one would think you were silent on retail? You did not even use that word in your two-hour speech.
A: I do not use the budgetary exercise as an announcement of a policy, unless I am quite confident that I am going to do it within a specified period of time for which I am not to depend on others.

©Entrepreneur March 2011

Tags:
Finance Minister, Pranab Mukherjee, Union Budget 2011