Investors, foreign and domestic, have appreciated that the Budget 2013-14 hasn’t gone back on the fiscal consolidation promise, believes economic affairs secretary Arvind Mayaram. Several investor-friendly decisions announced in the Budget would help accelerate the GDP growth that has faltered, said Mayaram, one of the key persons behind this year’s Budget and a trusted member of finance minister P Chidambaram’s team. In an interview with KG Narendranath and Himani Kaushik, the 1978-batch IAS officer, who is in his third stint in the finance ministry, said the proposed review of foreign investment norms might result in removal of certain sectoral FDI ceilings and possibly a curtailment of the Foreign Investment Promotion Board?s role. Mayaram said the proposed PPP model for coal sector would involve a 30-35 years? concession agreement between Coal India and private players, under which the sale of fuel would be the PSU’s prerogative. Excerpts:
The short-term gut reaction of stock markets to Budget 2013-14 was kind of giving a thumbs down (the Sensex plunged to what was then a three-month low on February 28) although it rebounded the day after, appreciating the finance ministry’s clarification that validity of tax residency certificates furnished by foreign investors won’t be questioned. Two weeks later, how do you think the markets, foreign investors in particular, have rated the Budget?
I think now that people have read the Budget carefully and have understood its true design ? incentivising growth (by) ensuring the right environment for investor ? there is a more nuanced appreciation of it. This is evident from the manner in which capital markets are picking up again and the rupee is holding its value. These are the demonstration of the confidence the investor has shown in the Budget decisions.
Government spending more than doubled since 2007-08 and this may have prevented economic growth from falling too drastically. But the steep fall in both savings and investment rates during these years have undermined the economy’s capacity to grow. Even by the estimate in Budget 2013-14, (government) expenditure to GDP ratio continues to be around a percentage point higher than the level before the global crisis. What is the thought behind the expenditure budgeting?
It has been an extremely difficult balance between ensuring adequate expenditure by government (so that requisite growth impulses in the economy are sustained) and yet not allowing the fiscal deficit to exceed 4.8% (of the GDP), where the finance minister has repeatedly said the red line is drawn. Therefore, the entire calibration of the Budget has been in appreciation of the need to provide adequate funds for the (flagship) schemes. Because we believe the expenditure in these schemes are necessary expenditure and that they also contribute towards the growth of the GDP. Yet, if you would see, there has been a very careful appreciation of where the savings can be done and there, we have tried to rationalize the expenditure.
Government spending usually rises in the year leading up to a general election. Do you mean to say that unlike this year, the expenditure plans in Budget 2013-14 are for real? If so, considering the growth slowdown, would revenues keep pace with the spending?
The Budget estimate that we have provided for the next year is backed by the receipts that we are expecting ? not only the tax and non-tax revenues, but also the borrowings. We have been pragmatic and the accounted receipts for the next year are (going to be) matched with expenditure. In fact, the first direction that the finance minister has given to all is that all approvals that are required for getting the expenditure going ought to be obtained by different ministries, not later than May. In the next two months, the approvals should be taken so that expenditure begins to happen not later than June. In many cases, he has emphasised that if the approvals can happen in April itself, we would be very happy as this would allow the spending to start in May.
Now, if the expenditure begins (early), then we don’t believe there would be any reduction in the revised estimate (RE).
The problem arises when for a particular scheme announced, the approval of the Cabinet is obtained only in the month of November or December. So obviously when the RE is finalised in the month of December and you don’t even have your approvals in place for, say a R5,000-crore scheme. Then the finance ministry would be very clear that the entire money could not be spend in January-March period. So you reduce the RE up to a level, which you think the (agency concerned) can utilise the funds in the last quarter of the fiscal year.
That is what happened in the current year. So, in order to prevent this pattern from recurring, the ministries have been advised to commence expenditure right from now. We are really hopeful that the ministries will pay heed. The Budget expenditure is, therefore, for real.
When it comes to private expenditure (investments), there is the question of supply (and high cost) of credit, apart from the general climate of both types of demand (consumption- and investment-driven) being considerably weak.
To break out of this vicious cycle, you have to incentivise new investments. In the Budget, an investment allowance (in addition to normal depreciation) has been introduced after gap of many years. More importantly, the institution of Cabinet Committee on Investment (CCI) has been created to give clearances for large projects in a time-bound manner.
Now, our assessment is that because of the CCI’s intervention ? directly or through directives to the ministries concerned ? projects of a combined value of R50,000 crore or more would have been approved by March 31 this year. So, I think this itself is a very big trigger for investments next year because the projects that CCI clears are not only the public sector ones, but also large private projects. Once there is confidence among private firms that if they are looking at large investments they will be provided a special window for clearances and approvals in a timely manner, investments will indeed materialise.
Growth in bank deposits has seen a steep decline (from the earlier norm of an annual 20% to about 13%), affecting the supply of domestic credit. How would potential investors access funds at reasonable rates?
The supply of finance has to be seen in two ways– the institutional (bank) finance and the equity and bond markets. Substantial funds (R14,000 crore for 2013-14) have been been allocated for bank recapitalisation in the Budget, which means there will be greater headroom for banks to lend. We are also looking at various measures to clean up the balance sheets of banks. For instance, the infrastructure debt fund (IDF), which will work on take-out financing, would step in after one year from commercial operation date of a project, enabling the banks to sell their debt. We are also working on ways to deepen the corporate bond market. The reduction of withholding tax on certain type of bonds and debt to 5% would incentivise foreign investors to invest into debt instrument in the infrastructure sector.
There is some talk that the government is looking to reduce withholding tax on all rupee- denominated bonds.
There is indeed a demand for it. I cannot say at this moment what decision will be taken or not taken. But the measures already announced are substantial in nature and will give a vital push to the corporate bond market.
How do you ensure corporate debt recast schemes (including special ones like power sector package) don’t hit banks?
The restructuring of loans is linked to reforms. It has been in the news recently that Punjab may not go for the restructuring package for state electricity boards (SEBs) as the conditions are very tough. The message is clear ? you can’t go for restructuring of loans repeatedly just because you’re an SEB.
The SEB debt recast scheme would help improve the health of the banks and would also be very good for the states because once the tariffs are rationalised, they will be in a position to generate more power and give electricity to more people. Now, many states that have promised free power to farmers give only two hours of power to them in a day. What good is that power for? One would rather pay some money and get 24-hour power supply than pay no money and get no power. Thanks to this realisation, steps are being taken towards cleaning up the doubtful loans of the banks to ensure that health of the banks is not further jeopardised. So, I do believe we will have much greater credit availability in the next year than the current year.
Linked to this issue is the fuel price reform, the need for enhanced productivity in the coal sector and the demand for the revision of gas price.
A decision has been taken on price pricing for coal. A committee has been set up to work out the modalities. On gas pricing, there is already the Rangarajan committee, which has given its recommendation (to hike price to around $8/unit from $4.20 now), and this is being examined by the petroleum ministry.
Will the consumers be able to withstand the rates of power price hikes, which higher gas price would necessitate?
Pooled pricing of coal would soften the impact of cost of fuels on power price, rather than harden it. If you have to set up a total of 100,000 MW of additional generation capacity in the 12th Five-year Plan, you will obviously need to have fuel which is cheaper, although not totally domestic. Under the pooled pricing, the generation company gets coal at sort of an average price, lower than the price they would have paid for imported coal. The proposed PPP (public-private partnership) model for coal production would help in increasing domestic production of the fuel.
How would the coal sector PPP model be different from that in other sectors, considering that the Coal Mines Nationalisation Act disallows commercial coal mining by private players?
The PPP model for the coal sector would only expand the current mine development operator (MDO) model. Under this, a private mining company produces the coal and gives it to Coal India which in turn sells it. This is within the confines of the Act. If the MDO concession agreement is now for 10 years, the new one, for say 35 years, will allow large mining firms to invest hugely in environmentally sustainable technology for extraction of coal. The revised model, we’re sure, would attract large international players like BHP Billiton. Long-term concession agreements of 30-35 years would allow technological investment by global players in India’s coal sector, without violating the sanctity of the Coal Mines Nationalisation Act.
A review of foreign investment framework is under way. What can investors expect?
The finance minister and commerce and industry minister have said the entire foreign investment policy framework would be reviewed. Which means the government will look at the prevailing FDI caps in some sectors and see if some of them are at all necessary and/or whether some caps can be increased. We will also critically look at other restrictions that are placed on foreign investments and ascertain if these can be removed.
Is there a move to curtail the role of the Foreign Investment Promotion Board?
That (reducing the role of the FIPB) could also happen, if in the review it is discovered that some sectors which are not on automatic route can be on the automatic route. It is possible. As far as FDI policy is concerned, our stated position is ?national treatment? would be given to foreign investors. While this would mean non-discriminatory treatment to them vis-a-vis domestic investors, it is also clear that treatment of foreign investors can’t be better than that of domestic investors.
We are creating the right framework for FDI to flow into the country. If the CCI is going to clear large projects in a time-bound manner, then foreign investors would also be beneficiaries of that. The entire reform, which happens in the domestic economy, necessarily impact the foreign investors as they are given national treatment.
The drop in core inflation to a 35-month low of 3.8% in February bolstered the hope of a rate cut by the RBI in Tuesday’s policy review. How eager is the finance ministry to see the rates coming down?
I think the RBI will take the right decision from the monetary authority point of view. I think they do a very sophisticated and nuanced analysis and based on that they come to their conclusion.
All I can say is that like everyone else in the country, I am also waiting with bated breath to see whether the RBI votes in favour of growth or not. So we are just hoping, like everyone else, that they vote for growth. We do believe low interest rate plays a very important role (in reviving growth).