?We don?t expect the bad times to last for long?

Shortly after Budget 2009-10 was tabled in Parliament, finance secretary, Ashok Chawla, along with secretaries of other department in the finance ministry briefed the media on the short-term goals that the Budget has tried to focus on the medium to long-term policy initiatives that the government would like to take. Excerpts:

?The finance minister, as you would have heard him say in the Budget this morning, has essentially focused on three challenges. Firstly, the overarching challenge of getting past to the high growth rate that India has seen in the recent past, which it is fully empowered and competent to achieve once again. Secondly, he mentioned about the focus of the government on the inclusive growth and the third challenge he referred to is the challenge of re-energising implementation.

This essentially boils down, as far as the specifics of the Budget are concerned, to reconciling the short-term objectives with the medium to long-term objectives. The short-term objectives, if you see the documents, focused substantially on growth and public spending, which are vital components of picking up the space being vacated by lower private investment so that growth doesn’t suffer. This has acted as an automatic stabiliser in the last two or three quarters. But despite the fact that the growth has declined from the earlier rate of 9% or so, it hasn’t come down as substantially as in many others countries. We have seen a growth of 6.7% in 2008-09. The expectation for the current year, which the survey outlined, is around 7%. So the fact that spending and putting money in the hands of people so that there is more consumption, is an important part of the short-term goal of the finance minister.

The other short-term dimension is on the taxation front. The finance minister has not raised the excise duty or service tax rate which was substantially cut last year. You will recall that 14% was reduced to 10% in December and further reduced to 8% in February and the service tax rate was also brought down from 12% to 10%. In fact there was some debate within the government, and I sense that you debated in the circles outside the government as well, on whether the government should be inclined to raise some of these rates in order to raise resources. But our considered view and judgment at the end of these deliberations and exercise was that the time was not yet ripe for any kind of hike in these rates. Therefore the finance minister has not touched these rates in his speech. He has certainly taken some opportunity to make some changes in respective taxes which were found to be rather harsh or continuity of tax, which was causing distress and he has therefore done away with fringe benefit tax (FBT) and the commodity transaction tax (CTT). He has also done away with the surcharge on the personal income tax by giving a clear signal that he is going to look at surcharges as he treads ahead. The rule of surcharge on personal income tax, which was yielding the government five to six thousand crore will certainly put that much money more into the system and therefore lead to increased consumption.

These are the short-term measures. But what is equally important is the finance minister’s perspective on the medium-term. On this, the Economic Survey has outlined broad policy parameters which the government needs to look at. The survey, which is prepared by the economic advisory division of the finance ministry and is in a way the vision and dream of economists, has the blessings of the ministry and the minister. So, the two are not divorced from each other. On the one hand, the Economic Survey has drawn a medium to long-term agenda but on a slightly shorter time horizon, there are five things which the finance minister has specifically touched in his Budget speech. Those are the some of the concerns which you might have.

The first one is tax reforms. He made it amply clear that we would move very quickly on the direct tax code with a view to simplify and cut out all the architecture that causes hardships to the honest tax payer. He has reiterated his resolve to work with the state government in a time-bound manner.

Second is the fertiliser industry, which causes substantial amount of stress on the government’s budget, is probably not the best way of delivering the subsidy and is not perceived to be entirely in line with the interests of the farming community. He stated clearly that we would move towards a different kind of subsidy architecture, which is already under the consideration of the ministry concerned. In fact, they have gone ahead and this matter should soon be coming to the cabinet for a decision.

The third is oil prices. All that he has mentioned is that we would look at the issue. This is very important in the sense that the expert group is being set up specifically to look at a viable sustainable system of pricing petroleum products, which by all accounts, are perceived to be very sensitive issues socially, politically and economically in this country.

The fourth is disinvestment. The first response that one gets is that the finance minister has not really articulated his position on disinvestment. Let me say it very clearly and categorically that the government’s intention is that within in the parameters announced by the finance minister in his Budget speech, the sale of government equity in PSU will be done in a phased manner. It is not very necessary for the finance minister to spell out in his Budget speech which entities would go in to the market and what percentage would be divested. But the intention of the government on this issue is very clear. We have refrained from putting out a specific number in the budget document on that. So we haven’t therefore taken that number on the receipt side because we want to be very sure of what the right time for the market is and when the sale of government equity should be done. So rather than giving a specific number like Rs 20,000 crore or Rs 25000 crore, which can also be given in the revised estimate as we go along. By this, we have also provided a cushion to government finances for meeting any unforeseen expenses so that our fiscal deficit positions doesn’t become stressed any more than what it is today.

Lastly on fiscal sustainability, it is true that the fiscal deficit has widened to 6.8% compared to last year’s actual numbers for the fiscal deficit of 6.2%. But another 1.8% of GDP was spent on oil and fertiliser bonds, which were below the line items. So the Centre?s actual fiscal deficit was 8% last year and is not going up this year.

It was a conscious decision to increase the government?s public spending to take the space which others are shying away from, to return to growth path as soon as possible. So with that objective we have this fiscal deficit. But to say that the road map has not clearly spelt out is wrong. There is a document placed in the parliament which clearly spells out a three year target of 5.5% by 2010-11, 4% by 2011-12. So we have not chosen an unrealistic target of 2.5%, 3% because it will be very difficult to come from a situation of 7% and go to 2.5%. But the intention and the resolve of the government and the finance ministry is very clear that the situation of high fiscal deficit is not something which is sustainable in the medium to long term and therefore we need to roll back but the roll back will be over a period of time.?

While the budget has abolished CTT, same treatment was not given to STT. Why this disparity?

Bhide: When we talk about STT, we must understand the nature of transaction. There is a concept of long-term capital gain. So unless you find something which can capture that essence, you can?t just abolish for the sake of it. And with whatever interaction I had with traders and stock exchanges, they all feel that STT is not so bad.

The PM has said that we would achieve a growth of 8%. How will it be achieved?

Chawla: The Economic Survey also mentioned a 7% figure with plus-minus 0.75 %. Basically there are two things. One, the monsoons? as the survey got finalised, it was not clear which way the monsoon would actually go. In any case, we need a certain margin of error. The error is in the global situation. The domestic situation is certainly panning for the better. The global situation also to some extent is like that but rather weak. If we fix up, there is every likelihood that we could get to that growth rate.

We certainly don?t expect that the bad times are going to last for long. And the situations which were there in September-October 2008, is substantially different from what it is two or three quarters down the road. So there is every reason to believe that the difficult situation is not going to last for more than one or two quarters. So by 2011-12 or 2013-14, we would definitely go back to those growth figures that we have earlier witnessed. So once the animal spirits of our private enterprises are back in to the system, we would definitely achieve our previous high growth rate.

What is the commitment of the government towards food subsidy?

Sushma Nath: The food subsidy had been increased and procurement of both wheat and paddy has been substantially more than what it was previously. At present it is not clear what the commitment for food subsidy is.

What will be the extent of deficit for this year taking into account subsidy bonds that may be issued during the year?

Chawla: This year we don?t anticipate any bonds. The fertiliser ministry is given money through the Budget. We have provided for the subsidy in terms of cash. It?s about Rs 50,000 crore. Those bonds will be issued through the fertiliser ministry. We have yet not decided or taken a view on oil bonds for the petroleum ministry. Depending on the requirement we will take view on whether we will address the need through cash route or bonds route. There were some Rs 10,000-crore of bonds, which were spilled over from last year, and we have already settled that in the first quarter. Beyond that there is no demand for oil bonds, so therefore the 6.8% deficit is the actual deficit and there is no bond or off-budget item as of now.

There will be a huge revenue loss this year. What do you plan to do about that?

Bhide: The global scenario was such that we decided to remain the way we were. The government will take a view at an appropriate time.

The industry has responded negatively to the Budget. What do you have to say about that?

Chawla: I am not sure if the industry has responded negatively. But if you are talking about the Sensex going down, then the markets looks at those aspects that impact it. It does not necessarily look at spending, rural growth, employment opportunities in the rural sector and the aspects that have larger implications. I think the market has taken itself into too much frenzy not finding what it was looking for.

What kind of tax reforms will the government bring in?

Bhide: The Budget speech states that a model draft bill on direct taxes will be brought in the public domain in the next 45 days. There is also announcement regarding introduction of GST by April 1, 2010 and we will try to do that. Introduction of GST will bring transparency and simplify the tax system. You will have to wait to see these reforms.

What is the average price of oil per barrel that you have taken into consideration while making calculation for the Budget process?

Chawla: We have not done any exercise on oil bonds. It is for the petroleum ministry to do an exercise on how they see the oil price and the shortfall on let?s say LPG at a certain price of crude oil. That?s obviously something that keeps moving. First, the average price of oil is not known, rupee dollar parity is not there.

There is talk on inclusive growth, but not much has been specified about health in the budget.

Sushma Nath: Additional amount of Rs 3,000 crore have been provided to the health ministry. It is not that the government is focusing much on health. Allocation for the National Rural Health Mission itself has been increased to Rs 14,127 crore, and as we go along more will be provided depending on the requirement.

What level of inflation are you looking at?

Virmani: As far as the headline inflation is concerned, as you know, it is negative and we expect that WPI inflation will go down for a while and will come up. By the end of March next year, it will be in the range of 2-4%.

What part of the borrowing will be through the open market operation?

Chawla: You have the total borrowing number, ie about Rs 4,00,000 crore. The open market operation may be required for as much as about 50% of gross borrowing.

It is heartening to know that the finance minister has taken many of the suggestions made in the economic survey on board. But nothing has been done about the cesses. Why? Secondly, what was the need to raise the minimum alternate tax (MAT) by 50% from 10% to 15%?

Bhide: Let?s put the issues in a different perspective. 50% hike in MAT is a bit misleading when you see at the average rate of taxation of your total corporate profit is only 15%. Also, if you are saying that the impact of giving up revenue on CTT and surcharge is neutral on the total revenues, then you have to set it off somewhere. It is just a balancing act. I don?t see any reason to get worked up so much.

On the issue of cesses, the finance ministry has definitely said that you need to make it simple without forgetting the government?s revenue requirement that has to be met. And cesses do provide specific funds to specific sectors. You have to see what you can do without giving up the funds for certain sectors.

What is the revenue foregone on account of abolition of FBT, CTT and increasing the exemption limit for personal income tax? What is the revenue loss on continued cut in excise duties and service tax?

Bhide: We continue to lose Rs 30,000 crore, maybe a little more. On FBT,the revenue forgone is to the tune of Rs 10,000 crore and Rs 3,000 crore following an increase in the exemption limit for personal income tax. However, there is no loss on CTT, because it was not made operational.

The finance ministry speech contains an interesting statement that net gain from indirect taxes is Rs 2,000 crore for the year. Considering that the target is applicable for the remaining part of the year, is there likelihood that the actual collection will fall short? Also, can it be expected or ruled out that some changes will be brought in the indirect taxes during the year?

Bhide: Changes in indirect tax are by notification. If the industry is not doing well at a particular point of time, a view has to be taken at that point to change sector specific indirect taxes. The Rs 2,000-crore gain in indirect tax is based on the expectation that people continue to buy gold and silver and of course the two services including technical advice by lawyers that we have introduced in the service taxes.

Is there a need for more stimulus for the industry?

Virmani: As far as we see, the increase in deficit is a big stimulus for the industry. If you recall, in 2007-08 it was 2.7% of GDP. So this is a big stimulus. The problems we face are decline in export demand, reduction in the rate of investment and moderate economic growth. The increase in government expenditure and the stimulus in the form of reduction in taxes have transferred income to the hands of the consumers.

Are you looking at additional revenue generation through New Pension Scheme and Small Savings Scheme?

Chawla: The budget only talks about the New Pension Scheme and the revenue secretary has explained that it will be subject to EET, in line with what the revenue department find applicable to major pension schemes all over the world.

Bhide: There will be no revenue impact of the NPS. The pension is income in the hands of the beneficiary, but not today. So we are not having any revenue generation on NPS. Downstream, when the benefit has been realised by the beneficiary, tax revenue will come.

What is the roadmap to introduce the new fertiliser subsidies architecture?

Chawla: The work for the new architecture for subsidy is in progress. What will be the instrumentality and how we will go about it depends on the vision the finance ministry takes in the future.

What is the disinvestment target?

Chawla: Disinvestment is one of the issues on our agenda. OIL and NHPC IPO is already in the pipeline. These companies have to come out with IPO between August and September. The department of disinvestment with the administrative ministries will identify more companies. Whatever numbers on disinvestment are planned will be captured and reflected in the accounts.