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'MAT, I think, is a move in the right direction'

In 1975 he joined the Industrial Development Bank of India which is one of the largest development banks in the world. He was the senior-most Executive Director in Charge of its loan operations and treasury functions when he left IDBI to take up the post of the first managing director of the NSEIL on November 17, 1993. In an interview with Syed Firdaus Ashraf, he talks about the impact of the Budget on the Indian economy.

How has the Budget affected the economy's macros?
The Budget is incremental though not radical. Over the last four to five years the federal government's budgets have been following a well-defined track. This year's Budget is continuing in that track.

Before economic liberalisation began, India's budgets lacked focus. An attempt to give them a direction was made in the mid-Eighties by the V P Singh government. But Singh too deviated and the government lost sight of a long-term policy of change.

Now the situation is such that despite a change in government, the Deve Gowda regime is continuing the trend of the last few budgets, which ushered in liberalisation by adopting policies like rationalising and reducing duty structure.

Yet I would have liked the Budget to introduce more rationalisation. Recent budgets have been making quantum jumps every year. But this Budget has not done any such thing. Partly, because the finance minister had just 35 days to put his Budget together and partly because the new government is a coalition of several parties. He must have had to please many people. Then there was the coalition's Common Minimum Programme to be kept in mind. In this context whatever he has done is permissible, I think.

Which are the issues that the Budget has failed to address?
The recommendations of the Chelliah panel on tax reforms were not touched at all. Rationalisation is needed here. The moment you start complicating the tax system you give unintended power to the bureaucracy to interpret the rules.

Dr Manmohan Singh (former finance minister, regarded as the architect of the economic reforms of the past few years) was trying to cut down the complication. Ultimately, the administration must implement the will of the Parliament. But the moment you start drafting regulations in a complex way there could be several interpretations. I think tremendous modification is required in this area.

In fact, I would be happy if the entire duty structure can all be reduced to about 20 pages. Import bills, import taxes, all must be brought to about 10 pages. The best thing would be to have three to four duty levels across the board instead of a proliferation of duty levels. That should take away some power from the customs department and reduce the number of litigation which result from it. The nation is wasting a lot of energy due to such problems. And that is why the industry, the government, everybody is wasting time. The main focus of development is missed.

Which industries do you think will benefit from the Budget?
There are a few sectors which have been specially focused upon like telecom, electronics and computers sectors. Otherwise there are not many changes in the duty structure. In fact we were hoping that import duty peak levels would be lowered because (Finance Minister P) Chidambaram had himself as the commerce minister promised it.

We were hoping that the gap between the lowest and the highest levels of duty would be reduced further as it is still quite wide. But as you see, except in the case of electronics, computers and telecom, there has been no significant change.

Which sectors will be hurt?
The minimum alternate tax has been criticised much but in my opinion it is a step in the right direction. Ultimately we must get to a stage where the number of such incentives are minimum. We need as simple a tax system as possible. For example allowing some fast growing companies to be out of the tax net continuously for decades is not fair from the social equity point of view. They are also growing. They are also putting pressure on the whole system.

Ultimately, why does the government need money. It needs to run the economy, the administration and the whole system, defense, police, law and order... These companies have to bear the burden. They need incentives but some thought has to be given to the level of incentives offered. Can they continuously go on avoiding taxes. They are not evading taxes. They are avoiding taxes. MAT, I think, is a move in the right direction.

At what rates do you expect the GDP, industries and exports to grow?
Last year we had a GDP growth rate of 7 per cent. This year it may be 6 per cent and even that would be good if we can achieve it.

In the last couple of years not much investment has taken place in infrastructure, particularly power. But we still haven't faced major power constraints. Something very interesting happened in the power sector. The plant load factor has gone up quite a lot in the last couple of years.

From this point of view power is going to be a major constraint in growth. This year we may not face much trouble but unless we do not move massively into power investment, I think we will face a problem. This year we may have a good growth rate but to sustain it would be difficult.

The Budget has dwelt on infrastructure development. What do you think about it?
The government has received an important report on infrastructure put together by one of its own committees. The report will be released soon. Some of its recommendations have already been accommodated in the Budget.

The report is said to have suggested the setting up of a new finance corporation and giving tax saving incentives to companies investing in infrastructure. Yet the most important recommendation of the committee is on bringing about transparency in procedures. If you have to grow fast, decisions will have to be taken fast. If you have an excessively complicated administration, decisions are going to be delayed.

The best proof of this is the fate of the fast-track projects. They were supposed to be fast-track but since the last three years are stuck in their tracks. Fast-track projects are possible only when you have a clearly defined objective and a policy parameters also are defined. And since it will be a transparent system, allegations and litigation of corruption and all that will not be there.

Unfortunately people are attributing motives to the fast-track system. Because in this country a new constituency has developed whose main object is to go to court and stop things. I think one must adopt a transparent policy. Once things are known, the game of these people, the bluff of these people, will be called off. They are known to rush to the courts for every petty thing. So many environment lobbies have come up and there is not one among them which is genuine.

What should the government be doing? Do we need a another independence, this time from the bureaucracy?
No. I do not completely agree with that. What the government needs is a policy approval methodology. Don't blame the bureaucracy all the time. Unfortunately our policy on the matter is very complicated. If the bureaucrats begin saying anything, they are victimised. Honest people find it difficult to work in such a system.

When policies are not clear anybody can change them in any direction. And even an honest man is in trouble. For example, why don't you have such disputes in the US. You don't have lobbies which are dragging cases in courts because their approach to the problem is transparent.

Take the matter of fixing the telephone tariff. They'll have a public hearing of all those who want to make a presentation to the commission. It can be televised too. If you feel that the telephone company is exploiting you, you put forward your reason to justify it.

How can the situation in the country be remedied?
Ultimately the government has to work out a strategy for it. Dr (Manmohan) Singh had introduced several changes towards rationalisation. He appointed expert committees with special focus. They gave suggestions and he implemented them. This approach can be taken in improving the decision making process too.

Will the finance minister be able to achieve prognostications on fiscal and revenue deficits? If not, what factors will impede it?
Fiscal and revenue deficit will continue as long as the government does not take up curtailment of fiscal instruments seriously. In that sense I think the announcement made by the minister that he is bringing a white paper on subsidies is welcome. Let the subsidies be discussed first because there are so many of them which we have never heard of.

Many of the subsidies are concealed. Let all this come out in the white paper. Let the people find out who is benefiting from them. The most tragic thing is that many of the subsidies do not benefit the poor. That is why I say let us have a debate on them.

For example, take the Asian region. The savings rate here is very high. Most countries have a savings rate of 35 per cent. Then why is India's savings rate not high? Well, if you only take household savings, the country is as good as others in the region. Yet the overall savings rate is low because the government has become a drag on the system. And why has it become a drag on the system? Because there are so many public sector enterprises which are making huge losses and they are all being defended by pressure groups.

In Bombay, for example, I consider the BEST to be a white elephant. You can say that it runs very efficiently because it is running smoothly and all that. But the price of a BEST bus ticket is expensive for an average person in the city. The tariff is high simply because the service is not managed properly.

These problems will not disappear unless you bring about proper administration and an efficient administration is not possible unless you bring in competition. I would not like any monopolies running in any area. From that point of view if you go to many sectors like road construction, irrigation, power, transport; everywhere there are concealed subsidies and a lot of waste. Unless we stop this the government will continue to waste money. And the country's savings will be low. If this waste is stopped our saving rate will reach 35 per cent. And then we will grow faster.

Do you think we need an exit policy at this juncture?
The exit policy has become an emotional issue. You need not have a specific exit policy. If an enterprise is running inefficiently then you just bring out a white paper on it. I know individual cases which I don't want to name.

There are PSUs which have had to close down. They had very funny labour agreements. In one case labourers were given a quota of work. They would come in at 10 am and finish by 11.30 am. The rest of the day they would while away playing cards. Such units were bound to go bankrupt. Yet the losing propositions were being maintained. No production was being done but labourers were being paid. No doubt they would come to work regularly. If you ask me why, I would presume because they were getting subsidised lunch and had to spend their time.

It would have been appropriate to find out how much they were producing and what they were doing. Late a white paper on the case should have been brought out. Once everyone would know about the reality all labour pressures would automatically stop. The more you conceal, the more complicated you make things.

Do you think the finance minister had anything significant on the revenue raising or expenditure control fronts? What should he have done?
He himself said that he had very limited time. In the case of the proposals to allow private sector companies into the insurance business, it was a policy decision. It has nothing to do with the budget really. It has no budgetary relevance. A policy decision can be taken outside the budget too.

There is an attempt to manage the budgetary gap. And there is also an attempt to see that the interest rate burden of the government does not rise. For example, two years ago, the interest expenditure as a part of revenue income was about 47 or 48 per cent. This year it has slightly come down. So in that sense I think it's not that the absolute amount will come down. In this Budget the deficit itself has gone down, absolute amount can't come down.

Do you see a debt crisis looming? Will it be exacerbated by the Budget provisions?
The fear of internal debt is still there. Because the moment you have revenue deficit that means capital is being raised to finance revenue. Until we are able to bring the revenue deficit to zero and generate surplus revenue from revenue budget the trouble of internal debt crisis will continue to loom large.

And especially, I think, attempts have to be made to bring down the interest rates for the government debt. But the very fact that the marginal cost of the Budget is what is close to 14 per cent means over a period of time it is going to rise very stiffly. So we have to make an attempt to bring down the interest rates also and that is possible only when government expenditure can be contained.

But how does one contain government spending. Is it possible to curb it?
I think the proposed subsidy paper and expenditure commission are a step in the right direction. If these materialise, even the members of Parliament will get a better picture of what's on and they will be more willing to take drastic corrective decisions.

Take for example the 1991 situation when several major policies were introduced. Everybody then knew that there was a crisis. They did not protest against the policies because if they did they would be in deeper trouble. That is why public education is so important. That is why I believe in transparency.

Has the finance minister done enough on the direct and indirect taxation front? What do you feel would be necessary to bridge the revenue gap?
On direct taxes he has reduced the surcharge and has promised that next year he'll remove it. Through MAT he is raising about Rs 15-16 billion. That means he is bringing down the peaks of the taxes while bringing into the tax net those who were left out. You know you have to make an attempt like this, peak taxes should be brought down and those who are not covered must be brought in. That only will bring additional revenue.

Do we really need foreign money in infrastructure development? Has the Budget done anything to increase or debottleneck the inflow of foreign investment?
Yes. In fact there are many changes that have been made. One major change is that infrastructure projects are not going to be listed companies. You can do the listing later when you start earning. But until then you can have an unlisted company.

Do you believe the Budget is truly pro-poor? Or has the finance minister merely made a gesture and left the real work and financing to the banking sector?
The public distribution system is to be restructured. We have to see what the restructuring will be like. They have also announced that the change will be poverty-oriented.

Subsidy is not likely to increase and if more of it goes towards the poor, the Budget can definitely be called pro-poor. Today even a person like me has a ration card. I don't use it. The point is that many rich people have ration cards and so the bulk of the foodgrain distribution goes to the rich. The government has hinted about correcting this anomaly. In that sense too it is pro-poor Budget.

Will the benefits actually percolate to the poor, given the existing way things work?
Yes. You have to tackle the administrative machinery for that. And tackling it is possible only when you have the political will.

What according to you is the one prominent issue the Budget should have addressed but didn't?
The continuation of the rationalisation process. There were many recommendations made by the Chellaiah Committee on tax reforms. They could have picked up several of the recommendations immediately. But I think if they had picked up all the suggestions of the committee they would have not been sure of the reaction of the parties which are partners in the coalition government.

Perhaps that is why the finance minister did not take a risk. There are many things about the Budget which you can't talk about publicly. Because the Budget is supposed to be a sensitive issue and nothing must leak out. Yet the finance minister must have a lot of discussions, you see.

Given P Chidambaram's political and economic constraints, what kind of Budget would you have presented had you been the finance minister?
I would have gone for many of the things on Dr Manmohan Singh's agenda. I would have continued Dr Singh's policy. I think it was going in the right direction. However, in the last two years, as elections neared, there were political restrictions on him and he could not achieve as much as he wanted to.