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All political parties agree on farm debt waiver: PC
Published on Sat, Mar 01, 2008 at 23:39, Updated on Sun, Mar 02, 2008 at 09:59 in section
Tags: Union Budget 2008, P Chidambaram
HARD TALK: P Chidambaram explains the finer nuances of the Budget in an interview to Raghav Bahl.
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With a Rs 60,000-crore loan waiver for farmers, higher income tax slabs for the middle class and a big push to stimulate consumption in the economy; Finance Minister P Chidambaram delivered a stunner with sixth Union Budget, which was also the last full Budget of the UPA Government. Chidambaram explains the finer nuances of the Budget in a special interview to the Managing Director of Network18, Raghav Bahl.
Raghav Bahl: Hello and welcome to this very special interview with Finance Minister P Chidambaram. Sir, if I was to sum up in one phrase the Budget that you have presented, it is heads I win, tails you lose. You seem to have taken all the credit for the farm waiver, but the problem seems to have been left for the next two years, for the next Finance Minister.
P Chidambaram: The next Finance Minister, I am sure, will be from the Congress party.
Raghav Bahl: But the problem is still with him.
P Chidambaram: No.
Raghav Bahl: Why do you say that?
P Chidambaram: We won’t do anything in the way Mr V P Singh or Mr Devi Lal did. We have done our homework (and) we will find ways and means to provide equivalent liquidity to the banks over a period of time during which they would have expected to recover loans that have been written off.
Raghav Bahl: Are you in a position to share some detail at least of this package?
P Chidambaram: I can’t share the details of any package, but we will find the resources — non-tax revenues. There are other resources, there are other ways to provide the liquidity.
Raghav Bahl: By when do you think we will know the contours of this package?
P Chidambaram: Let me first implement the package by June 30. Let me first do what I have undertaken to do, namely write off the loans of small and marginal farmers and then get into an OTS arrangement with other farmers.
Once this part of the exercise is done, we will have an exact idea, exact number and then we will address the issues of how to provide equivalent liquidity to banks.
Raghav Bahl: When you say equivalent liquidity? Is it going to be bonds or is it going to be, for instance, non-debt capital receipts like sale of public sector stock — something which the markets or the analyst community or even financial commentators would welcome very much?
P Chidambaram: I think there are a number of options before the government and we are examining all the options. It could be a mix of a number of instruments.
Raghav Bahl: There has been some talk about the fact that you could probably have enlarged this offering by including not only bank loans to the rural poor, but also the village money-lenders or the non-institutional form. Is there any mechanism of doing that?
P Chidambaram: How do you do that? Tell me if there is one. Nobody has told me about any such mechanism.
Raghav Bahl: Has any analysis been done as to what is the ratio of indebtedness to village money-lenders and that to the commercial banks? Are there any studies that you may have consulted?
P Chidambaram: No one knows that. There are only surveys. But these are not exact numbers which can be relied upon. Because people borrow from money-lenders for a variety of purposes — they use borrowed money partly for agriculture and partly for non-agriculture purposes. How can you make an estimate? How do you know who has borrowed from whom? How are these numbers reliable?
Raghav Bahl: What about the moral hazard argument that a lot of people are putting forth — including you yourself and your Prime Minister? When the whole issue of free power was being debated, the PM as well as you felt that this kind of economics is not something that’s going to work?
P Chidambaram: Please! When farmers were committing suicide, there was a clamour that there should be debt relief. When the MS Swaminathan Committee suggested that farmers’ debt must be relieved, why did nobody raise this issue of moral hazard? In the run-up to the decision, no one raises the issue of moral hazard. When the decision is taken, it suddenly becomes a hazardous decision. I think that’s a very cynical way of approaching the problem.
Today there is a problem. There is a clamour all around that the debt of farmers must be relieved. In fact, all political parties seem to be agreed that debt relief must be given. And, therefore, the government has done what I believe is the right thing. We have granted them debt relief.
Indian farmers are quite honourable. Nine out of ten years, they repay their debts. There is one year when there is a natural calamity or a drought or a famine or whatever, when they are unable to pay their debt. I think we have reached a situation where a large number of farmers would have gone out of institutional credit and that would have seriously affected agriculture.
Raghav Bahl: I go back to the free power argument. Is there any assessment if there was any kind of threat of any dislocation or imbalance? There have been some studies which have shown that the water table has receded and there has been reckless use of power. Do you think a waiver of this sort would perhaps lead to any kind of perhaps reckless borrowing in the second round?
P Chidambaram: I don’t think so. In fact, farmers are honourable people. As I said, nine out of ten years, they repay their debts. It just happens that from time to time for a variety of reasons this debt accumulates and a large number of people are in danger of going out of the institutional credit system. And, therefore, we intervene. But I don’t think this needs to happen year after year.
Raghav Bahl: Let me move to the fiscal deficit. Clearly you said that even though they are below the line, this time you are putting them in the Budget at a Glance document. What’s your assessment as to what the total fiscal deficit would be when you put all the off-balance sheet and on-balance sheet items together?
P Chidambaram: No, you don’t put all. You only put that year’s, because the fiscal deficit is only that year’s. I have given the number in the Budget at a Glance. And as on the day the revised estimates are published, you will find that it adds up to another Rs 18,757 crore, that’s about 0.3 per cent of the GDP. So my 2.5 would have been 2.8.
Raghav Bahl: But that still doesn’t take into account the entire oil pool deficit in a sense, because you haven’t fully compensated the oil companies yet.
P Chidambaram: This is the bonds that I have issued so far. When we issue, we will bring it over the line.
Raghav Bahl: So what’s the estimate therefore? Some estimates are that it could be even two percentage points.
P Chidambaram: No, no. I think that’s highly exaggerated.
Raghav Bahl: When you put the oil, the food subsidy and the fertilizer subsidy together and the Pay Commission…
P Chidambaram: Why assume that the Pay Commission would have to be paid for by bonds?
Raghav Bahl: No, not by bonds. The fact that consolidated, it becomes a part of the fiscal deficit.
P Chidambaram: I don’t think so. I can only report what bonds are issued. It’s for Parliament to vote the bonds. When bonds are voted and we have an exact number, we will show that in the documents. For the first time, we are showing it. In all these years, nobody showed it; nobody asked questions. When I am showing it, people are asking questions.
Raghav Bahl: They will, because it’s visible now.
P Chidambaram: These numbers were available. They were not on the Budget document.
Raghav Bahl: My question is you have recognized the bonds that have been issued. But there is also a contingent liability to cover up.
P Chidambaram: That will show up in the actuals.
Raghav Bahl: Any estimate of that that you have?
P Chidambaram: When we issue the bonds, we will know. And that will show up in the accounts put out by the controller of government accounts.
Raghav Bahl: Pay Commission, why is it that the Railway Budget makes a provision and you don’t?
P Chidambaram: But I do in a sense. Because there is a normal increase in 2008-09, that has been factored in. The Pay Commission’s award will subsume the normal increase. So I have to only provide for the increment over the normal increase. That increment we have no idea at the moment. And, therefore, when the report comes, we will have an idea. But I have left for myself headroom to borrow if necessary. But I don’t think that will be necessary. I think the revenues will take care of that.
Raghav Bahl: The headroom that we have is about .5 per cent, which should be what, about Rs 40,000 crore?
P Chidambaram: No, no. 0.5 per cent is not Rs 40,000 crore. It’s about Rs 25,000 crore.
Raghav Bahl: And that will have to take into account the farm waiver bonds, if they are bonds?
P Chidambaram: No, you are going back to the same issue. I have said the farm waiver will be handled in a different manner. This headroom has been provided, in case I have to borrow. But even here I am confident that the revenue buoyancy will take care of the Pay Commission requirement.
Raghav Bahl: Let’s come to the revenue buoyancy argument. Clearly, you have had a very good year. In fact, you have had two very good years. Clearly also the first signs of deceleration are there. This can’t be denied. We are still high, but we are decelerating. That’s a given. And your real interest rate structure in the economy is very high.
P Chidambaram: Real interest rate is not very high.
Raghav Bahl: It’s about 7 per cent.
P Chidambaram: No.
Raghav Bahl: How do you say that?
P Chidambaram: You are looking at the PLR. But bankers will tell you that there is a very large part that they are lending at sub-PLR. In fact, virtually their loans to industry are at sub-PLR.
Raghav Bahl: Well not true for all of them, sir.
P Chidambaram: I don’t know about your credit rating.
Raghav Bahl: Well, ours are probably not even at PLR, but PLR-plus.
P Chidambaram: I don’t get a loan, so it’s OK.
Raghav Bahl: But be that as it may, a lot of borrowing is happening at about 12 per cent and your inflation is at about 5 per cent.
P Chidambaram: That’s not correct. Agriculture lending is taking place at 7 per cent. Export sector gets it at less than PLR. A large number of industries get it at less than PLR. This is the reason why the benchmark PLR remains high. If all loans were being given at PLR, bankers have told me, PLR will drop immediately.
Raghav Bahl: What’s your estimate, then, of the real interest rate?
P Chidambaram: I don’t know. Real interest depends on the category of borrowers. For the farmers, the real interest rate is only 2 to 2.5 per cent. For the exporter, it’s about 3 per cent. For the industrialists, the first-class industrialists, I think the real interest rate is only about 3.5 to 4 per cent.
Raghav Bahl: Well, I would disagree, but then we would quibble. The fact is at 4 or 5 per cent even, you have got a very high real interest rate structure.
P Chidambaram: But then that’s necessary for monetary management, for containing inflation.
Raghav Bahl: But that also could dislocate growth, which is everything that your revenue buoyancy is predicated on.
P Chidambaram: Which is why I said in my speech that there are limits to monetary accommodation and, therefore, I will take fiscal step. And I have taken fiscal steps to stimulate growth and demand.
Raghav Bahl: Are we saying that we are then stuck at this real interest level?
P Chidambaram: We are not stuck on anything. It’s the RBI which manages the interest rates. RBI consults the government and we convey our views to the RBI privately as we should. But since the RBI is the monetary authority, it has a right to decide interest rates and I am sure they factor the need to provide interest rates that will not hamper growth. In fact, more than once the Governor has said, growth with price stability. The Prime Minister has said it and I am sure the Governor fully recognizes that it is important to ensure that growth takes place with price stability.
Raghav Bahl: Well, there has been a lot of focus in your Budget in stimulating consumption, the sub-text there being that investment demand in the economy is now something which is stable and pretty much a given. But there could be early signs of investment demand also slowing in the economy.
P Chidambaram: Not the figures we have. The Economic Advisory Council places investment to GDP as over 36 per cent. My own Economics Division places it slightly higher. We will have final figures, of course, much later from the CSO. But assuming that investment to GDP is 36 per cent, that’s very high investment.
Raghav Bahl: It is. I am just saying that first signs of deceleration. I am looking at the signs of deceleration. Your credit growth is slowing?
P Chidambaram: No. That is a conscious, deliberate attempt to slow down non-food credit growth.
Raghav Bahl: Also the fact that you have, whether it’s admitted openly or not, in fact, a quota system where FCEBs and ECBs are not really getting approvals. When was that last big FCEB or ECB that got your approval?
P Chidambaram: $500 million is automatic.
Raghav Bahl: Yes, but you are not seeing the inflow of capital. And the government has openly said that we are not very comfortable and RBI also…
P Chidambaram: That’s not correct. FDI numbers, FII numbers, ECB numbers for 2007-08 are higher than 2006-07. For 2008-09, we will have a policy. But then numbers clearly show that these three heads are higher than 2006-07.
Raghav Bahl: So, you are saying no sign at all of any slowdown?
P Chidambaram: No. I am forewarned, there could be a slowing down because I see in consumer durables. And, therefore, we are taking steps to stimulate demand. We have cut excise duties, we have cut duties on project imports, we have cut some customs duties and we have also left more money in the pockets of consumers.
Raghav Bahl: But in investment demand, you don’t seem to see that kind of slowing down.
P Chidambaram: Not yet.
Raghav Bahl: In terms of how you intend to insulate the economy from a global recession, we didn’t hear too many steps in that direction. What the plan be?
P Chidambaram: There are no ready answers to this. We will have to respond, as I said, we will have to be prepared to respond swiftly as the situation evolves.
Raghav Bahl: What kind of responses would those be?
P Chidambaram: Monetary, fiscal.
Raghav Bahl: Monetary would be a cut in interest rates?
P Chidambaram: I don’t know. Monetary response is a standard textbook response. Fiscal response is a standard textbook response.
Raghav Bahl: Fiscal response you have already given.
P Chidambaram: Supply side responses are there.
Raghav Bahl: What about food? We had a problem last year.
P Chidambaram: We will import food if necessary.
Raghav Bahl: Is there a plan in place to do that?
P Chidambaram: Yes, of course. If necessary, we will import food. But the idea is to increase production. And I have disclosed in my speech that the Ministry of Agriculture expects an all-time record at least in five crops. There are some which are not doing so well. But if necessary, certainly we will import food.
Raghav Bahl: One major thing which went against the grain of a feel-good Budget was the change in the short-term capital gains tax.
P Chidambaram: Who is affected?
Raghav Bahl: Well, certainly sentiments get affected and people are paying short-term capital gains tax.
P Chidambaram: But who is affected? There is a person who is buying and selling in the short term. He is making a gain. He is not making a loss. If he is making a loss, he doesn’t have to complain. He is making a gain.
In many countries, they don’t make a distinction between capital gains and income. In many countries, there is no distinction between short-term capital gain and long-term capital gain. For a historical reason, we have got this difference between gain and income, we have got this distinction between short-term and long-term. And they were paying 10 per cent. It will be equated with the DDT rates.
Raghav Bahl: But the question really is three years ago, you yourself put in the structure.
P Chidambaram: No, this structure has been there for many years. I abolished long-term capital gains tax.
Raghav Bahl: And the markets and the international community thought that this is now a stable regime.
P Chidambaram: No. The context has changed. Three years ago, the market was virtually dead. We had to revive the capital market. We had to bring back retail and interest in the capital market. Today, the Indian market — at least till it was 20000-21000 — is extremely attractive. It is giving returns higher than in any other kind of assets.
And, therefore, in this point of time to equate the short-term capital gains tax with the dividend distribution tax makes sense. If I hold a share and receive a dividend, I pay 15 per cent. If I sell the share and make a gain, I should pay the same 15 per cent.
Raghav Bahl: I think what it has done is brought into question the regime that was put into place. Now people are saying you may also get a long-term capital gains tax next year or from any other Finance Minister.
P Chidambaram: See the point is these are not carved in stone. All that we offer to the investor is moderate and stable tax rates. But that doesn’t mean tax rates wouldn’t be jigged, in which case I shouldn’t have changed the slabs of income tax either.
Raghav Bahl: I think the expectation was that we now had a system in place. I think with the change, that expectation gets into question.
P Chidambaram: I think you should now expect that DDT and capital gains will bear the same rate of tax.
Raghav Bahl: Sir, my last question. And this on five years after having managed the economy, one expectation people had that when we have people like the Prime Minister and people like you — who are experienced economic administrators — that when you exit you will not leave us with that much big government. We still seem to see a lot of big government, a lot of micro-management, that is still getting done off the economy.
P Chidambaram: The Central Government looks bigger because the state governments want the Centre to bear the burden of many many programmes — agriculture, primary education, primary healthcare. Under the Constitution, these are the subjects reserved with the state governments.
But because states are not willing to bear responsibility as much as they should in my view and because there is uneven progress in the states — and some states are falling behind very badly — the Centre had to intervene. That is why we have over a thousand schemes which are Centrally funded. Therefore, the government looks big. But if the state governments are willing to take more responsibility, I will be very happy to shed this responsibility.
Raghav Bahl: But big government also in the sense of a government which still wants to micro-manage.
P Chidambaram: Such as?
Raghav Bahl: Look at the plethora of rates you have on FDI and FII. That it will be allowed 20 per cent here, 26 per cent there, 38.5 per cent somewhere.
P Chidambaram: Life was indeed simple when we banned FDI. Point is we are a closed-door regime. We are opening the doors and the windows. We are opening it as fast as we can. But there are problems. There are political objections. There are domestic sensitivities. There is a need to protect domestic industry. So when we open some door, we cannot open it fully. When we open some window, we have to open it partially. That looks to you like micro-management.
Raghav Bahl: But do we need to have so many slabs?
P Chidambaram: We don’t.
Raghav Bahl: I can have one more than 50 and one less than 50.
P Chidambaram: I agree with you. I am trying to convince people that there is no difference whether there is 26 or 49. Because 26 and 49 put you exactly in the same position.
Raghav Bahl: What’s the objection?
P Chidambaram: Objection is 26 is OK, but 49 is not OK. The point is we are a coalition. We have to carry out allies and colleagues with us and we have to be sensitive to their concerns.
Raghav Bahl: My last question. When do you think we are going to have the elections? Everyone is talking about a September-October election.
P Chidambaram: May, 2009, I am told.
Raghav Bahl: That’s the scheduled one. But do you think the politically correct or opportune time could be the last quarter of this year?
P Chidambaram: I don’t decide this matter. I am not the leadership of the UPA or the Congress party.
Raghav Bahl: But you are an important voice in that leadership.
P Chidambaram: I am only doing my job as a Finance Minister.
Raghav Bahl: Would you rather have a winter election than a summer one?
P Chidambaram: I’d rather have an election which takes place regularly every five years. In fact, I’d rather have elections for states and Centre to take place together so that we can focus on governance for four years. Unfortunately in India, every year is an election year. 2008 is an election year, 2007 was an election year, 2006 was an election year. If Finance Ministers were obsessed with elections, they can never present a Budget.
Raghav Bahl: Mr Chidambaram, thank you very much.
P Chidambaram: Thank you.
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Total Comments: 3
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Our Honorable FM has given TAX exemption to IT companies those who set up shops in IT SEZ. He is
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many many %22I dont know%22s from FM. we have or are opening our doors and windows as fast as possible,
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It was a delight to see this interview. The conversation had content and there is something to take away from
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