Budget '07-'08: PC's post-Budget interview

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Keywords: Interview, Post-budget

Palaniappan Chidambaram, the Union Finance Minister, who is perhaps also the most prolific Finance Minister since India began its reforms in 1991, explains the finer nuances of the Union Budget 2007-08 in a special post-Budget interview to Raghav Bahl, MD of the Network 18.

Raghav Bahl: Sir, yesterday, people who saw you giving the Budget speech must have been rubbing their eyes in disbelief. Here was a man 10 years ago with a much worse macro-economic situation took bold leaps of faith. But yesterday he was a man sitting on a dream macro-economic situation being virtually status quoist?

P Chidambaram: Wrong. The dreams of 1997 and the dreams of 2007 are very different. I am lucky to be part of that dream and I am lucky to be part of this dream.

In 1997, what was the dream? India must join the rest of the world, India must take wings, India must accept her share of responsibility to become a key driver of economic growth in the world. Those were the dreams in 1997, and the engines that could have driven those dreams obviously were industry and services sector.

The dreams of 2007 are very different. The growth today is a given, it's not a cyclical shift. It is a structural shift. Given that the growth is a given and industry and services seem to be virtually on auto pilot, they are mature, confident enterprising, willing to take on the rest of the world; this is the time to dream other dreams, namely to make growth more inclusive.

Bahl: I will come to your assertion that growth is a given, which maybe a bit too facile and does not quite get reflected in your numbers. But your Budget that very morning was born under fear. You ban forward trading in wheat and rice.

Chidambaram: I didn't. Forward Markets Commission did it.

Bahl: But here is a government, a Prime Minister, a Finance Minister who believe in the efficiency of markets. And then, you get scared.

Chidambaram: I think you are drawing very facile conclusions. The economics division, which enjoys a large degree of autonomy, has got a section on forward markets in the Economic Survey, which justifies forward market as a price-discovery mechanism. But there is another view. There is another view that there is too much speculation, there is too much trading in "thin" commodities and I am no expert to say which view is right. Let me make that very clear, I am no expert to say which view is right.

Bahl: Sir, it's a problem of regulation.

Chidambaram: One month ago, the FMC restricted forward trading in tur and urad. Tur prices have declined. There maybe no cause-and-effect relation, but it has declined. We don't know, which view is right, which view is wrong in the given context. Therefore we have appointed an expert committee, for, I do not have to take a view now, I have to take a view only when the expert committee report comes to me.

Bahl: Sir you have just played safe.

Chidambaram: I have simply reported what the FMC did.

Bahl: Let me say why I believe it's a status quoist Budget. You had 20-30-35-40 per cent, unheard levels of growth in your tax revenues. And you wanted to control inflation.

Chidambaram: That was not because some kind God smiled on us. It is because our department worked hard.

Bahl: You managed the economy very efficiently. Absolutely. You had that much of flexibility before you and you wanted to rein in inflation. What then stopped you from bringing duties down to 7-8 per cent? In one fell swoop, you would have killed inflationary expectations in the economy?

Chidambaram: Not correct. I will tell you why. When an economy is firing at near-full speed, when actual outputs exceed potential output, cutting customs duties alone does not act as a price-restraining measure. Because the demand is so high, you can still sell your product at the price that you are able to command.

Bahl: That’s a strange argument I am hearing from you. You have always said consistently that this inflation is far more supply-induced than demand-driven?

Chidambaram: No, you talked about cutting further. I am answering that.

Bahl: You were giving me the reason for not cutting?

Chidambaram: No, I didn't say that. You said that I should have cut custom duty further, it will be disinflationary.

Bahl: It would have killed inflationary expectations?

Chidambaram: That is not correct. I will tell you why it’s not correct and that’s what I am trying to explain to you. You agree or disagree that’s a different matter.

I have been advised by my economic advisors. You have to cut a customs duty that is disinflationary. But the further step that you are suggesting - you cut it deeper, it is more disinflationary; we don't buy that argument.

That will apply only when there is industry working at less than full capacity. When industry is producing at full capacity, in fact, actual output is exceeding potential output and they have got pricing power; merely cutting customs duties more does not make it more disinflationary.

Bahl: That’s the sub-text of status quoism I am talking about?

Chidambaram: That is an economic advise I have received and I think it is sound advice.

Bahl: Let me give you another example. Last year and the year before that, we all applauded you for the kind of tax reforms and the convergence to the single rate that you talked about. Now, we were all expecting this year that you would cut excise, move service tax up — sort of converge to that single rate that you have been talking about. You didn’t touch it, nothing.

Chidambaram: How can I? I will tell you why. How can I do that? Only a few days before the Budget, we reached an agreement with the state governments. I have given an outline of that agreement. You don't know the details of that agreement.

Under that agreement, we have agreed to work together on a roadmap for GST. They have accepted in principle the GST, they have not yet agreed on a roadmap. At the end of that roadmap, we will have to agree on a rate on which all taxes will converge. We have not agreed on the convergence rate.

Bahl: You have indicated that 16 per cent CENVAT is something you would like to do. What is the Finance Ministry’s view on this?

Chidambaram: That is my view. There are 30 state governments, it requires a constitution amendment, state governments have to ratify that amendment. I can’t thrust an opinion down the throat of state governments.

The consultative process has not even begun, we have just reached an agreement to begin the consultative process. Once I know what the convergence rate will be, then I have to move the excise duty, service tax and they have to move the VAT towards that rate. At this stage, without knowing what the convergence rate is, how do I move the service tax and the excise duty rates?

Bahl: But that's something you had spoken about last year. You said 24 per cent and 32 per cent rates, and then you would start moving towards the convergence rates. Now the convergence rates would be 15, 16 or18?