Tax breaks for private sector a priority: Sinha

finance minister yashwant sinha, it would appear, is not given to wallowing in any slough of despond. at the fag end of a horrible year that began with the gujarat earthquake, progressed through global recession and is ending with an armed attack on parliament, he has good reasons not to break out into peals of merriment, even if its the christmas eve. yet, hope lives on. so, brave sinha would like to hold out for the nation reassurance for the new year. sinha sees recovery in 2002 and has his own plans to make it materialise. he would break with the fiscal deficit-obsessed practice of cutting back on public investment and boost government spending in those sectors that fail to attract private sector investment. he is confident that the government, currently engaged in tackling some of the more difficult areas of reform such as labour reform, would be able to find its way through legislative haze and inertia. but the fm wants more responsible behaviour from india's economic agents as well. he would like indian industry to stop pleading for sectoral protection and he wants the markets to stop reacting to rumours. too much to ask? sinha met et on sunday morning at his kushak road residence for a free-wheeling interview with t k arun and jayanthi iyengar. excerpts: at this moment people want to know, will there be war, what is in store for the economy, for the markets? let me begin by saying that history has shown that uncertainty is the worst enemy of the economy. today, the economy is driven by sentiment, and uncertainty surely impacts sentiment. this can be seen minute-to-minute in the market. having said that, i would also like to add that no country will ever sacrifice its national security by saying that we're not prepared. i would like to say that given the enormous challenges that we have met in the past years, given the resilience of the indian economy and its innate strengths, we are prepared for any eventuality and certainly much better prepared than our neighbour. the picture has been gloomy for quite some time; the only bright spot has been a recent spurt in machinery and equipment production and non-oil imports. what can be done to revive investment growth? i think we will have to go back a little to understand the present. this should be a matter of some in-depth academic study. the growth experience of the 1980s has been studied and the crisis of 1991 has been largely ascribed to it. the growth model of the '90s has not yet been studied. and the aspect we have to study is the loss of momentum of growth after the mid-'90s. why did industrial growth rate come down to 4.8 per cent in 1997-98 from 7.8 per cent the previous year? clearly because of some of the decisions taken in the mid-'90s the economic reform programme had lost its momentum. and in the first flush of happiness with economic reforms, a lot of capacity had been added in sectors like cement, steel, in the middle of the '90s. unfortunately, neither world trends nor domestic trends could match up to the projected level of demand growth. the result is that we were left with surplus capacity in most sectors. also the global it meltdown impacted our own it industry but more importantly, hurt sentiments. the rise in global oil prices had forced us to take courage in both hands and raise domestic prices. a basic purpose of raising prices is to dampen demand and that has happened, demand has fallen. then we have internal factors. for two years, indian agriculture has fared poorly. another factor is the paucity of private sector investment. we had this feeling that once we liberalise, private sector investment would flow into all sectors. we know from experience that this has not happened, particularly in infrastructure. and therefore, we have changed tack. and in those areas where private investment is not forthcoming, the government would step in. it is all private sector. it's all private money in communications. in ports, a lot of private investment is coming in now. but if you look at the power sector, there has been withdrawal of the private sector. in roads, again, it's largely government spending. if there has to be improvement in the civil aviation infrastructure — we havenn't had much success with the plan to lease out major airports — government money will have to do the job. in yet other sectors, like cement and steel, we donn't expect fresh investment to be made because of earlier capacity creation. thus, in some of the growth areas, it is the government the would have to come forward to invest. but private sector investment is a function of government policy. take the power sector for example. unless distribution is opened up, the chain of payments that has to translate into return on investment cannot materialise and so no private investment will take place... you're right. this is exactly the problem we have identified now. when the government opened up the power sector, one, we made the mistake of starting from the generation end; two, we did not fully involve the states in this. when we came to office, we also tried to move along the same path — complete the fast track projects and so on. until we reaalised that unless distribution is tackled, this will remain a very complex area. and distribution can be tackled only with the cooperation of the state governments. and that is why we have now adopted a policy of encouragement and discouragement and all that. distribution is the thrust of the policy. distribution has two aspects. one is that you must eschew the tendency to give free electricity. you must go for proper user charges. central and state regulatory commissions have been set up for the purpose. the second part is metering, to prevent theft. under the new electricity bill that is before parliament, metering is going to be compulsory, for all consumers and for all distribution channels. the third part is the technical infrastructure for transmission and distribution. you might have read about the power minister coming to me with a plan for a rs 25,000 crore for the technical aspects of distribution. distribution is the key. should we take this as an indication that in your next budget, the government would move away from the present trend of cutting back on capital expenditure as the easy means of fiscal correction? i'll agree with you that it has been the easiest thing to cut and that it has led to investment slow-down. in a country like india, the government has to lead with the right policy framework as well as with commitment of resources. in the last couple of years, you might have seen that, through budgetary provisions and other means, we have committed significant resources to specific areas. roads is a good example of that. i would certainly like to increase the outlays. outlays, you are aware consist of both budgetary support and internal and extra-budgetary resources. and in many areas, the public sector does depend on internal and extra budgetary resources to finance projects. if there is a need, i will certainly provide for it. i will only qualify it with this: the capacity of the government or the public sector to spend in a hurry is not there. but the capacity to mis-spend is there, of course. there are also problems of huge procedural delays. we have been trying to push things through. the pm took a meeting in september to smoothen procedure and we have put a mechanism in place to facilitate implementation, delegate decision-making to the concerned ministries and simplify procedure. and we now have a cabinet committee on economic reforms, which will push these things through. coming back to investment, industry complains that several policies that used to encourage investment have been withdrawn. the minimum alternate tax is a bugbear in particular. would you say that there is case for more liberal tax treatment of investment? without going into the specifics, i would like to say that we are going to look at more investment friendly measures in the budget. in terms of taxation? yes, the fiscal treatment is what i have in mind. we are looking at the fiscal framework for encouraging investment. what happens to phasing out exemptions? is there a conflict between encouraging investment and phasing out exemptions? it is not our intention to phase out all exemptions. there are some necessary exemptions and there are some exemptions that reflect sectoral interests. the exemptions will have to be carefully examined for their utility at this point of time. obviously, with all these exemptions in place, there still has been a slowdown, all these exemptions don't do what they claim to. there is a perception that reforms are being stalled because of political problems. and all of them clearly are not under the control of the finance minister. to take the coal sector, for example, whose reform is essential if the demand from new power plants is to be met on the scale envisaged in a high growth scenario. decontrol of coal will entail rationalisation of the industry, closing down of unviable mines, retrenchment, etc. how can this be tackled? or how will the government overcome resistance to labour reform? look at the model of the insurance sector. in that, we seek to have a strong public sector, along with the private sector. so, what is aimed is not de-nationalisation in that sense but you are allowing in fresh winds of competition to blow. in the coal sector, this is exactly what is being planned. as in the case of insurance, which had the sympathetic support of the banking unions, we are facing trade union resistance to removing the coal nationalisation act. i head a group of ministers which is trying to convince the coal industry and all those associated with it of the need for reform. the unions did not listen to us and went ahead with a three-day strike. you are right, restructuring is inevitable. when economic reforms were launched in the early 90s, we all stood up and cheered. then, we should have realised that indian industry would have to go through a restructuring phase, including the public sector, because of liberalisation. in both the public and the private sector, there is a tendency to run for cover and ask for protection. and that's why i made this point to industry about not seeking sectoral protection. on the general question as to whether it's the responsibility of the fm or of the entire government to see reforms through, clearly, it is the responsibility of the entire government. it will be driven by the collective will of the government. but, let me add, at times the collective will of the government also is not enough, it has to be driven by the political system as a whole. we are now tackling some of the most difficult areas. labour reform, for example. labour reform was unutterable till now. at some point of time, it was said that insurance sector reform was lost. but it finally went through. on labour reform also, an elaborate process of consultation and consensus building is underway. introduction of the labour legislation will not immediately lead to its passage. we now have a system where bills remain pending in parliament for 12 months, long periods. also, there is a tendency for some to speak as if economic growth would have taken off if only labour legislation had been introduced in april or may this year. nothing could be farther from the truth. coming back to collective leadership of the reform process. there are several factors that detract from the credibility of such a proposition. for example, mr george fernandes made trenchant criticism of the labour reform you have proposed. then again, the size of the present cabinet and the manner in which the government has created new ministries and departments to accommodate ministerial aspirants, militates against serious commitment on the government's part to curtailing expenditure... i think much more is made out of all this than the truth is. i have found — and ii'm mentioning this because you've taken a specific name — ii've found a very strong ally in mr george fernandes as far as economic reform and reform legislation are concerned. that one minister has a particular point of view and that another minister is pulling in a different direction — these things are bound to happen. but that is the quality of this whole system. ultimately, we arrive at a consensus, arrive at a decision. and then it becomes a decision of the whole. the problem, it is the environment outside, it is more the spirit of competitive populism, and ii'm including all political parties, including mine, in this, which is militating against faster reform. there is an asymmetry between the gainers and losers from reform. the gains are dispersed among a large number of people and spread out into the future, whereas the loss is borne by a relatively small number of people who can register a vocal protest... yes, there is an asymmetry. but there is an asymmetry also in the media. you make a big issue about a policy and when it is actually made and does not seem to be working in the short run, you immediately start criticising the policy. i'm giving the example of interest rates. softening of interest rates has been one of the biggest demands. i've read a number of articles in all the pink papers saying why this should be done. and now, i've been noticing that i'm being criticised because interest rates are soft. what'll happen to the small saver, the pensioner, bechara and so on. nobody's looking at the rate of inflation. even that simple connection is not sought to be established. the aditya vikram birla group is able to raise five year money at 8.6 per cent. but a small scale ancillary unit, which probably supplies to aditya vikram birla, won't be able to get money from a bank even at 16 per cent. the present policy of limiting the spread over the prime lending rate to 4 per cent precludes the possibility of banks charging an appropriate risk premium and yet lending to the small enterprise. at present, the small guy has to go outside the formal credit network, and pay steep rates of interest. ultimately, even aditya vikram birla's costs turn out to be higher than they ought to be because his inputs costs reflect these high interest rates paid by the small operator. we have lent over rs 40,000 crore through kisan credit cards. one crore and ninety lakhs is the number of kisan credit cards that have been issued. in fact, an amount of rs 41,000 crore has been lent through them. it is not the case that is a reluctance to lend to the small guy. but the small industrialist... no, this is not a judgement that you or i can make. this is a judgement that the authorised person at the bank has to make whether loan proposal before him is viable or not. he alone has to decide that. the cbi will be after him, the cvc will be after him, if there is any mistake. you know, when we're talking of reform, it has to be a holistic approach. i don't think that there is any need for banks, public enterprises, financial institutions, which are now operating in a competitive environment, to remain within the definition of public servants. this is one of the main, biggest drags. banks are in the public sector, they are scared. but, apart from that i do get complaints that small sums of money are not being lent and so on. perhaps the solution to that is to give more autonomy to the banks. and that is exactly what we're trying to do. now we are introducing a laghu udyami credit card for small entrepreneurs, who can avail of a revolving credit of up to rs 2 lakh with this. small shopkeepers and others can now the advantage of this. this is something that we've devised in the last couple of months. has this been launched? yes, it has been launched. but, you know, it takes some time to pick up. even the kisan credit card took some time to pick up. it takes some time for the branch manager to understand what the whole thing is all about. i am positively aware of the fact that there was a lot of resistance on the part of the bank managers to even giving the forms to the farmers. things have improved over a period of time. we've pushed a lot. but, yes, you're quite right, one of the things that we've discussed with the bank chairmen is how we can use nbfcs, how can we use good ngos, how can we use other organisations as retail bankers — because the bankk's spread even today is not as much as to cover all the people. and in the whole issue of what percentage is lent, etc, we find that it is not the neglect of the big borrower, that is responsible, but the neglect of the small borrower. and the small borrower, the small investor and entrepreneur is the one who has to provide the backbone. agriculture is in far deeper crisis than is generally believed. for example, the per capital availability of cereals last year was 8 per cent lower than in 1991 and was at the same level as in 1984. yet, some 75 million tonnes of grain has accumulated in government stocks. this shows that consumption has been squeezed. but do you see this on the ground? do you see it around you? forget the figures but do you see that deprivation has gone up in the urban areas, in the rural areas? do you actually get this feeling? perhaps not in the urban areas, but in the rural areas, one hears of starvation deaths. there is very populist statements about foodgrain rotting in godowns even as people die of hunger. these are very easy, facile claims. but there is widespread malnutrition which is captured by our data. one-third of all south asian children are born underweight, for example. but do you think that this has been on an upswing in the '90s? the accumulation of foodgrains is a recent phenomenon. i don't know, there is a counter theory that people are eating more fruits and vegetables, more fish and meat, etc. this can't be entirely correct. the way we calculate this data on per capita availability of cereals, we assume a constant 12.5 per cent of the output being used up for seed, animal feed and waste. if people are switching to meat on a large scale, more grain would be needed for animal feed. but a low per capita availability of cereals means low per capita availability for animal feed as well. i don't live in delhi all the time. i have a constituency to nurse, which is one of the poorest in the country, it has a large tribal population, it has a large backward class population, and most of them are poor. i travel in the rural areas. i don't see the kind of deprivation that the figures suggest. i've seen consumption going up. people are certainly better off than they were 10 years ago. grain is now available for free. look at the antyodaya scheme, look at the food for work and other assorted programmes that distribute grain, the offtake has been poor. the food for work programme that i'm talking about is not the grameen rozgar yojana but a programme for drought affected areas... rajasthan had implemented it well... yes, rajasthan had implemented it well. from orissa to rajasthan, we had allocated 2.5 million tonnes of grain for the scheme. i had thought that it would play a major part in food security. but not all states have taken advantage of it. when we gave foodgrains in the shape of the sampoorna grameen yojana, some of the states told us, no, no, this won't work, people want cash, not food as wages. that would make it all the more imperative that you reform your current procurement policy. certainly. to tell you the truth, when somebody asked me the other day, you have been finance minister for four years, which has been the major area of disappointment, i said that the most important unfinished agenda is in the agricultural sector. because, in this area, where again we have to work with the states, many of the reforms have not gone through. a common market for agriculture, freedom to the farmer to sell wherever he wants., a minimum support policy which will promote diversification of crops, diversification of agricultural marketing in a way which will help the farmers, through, say the futures market, get a better price. i am a strong votary of the farmer's freedom. but left to barnalas and chautalas, will things change? it will change. there are problems and i'm not minimising them. but in this area, we have to work in close collaboration with the states. otherwise, policies will remain unimplemented. the present policy helps only punjab, haryana and western up, which account for 95 per cent of procurement. of course, chandrababu naidu's andhra pradesh also gets a piece of the action these days. but in bihar, the only effect of a bumper crop is to send prices crashing. orissa has just 72 procurement centres. the present policy helps only the farmers of northwest india. you're quite right. and that is what has created the vested interest in the system. i talked of decentralised procurement in the budget. the greatest resistance has been coming from the most surplus states and the most deficit states. even the kerala chief minister is opposed to it. what will be the final shape of apm dismantling? we've been quite transparent on the decisions, the petroleum minister has been announcing our decisions. anything further, i would like to hold back till the cabinet clears the whole thing. but let me tell you one general thing because i've seen reports to the contrary. the idea is to dismantle the apm and not replace it with another set of controls. subject to the continuations of some amount of subsidy... yes, that is the idea. the petroleum minister has talked of a road map for eliminating subsidies. you would remember that it was the uf government that had worked out the original roadmap for dismantling subsidies in september 1997. bt we are the ones to implement it. and that is why the prices of lpg and kerosene had to be raised. within 7-8 days, the uti's us 64 scheme will become nav based and open for redemption. do you expect the need for some capital infusion? the uti board has considered this matter. they've sent their views to the ministry, the ministry is examining them and will come out with whatever is required. on capital infusion, i would not like to comment on that at this point of time. the tarapore committee has found some lacunae in the functioning of uti. what kind of steps are being considered for structural improvement? there is the tarapore committee report, the malegam committee report, they have made various recommendations, we've asked the uti board to look at all the reports, consider them, we should be able to announce some reform measures within the next few days . uncertainty, you said is bad for economics. don't you think indian industry should be given some idea of what kind of import duty rates they can expect not just in the coming budget but in the coming years? everyone has given clear indication to indian industry that they have to be ready for competition. not just me, but before me mr chidambaram and dr manmohan singh had said the same thing. i had said in the budget speech that we will move to asean level tariffs in three years' time. there are those who say that what indian industry needs to boost exports, even in an hostile external environment, is an end to the anti-export bias created by domestic prices higher than international prices. infrastructure and finance, apart, of course. quite right. i think people don't fully understand the import of the removing the quantitative restrictions with effect from april 1, 2001. india has become an open economy where indian producers have to compete with the world's best even on indian soil. if someone were to ask me what has been the most significant achievement of a decade of reform, i would say that it is that the indian consumer has got a better deal than he ever had in history. with the lowering of trade targets, are you also working on lower customs revenue targets? because international oil prices have fallen and products are no longer imported, import revenues from petroleum products has considerably declined. i'll come out with the revised figures in the budget. what about pension reform? we are looking at pension reform in two major areas. one is the government, for which some steps have already been taken. then we have the oasis report for social security. that is also under consideration, along with the irda's report. what is happening on enron? the enron problem will be solved. we are moving in the right direction. as soon as the due diligence is over, i expect things to happen. a solution is within our grasp, although i would not like to hazard a time-frame at the moment. what is your message for the stockmarket? i've felt a little dismayed from time to time, to find that markets respond to rumours. if it responds to reality, nobody minds that. some people spread rumours for their own benefit. some bit of concern in response to that is understandable. but i don't see any need for panic. the market reacts from minute to minute. but we have to look at the indian economy in the long term. the indian economy has faced a large number of challenges and successfully. i would expect the markets to behave more maturely and not resort to short-term methods which is not the right thing to do. when do you think would the economy look up? i am hoping that 2002 would be better than 2001. let us not forget that this year began with the gujarat earthquake and is ending with the attack on parliament. what is mrs sinha telling you about the budget this year? we are nine weeks away from the budget as yet. she'll come up with her ideas soon enough.

Tax breaks for private sector a priority: Sinha

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