New Delhi: Finance secretary Ashok Chawla has been in the thick of action as the government has moved to put in place major policy changes to, first, mitigate damage from the global economic meltdown and, later, chart a revival of domestic industry. Even as the economy has gradually stabilized, the finance ministry is readying for the presentation of the next Union budget and negotiating the next steps in seminal tax reforms. Chawla took some time off from his schedule to speak to Mint on the macroeconomic challenges facing the country, and the government’s plans to push through economic reforms and put in place new expenditure management measures. Edited excerpts:

Now that we are into the latter half of the third quarter, what is your sense of the growth trajectory for this fiscal year and the next?

So far as the numbers are concerned, we are keenly awaiting the GDP (gross domestic product) numbers for the second quarter. Our expectation, not just hope, is that they will be better than the first quarter numbers (India’s economy grew by 6.1% in the first quarter). But we need to get a confirmation on that. Having looked at that, our sense is that in the third quarter, fourth quarter as we go ahead will continue to be slightly better than the previous period. The reason is not very far to see: Domestically, things have certainly improved; internationally also there is some improvement—exports are still in negative territory, but their decline is much less. So, overall, our sense of 2009-10 fiscal continues to be somewhere between 6.5-7%, which may be slightly more optimistic than some of the other forecasters. But I don’t think we will be proved very wrong.

What about the next fiscal?

No cause for worry: Finance secretary Ashok Chawla says there is no case of a bubble either in the stock market or the real estate sector—‘certainly not in real estate’. RajKumar / Mint

There has been a renewal of capital flows into India. Given the current trends, do you expect them to go up to the record levels of 2007-08, when they aggregated 9% of GDP?

Certainly not to that extent. The flows that we got this year seem to be in line with our current account deficit—which is expected to be close to or slightly less than 2% (of GDP). They will continue to come, continue to be active because the markets in the Western world have got declogged and they need to find good avenues to invest. That kind of flow (that we saw in 2007-08, however) is not expected. While we are certainly watching to see if any corrective actions are required, the clear sense that both the Reserve Bank of India (RBI) and we have is that there is no cause for undue concern or panic at this stage.

Why do you feel it won’t surge beyond manageable levels?

One is that there are needs of capital that are re-emerging in those economies. In the first flush, the real sectors there were not able to absorb (this capital), but now real sectors there are coming back. Secondly, there is this constant fear or anxiety of a double-dip (another plunge in economic growth), so people are not absolutely certain at least in the industrially advanced economies; hence, they are not willing to take very clear positions with regards to money and financial markets. So the expectation is that it will come in, but in a calibrated manner which the economy will be able to absorb.

You expect this macro backdrop to endure for at least two quarters? If so, will it set the stage for the next budget in terms of challenges and agenda?

I would think so, yes. Setting the stage in terms of the fact that there is reasonably good growth, but not the kind of growth which we saw before the crisis. It is setting the stage where exports are doing alright, but not really up to the mark—trade deficit is there but not too high, because imports are not too high. Third is inflation, which will be in the region of 6%-plus/minus by the time we go for the budget. And fourth, the external sector is reposing confidence in India and we can expect monies to come in. Lastly, we go into the budget with the broad idea that the parameters of the economy, on the whole, are not dysfunctional.

Presumably, it will free your arms to divert your energies away from firefighting.

Absolutely. I think that is what the government will be looking at.

Any broad focus areas?

They have been spelt out by the government when the President gave the address after the formation of the new government. They continue to be (to) improve our growth, focus on infrastructure, ensure that there is more by way of inclusive programmes in the rural countryside, focus on education and health.

What about fiscal reforms? Especially with respect to subsidies, taxes and expenditure that the finance minister signalled in the budget?

On taxes, there has been movement. In the sense that the government has put out in the public domain its thinking on the direct tax code and, on broad lines along with the state governments, GST (goods and service tax). This is a work in progress and cannot conclude in a day; so, they will play out. Now, on the subsidies and expenditure, overall, there is some thinking going on, but not much has been attempted so far because this particular year has gone in ensuring that public spending on programmes which are of importance (is done). So 2009-10 is not really one year where we could have logically expected some action on these. But as we go ahead, particularly with respect to 2010-11, the government would like to have an overarching view on the expenditure framework, how things are moving and what should be the areas of focus and where we should try to cut. There is some thinking going on and I think you should wait till the budget for government to announce larger policy measures in terms of expenditure. You can expect that.

The finance minister had promised a Bill on the direct tax code in the winter session of Parliament. Is that happening?

I think the process of consultation needs to be further broad-based because there are a number of issues where concerns have been raised quite strongly. Some of those issues have to be addressed in consultation with all stakeholders so that there is wider acceptance. We also have to look at the fact that the direct tax code was conceived as one overall package. So if some elements are going to be moderated or deleted, then what is going to be the impact on the entire structure. So whether it will come in the winter session of Parliament or not, I am not very sure...but the idea is to carry this forward. In any case, the ultimate objective and plan was to bring it into force from April 2011; that end objective remains.

As and when GST and the direct tax code come into play, won’t it completely reorient the budget to focus on expenditure management?

Exactly. In fact, that is the kind of thing that happens in more industrially advanced countries, where the annual budget statement is more focused only on expenditure and the quality of expenditure. They don’t really go into specifics of taxation and duty rates as those are supposed to remain the same over the medium term. So once this kind of framework comes in on the direct tax side and indirect tax side, the annual budget here will also to that extent become something like what happens in those countries...once this happens, the architecture would be far more balanced, logical and comprehensive. So the whole business of entities and individuals not knowing how to make out their tax arrangements either on the production side (or the) individual income side will get addressed over a period of time.

The Union Budget had proposed unshackling of the fertilizer subsidy. What is the progress?

The fertilizer ministry had prepared some kind of scheme on that which had to be considered by the government first, the other ministries and then at a political level. So, at the moment, it is just work in progress and has not reached any degree of finality.

Any timeline for that?

I will find it difficult to comment on that.

The government has recently moved on several reform initiatives. What does the blueprint look like for the next six months?

Six months is difficult to say. Many of these are long-haul things. But I think the general position of the government is very clear. Not only the finance minister but also the Prime Minister articulated it at the World Economic Forum (the India Economic Summit in early November where both spoke) where he said that we would be keen to carry forward reform of the financial sector; they have to complement the activities and growth in the real sector. We are very conscious of the fact that efficient, big-sized intermediation is critical to sustained growth of 8-9%, because business and industry need that kind of service to enable them to grow. So we need progress... insurance, pension and even the banking system needs to respond more effectively in terms of their operation. A number of things that we are looking at have been identified in the Economic Survey (2008-09).

Are you suggesting that over the next few months the government will spell out details on these reform measures?

Maybe not in the next few months, but in the budget the finance minister will detail more things as we go ahead. That will be the time. Between now and the budget, which is not very far away, we need to really get a clear idea and consolidate our position, whatever it is, on the growth side and watch how it plays out in terms of revenue collections. My sense is that you should not look for any big-ticket things in the next three months. But the budget will be an opportunity for the finance minister to take stock of how 2009-10 has been, how he sees 2010-11 as he goes ahead, and what is his agenda for the next 12 months—which will detail some of the reform measures.

Is there a move to convert the high-level coordination committee (HLCC) into a formal body?

There is a move but these things have to be discussed and finalized with the Reserve Bank of India. There is certainly a move.

Given the excess liquidity in the system, are we looking at a new asset bubble, especially in real estate or any other financial sectors?

The sense we get from the securities regulator (the Securities and Exchange Board of India) is no. And there is some amount of movement in the stock markets; it is not something that can be really categorized as leading up to a bubble. Maybe there is an occasional exuberance, which is more than what it should be. But beyond that, there is no case of a bubble either in the stock market or the real estate sector—certainly not in real estate, which is just coming back to reasonable kind of levels. So I think the asset bubble part of it is not all a cause to worry. And since we expect the capital flows from outside to be manageable and in a modest range, that is not going to fuel these things.

What is the next stage in the calibration of your exit strategy (from an easy money policy and the fiscal stimulus)?

On exits there are two views, which the whole world has been debating in the G-20 (Group of Twenty countries) forum. That we need to now start talking about exit; at least prepare ourselves for it; also, whether the economies need to unwind the fiscal part first or the monetary part first. And one view at the international level is that the fiscal part should unwind first. The appreciation that we have is that our fiscal intervention was more to revive public spending and put money into the system which will generate demand and ensure growth. And for that we had to give some amount of tax revenues as we went along. Now these need to play out a little longer. And the monetary part can, therefore, come in first; that is our assessment. RBI will have some assessment of its own and they are working on it. Also, the monetary policy transmission, both ways, takes longer in financial markets that are not well developed and efficient—that is the general prescription which economists give. So, therefore, the monetary part comes in first—as it has come in. The fiscal part will come in when the finance minister will indicate what his position is on these things in 2009-10; basically, fiscal policy uses two instruments—one is more spending and (the other is) tax cuts. Spending in any case, he (the finance minister) has announced, will get moderated because the Plan expenditure was front-loaded for one-and-a-half years to take care of this decline of private spending; that has done its job and it will go back to reasonably normal levels of spending which the fiscal position of the government can accommodate. On the taxation part also, I suppose, business and industry will have to get used to normal level—but it is not as if there is something round the corner because it will have to wait for the appropriate time.

That would be based on the third and fourth quarter economic data?