New Delhi: The budget has focused on the rural economy and pushed for higher investment in infrastructure without breaching the fiscal deficit target. Minister of state for finance Jayant Sinha said in an interview that this strategy had led to a “happy outcome" of the government spending on productive sectors and off-budgetary resources financing profitable investments. This has created scope for the Reserve Bank of India (RBI) to lower borrowing costs further. Edited excerpts:
How has the response been to the budget?
You know, I am still processing all the inputs because there are just so many different stakeholders and there is obviously the firefighting going on right now about the provident fund matter that I’m sure you will ask me about. I have read most of the material put out, really haven’t had the time to step back and just digest it all.
The overall exercise was to ensure that we are able to do justice to the informal rural economy, which is the Bharat side, along with the modern globalized 21st century economy which is the India side. So, we had to do justice to both.
That is why as I have said many times that we are a pro-poor government and because we are a pro-poor government, we are also a pro-market government. I think it did achieve that fine balance.
I am a student of India’s economic history, I have of course lived through it personally, I have read the 25 budget speeches since liberalization twice over and what you find is that themes are timeless.
What to do about the rural economy, what to do about industry, infrastructure, fiscal management, inflation, these are timeless themes and every finance minister has to find his own balance.
One ideological strand which we can draw when you said you are pro-poor and pro-market is that you are saying that you can be pro-poor but not necessarily be populist.
Absolutely, and I think you picked that up when you talked about empowerment and that is very much what the honourable Prime Minister views as being our philosophical approach.
It is about human dignity, it is because when you empower people and when you give them tools, the resources, the opportunities to better their lives, they feel uplifted, they feel that they have got dignity and that is very important as the honourable Prime Minister says over and over again. If we can help a poor lady by empowering her—we can give her a bank account, we can give her an opportunity to get credit, access to pension, health cover and give it to her directly in the hands, then you know it is so empowering for them.
It will be so empowering for a young person if we can give him the skills and the ability to find a job.
Now to the hiccup on the EPFO (Employees’ Provident Fund Organisation); is there a rethink?
We are very clear as to what we have done. I mean of course, we’ll see what the inputs are and what people are saying. But there is a very clear logic in what we have done. This does not pertain to the public provident fund, so PPF is out of the picture completely. This is only about EPFO and NPS (National Pension System).
All government employees today going forward are covered under NPS. So, they are out of the picture in any case. Employees’ Provident Fund has 3.71 crore subscribers, 3 crore out of that are below ₹ 15,000 a month, they obviously are not going to (get) impacted by this because they are going to not have to pay any of these taxes, this is only about the 60-70 lakh private sector employees that are contributing into provident fund and will be impacted.
Now let me explain how this will work. Suppose there is somebody who is 38 years old, at 58 they can start withdrawing from provident fund, so from 38 onwards they start to contribute. Now let’s assume they contribute for 20 years, they contribute ₹ 5 lakh into provident fund, there’s returns of another ₹ 5 lakh, so they have ₹ 10 lakh by the time they are 58. They have put this money in, tax-free. The money compounds tax-free, you pay no taxes on it and then at 58, you have the right to take out 40% tax-free. 60% is what we are saying if you put it into an annuity, get retirement income on it, that also can be done tax-free. Of course, on the annuity income, you will have to pay taxes. That is how NPS is right now.
And there is a real clear logic behind it; it is that provident fund should be on par with NPS, otherwise private sector employees will never put money into NPS, they will just put it into PF and we want the two on par.
You have brought in a health insurance cover in this budget. Is your whole Jan Suraksha plan now complete? Or could we see more elements coming in?
I think you will see different packages put together for different beneficiary groups. But really, if you step back from the noise of the budget and say what are the three really historic things we have done, and again I am saying this as a student of economic history, first, public investment, the massive push for high multiplier public investment, roads, railways, irrigation, I think that is truly historic. The second historic thing is social security and in social security, that social security architecture is now coming together. We have Jan Dhan, obviously we are building a social security platform backed up by Aadhaar (for) which we will give statutory backing; we have also said that we will have ATMs (automated teller machines) and micro ATMs in every post office so a guaranteed basic level of financial access to all people will be provided. We are now going to put health cover for one-third of our population, BPL (below poverty line) families, roughly, we will provide them health cover as well. Food security also will go through the same social security platform, the authentication in fair-price shops will also happen because we’re digitizing that as well. So, we are establishing an entire social security architecture which will enable us to deliver a support package to every individual depending on their eligibility.
The third historic thing that we have done is changing the manner in which the tax authorities and taxpayers interact that deals with just the online interaction, deals with dispute resolutions, penalties, with assessments, all of that, completely streamlining the interface between tax authorities and the taxpayer....
I’ll tell you, as far as the income disclosure scheme is concerned, as far as the dispute resolution is concerned, as far as the retrospective (tax) is concerned, we have not assumed anything for that in our revenues; that gives us a real buffer when we look at the fiscal deficit number and so on. So we know that just in disputes, ₹ 5.5 lakh crores that is pending in 3 lakh appeals, so if we can resolve a big chunk of that, if we can deal with the retrospective issues, if we are able to convince people who have undisclosed black money right now that they should go clean, those are all buffers that we have in terms of fiscal consolidation.
But Vodafone is not very enthused. Is this the government’s final offer?
I think we have a very fair offer on the table now and provided a pathway to closure as well, a conciliation mechanism that did not exist earlier.
On this retrospective amendment, analysts have been saying that you have the majority in the Lok Sabha; so you can just strike down the provision.
I think that is a very ignorant statement that does not represent the facts. We have already said that we will not do anything retroactive going forward, but we cannot deprive a sovereign in the future to do it. In any case, you put in a law, they can overrule, if they have parliamentary majority on a money bill. So, whether we change the law or not today is irrelevant, it is a moot matter because anybody can change it in the future. So, that change doesn’t really mean much. That is the prospective part which we have already said we are not touching. On the retrospective part, there are a series of cases that are sub-judice. Now, when those sub-judice cases are there, in MAT (minimum alternate tax) and some of those other matters, we have tried to close them out but we need some legal standing to be able to close those out. That’s why on MAT, we have to get the committee to come back and give us a legal opinion, provide a legal basis for closing out the MAT matter. Similarly, on these tax issues, unless there is some legal basis, we cannot close them out. That’s what we have tried to do with this legislation, which creates some legal statutory basis by which we can have a conciliation mechanism and offer it to them.
Now you could say, retrospectively why did you not come up with a conciliation mechanism that says to Shell, Cairn and Vodafone and all of these people that you do not have to pay taxes. You know how much money is at stake? There is a tremendous amount of money at stake and in fact, there is a very serious substantive legal matter here as well. So, we have taken an approach that we think is a fair basis for settlement.
The government has made a number of announcements on the reforms and consolidation process. What is your vision going forward?
The vision is that we need a globally competitive and vibrant financial sector. The whole financial landscape is changing at warp speed right now, technology is having its impact, we have disruptive attackers that have come in. We have a situation where lots of banks are struggling with non-performing assets; tremendous new entrants have entered the market place through the 23 licences we have given out for new payments banks, small banks as well as scheduled commercial banks. So, the whole competitive landscape has fundamentally been reformed and obviously, what we would like is a situation where we have very competitive firms that are able to deal with these massive disruptive forces at work and are willing to be global partners with our corporations as they compete in India and overseas.
How will you deal with staff issues?
Staff issue is not something that should be of any concern because every time the government has gone through this kind of transformation like at the Axis Bank (formerly UTI Bank), all the workers’ rights and terms of service have been fully protected. For workers, this is a very positive step. We are considering Esops (employee stock ownership plans) for workers, there will be very good growth opportunities for those public sector companies that drop below 51%, they will not be subject to public sector or government compensation restrictions and promotion restrictions. So they will be able to compete, and paid more and flourish.
So IDBI Bank is an experiment which we could see in other banks?
IDBI we can take forward in terms of a strategic disinvestment because it is not covered under the Bank Nationalization Act. We don’t need parliamentary approval for dropping below 51%. So it’s a completely different proposition altogether.
But you are not averse to the idea of dropping below 51% for public sector banks and enterprises?
You are seeing what we are doing with IDBI Bank. We have said we want to transform IDBI Bank, but again, the most important thing here is that our public sector enterprises have to be competitive and they have to flourish. We don’t want a situation where they become laggards; they lose their market share because ultimately, we are stewards of the people’s wealth. This is your money, your assets, our job is to make sure your assets flourish. In a competitive market, that only happens if these companies hold or grow market share, become capable of innovating, attracting high quality talent and so on.
Another reset button you have hit is on subsidies, you seem to have signalled a regime change because the finance minister said those who deserve will get subsidies. So, is there a mindset change here?
No, I don’t think there is any mindset change. We took forward the LPG gas cylinder subsidy immediately on assuming office. Obviously, there was already the 12-cylinder restriction when we came in, but still, there was a lot of diversion going on. So, all along, our goal has been that the deserving should get that support.
As I said, we really are focused on the poor. The poor have the first charge on all government resources because it is our moral responsibility to do that, but it should go to the deserving beneficiaries. There shouldn’t be leakage and corruption and so clearly, what has happened in the past is that the whole system is completely inefficient and we can see that through the numbers. Just on the gas cylinder side, once we did the payments directly into the people’s accounts, commercial sale of gas cylinders went up 30-40%. So guess where the cylinders were going.
But how do you marry this with what the Economic Survey pointed out on the limits of DBT (direct benefit transfers)? It said candidly that there is a long way to go.
Well, that is exactly why we are doing in it a staged, methodical way. If you look at what we did with the gas cylinder programme, we did trials, we rolled it out in certain states, we saw how well it worked, then we rolled it out in the country and it has worked flawlessly. There were teething troubles and there were implementation troubles, but we corrected those and now it is working flawlessly, the world’s largest cash transfer programme.
That is exactly the same methodology we are going to use for fertilisers as well. So, in fertilizers, we have said we will carry out DBT trials, we are going to see whether it is working, how it is working and then we will tackle the fertilizer subsidy also. So, we are going step by step.
On the growth versus fiscal prudence debate, some analysts are saying you have chosen fiscal prudence and you have not gone aggressively to push growth. Is it also targeted in a way at RBI to help it cut interest rates further?
See, there is a happy outcome. The right way for growth is really high quality investments that provide you growth and create jobs. It is also a high-multiplier investment in the economy which means it is not just creating growth today, it is also creating growth tomorrow and in the future.
That is the right way to promote growth through that kind of high productivity investment. As I have been saying, our goal is to build India’s productive capacity not just today but in the future as well. And that is the kind of growth we want.
The happy outcome in all of this is as we pursue that kind of growth, we can use off-budgetary resources that we can use to put money into capital expenditure. If there’s a high return on investment, then there is an array of financing options you can use such as NIIF (National Investment and Infrastructure Fund), Nabard (National Bank for Agriculture and Rural Development) and the higher education financing agency.
Then there is a third outcome which is that when you do that, you open up monetary space as well because the debt dynamics are in your favour, yields come down, and then inflationary pressures are subdued because you are dealing structural bottlenecks in the economy, and that then creates the monetary space for RBI to take action. The right kind of growth has this kind of spiraling effect.
And that is the choice that we confronted which is that you can pursue this kind of short-term sugar-high kind of growth or the growth that comes from building muscle mass so you can run longer and better.
Global headwinds are getting more severe by day. Do you think they can impact our economy?
Of course they can, which is why the FM said in his speech that we have to build a firewall. As far as firewalls are concerned, there are two very important things, one is macroeconomic stability which we are pursuing, rupee is stronger, bond yields have come down, money is coming into our market. Then there is also domestic growth.
Is the threat of inflation over?
What really is driving inflation in India right now is food inflation, that also is isolated in certain commodities which is largely related to pulses and other protein which are important elements of the diet. We are working on these areas to reduce food inflation, but we have to remember that we’ve had two deficient monsoons. It comes back to our economic management that nonetheless inflation has gone down.
Tell us about the Uber moment in public transport.
We were looking at various sectors to see where is that we could have a transformation impact in terms of both quality of life as well as creating job opportunities and we looked at road transport. It is a sector that is vitally important to India and is a big job creator and drives a lot of investment as well because of trucks and buses and all that. So, we concluded that if you look at the roads transport sector, that was clearly a sector that could truly be overhauled in this fashion and that is why we decided to take it forward.