‘Indian private sector’s appetite for high risk opens up new opportunities’
Finance Minister Nirmala Sitharaman acknowledges private sector’s contribution to India’s future as it invests in sunrise sectors such as semiconductors, green hydrogen, solar, renewables, rare earth, genomics, and AI
The Union government is propelling the country's growth engines through an extensive capital expenditure push, but meanwhile private investments are also picking up in key sunrise sectors, Finance Minister Nirmala Sitharaman told Mint's editor-in-chief Ravi Krishnan at the Mint India Investment Summit 2024.
In a fireside chat, Sitharaman also said that though the Centre-state relationship has been highly politicised recently, it hasn't deteriorated. The finance minister emphasised that states such as Odisha, Jharkhand, Bihar and West Bengal would have to become the engine of India’s growth. The government’s approach is not just to uplift these states but to empower them so as to trigger further growth, Sitharaman said. Edited excerpts:
You have said the next set of reforms will be related to Panchayat Raj and urban bodies. Can you elaborate, please?
Sitharaman: I think in the last 20, 30 years, or even since 1991, whether it is urged by the IMF or whether India itself has been working towards wanting to reform its economy or bring in reforms in various aspects of the economy, it's always been addressed to the Centre.
During covid and also afterwards, we have been working with the states to say, if there are things that we can extend to the states, we would extend, but certainly, would you mind taking up some reform in the power sector? Would you mind taking up some reform in the 'one nation, one ration card' (scheme), and so on? And many states have enthusiastically come forward and… now they are in a position to say that these (reforms) have helped them.
It's now the time for taking it down further because eventually when businesses have to start or investments have to come, they have to be grounded somewhere. And that is at the level of some village, at the level of some periphery in a city. And in those places, if elected bodies are not aware or are not ready to be open, transparent, and welcoming, everything that we do will be on paper and not on the ground.
Some suggestions have been made as far as the next generation of reforms are concerned on direct tax reforms.
I take your point on direct taxation reforms. But on the question of amounts pending and cases lingering in the courts, we have very clearly indicated that we are looking at it by introducing the faceless system.
In fact, there was a taxpayers' charter which was introduced during one of the budgets–2021, if I remember correctly. So I'm not closing anything to do with the reforms, but the question of monies being held there or in the courts, the question has been partly addressed by the fact that we said cases cannot be opened beyond six years.
And every time through the year when notices are sent so that that assessment year doesn't get time-barred, by which time the (Central Board of Direct Taxes) sends the notice to the person asking for an explanation, if the explanation is fine, it is anyway dealt with by a faceless officer, and if it is fine, the matter ends there.
Faceless appeal happens, so an assessee doesn't have to keep records for 10 years but only six years. Beyond that, it doesn't get open unless the amount there is substantial or some search or some seizure somewhere has given some reason to think that this particular account has to be opened because there has been something else which has come out which requires the principal commissioner's specific clearance and permission. So that change was already brought in.
I may take this opportunity to say that many notices are being sent now because they have to start honouring that six-year time limitation… this 31 March is when the time bar is imposed on the tax authorities themselves, meaning they can't open it up on 1 April. So they are rushing a lot of these notices just to say, hey, I have asked you a question to reply and we will take it up further.
So it's not as if it's a new method of harassment. It is because the compliance for the board itself is now getting time-barred and they have to access people for whom information is not readily available.
There is also another dimension. If, for instance, you have been in the manual process of keeping your accounts with the CBDT and the CBDT maintained a manual account of yours till a certain year, it was so the conversions have started happening. But in some areas and some years, if the details are still in manual form, they are now being digitised. Therefore the question comes to you once again to say, look, we don't seem to have this patch of information about you. Would you fill in? And if you fill in, that's the end of the story.
But that is not a notice which has come to you because there's a suspicion. It's due to the gap in data because of the transfer from manual to digital. So these are reasons why before 31 March you have a flurry of notices going.
You touched upon the North-South divide. One area where we can see that is fiscal federalism, which is increasingly becoming a contested area. After the Planning Commission, it now rests on only one pillar, the Finance Commission.
The Planning Commission was not even a statutory body. It was a body just like that dispensing huge sums of money, saying this state should get this kind of a project, and states came begging to it. Prime Minister Narendra Modi hated that. He said, why should we? We are elected governments. Why should we go begging to the Planning Commission? Because it was not even an authority.
Therefore when the true purpose of that kind of planning body was brought back with the Niti Aayog, a think-tank for the government, it gave us the advantage of deciding which project to do regionally or which projects should be taken up because of a concept, or the ways to attract new businesses, which are the states that have new leverages that they can use up, and which are the states that have to be reached out to because they have inherent challenges, and so on.
So the idea of a planning body was restored, I would think, in the Niti Aayog… I think it is right that it's been changed. I don't think it adversely affects the fiscal federalism of the country.
But yet, the point that you say that because of performance, and this is one example of population, the weight given for population-related matters in the Finance Commission's basket was probably proportionately more than others which deserve that kind of attention. So the states had to negotiate with the Finance Commission.
Speaking about the earlier system and seeking something else better now, equally, as much as the labour, which comes from states such as Bihar, Jharkhand, and Odisha wouldn't come if they were also as efficient as the other states in terms of population. So I am not weighing in on one or the other much more than I should.
But yes, I also come from the South. I understand in certain areas efficiencies have come in on a larger scale, which probably doesn't exist in some parts of the North, but that doesn't mean that we can speak in terms of North and South.
Each state has its strengths. Each state has its contribution to the GDP of this country. We need to pep all of them up. But the language used is very separatist, and I object to that. It's a big business now that the states will have to negotiate better to make them formulate something which will be fair and just.
Do you think deteriorating Centre-state relations takes away from the efficiency of the capital expenditure projects in terms of implementation?
Deteriorating Center-state relationship? I'm sorry. Not at all. It's completely politicising the Centre-state relationship, and some states do it unabatedly. And they also approach the courts. And I take such opportunity to go to the court with a document to tell them where what has been done, where has the discrimination been, if at all, I explain it in the court.
The government has been pushing the pedal on capital expenditure. At the same time, you've also been signalling to the private sector to be more proactive in making fresh investments. What trend do you see here?
I think we are losing out in terms of seeing where it is happening by seeing where it is not happening. The private sector is going in a big way in the renewable energy sector. The private sector is also taking high risks. They are looking at hydrogen, green hydrogen, ammonia, semiconductors, etc. Imagine three semiconductor investments with investments of over ₹1 trillion. That's not government investment.
So actually all of us will have to now be ready to look at these sectors where the private sector has already invested and shown an appetite to take high risks. We should not keep looking at only integrated steel plants. Coal gasification is also happening through the private sector. India's private sector is investing in areas which are giving newer investment opportunities. The private sector, though risk-ridden, is coming forward. We should start looking there and counting those sectors.
Which are these sectors (seeing private sector participation)?
I should say semiconductors, green hydrogen, solar, renewables, rare earth, genomics, AI, medical, diagnostic equipment, etc… These are now new areas in which India's private sector is going in a big way and investing.
Private consumption growth has been suppressed in the last few quarters. What is your view?
Do you think 8% growth would have been possible for three consecutive quarters if there was no consumption happening? Otherwise India couldn't be growing at the rate at which it is growing... The global situation is very volatile, very uncertain, very complex and unpredictable. So we need to understand that if that's the situation outside, how are we performing the way we are performing, even among emerging economies.
We are doing much better than several countries. Emerging economies have quite a few strengths because of the products, the commodities that they have to offer, and the wealth that they have in terms of the commodities with which they can bargain. We are not even in that league in terms of commodity richness. We still import a lot of our main requirements, but still are the fastest-growing major economy.
What do you think will be the next big driver over the next five years?
If you're going to empower the women of this country, the youth of this country, and the farmers, you have to strengthen agriculture and develop rural areas. By 2030, we are going to have 70 crore (700 million) Indians in the middle class, meaning a large middle-income group with purchasing power in their hand, which will touch 100 crore (1 billion) by 2047. They will have the purchasing power for you to produce things which they can buy.
And you are strengthening the rural areas, strengthening the youth, strengthening women, giving them skills. The Drone Didi scheme is a massive success because women are volunteering to get themselves trained, and that is going to have a very big mindset impact in rural India, the women holding drones and controlling them, spraying fertilisers, assessing the density of the crop on the ground.
These are all small, small things. What you couldn't achieve during the socialistic era in terms of empowering people. No harm is now getting done by the adoption of technology among women, by the use of mobile phones among women. A small vendor of vegetables locally grown on a farm attains a lot more satisfaction by looking at not just the income, but how it's getting accounted for through her phone. Instantly, the mindset changes when women use phones. And also that they are earning money amid all the big-ticket reforms in the villages. And these have a lot of ripple effects I would think.
The Indian capital market has done well in recent times. But Sebi has cautioned about froth in certain parts of the market. And the RBI governor has raised concerns about unsecured lending.
The Indian markets, even during great volatility outside, have held their own. Where there is a need for a course correction they have done it on their own. How they handle it has also been very unique to India.
The regulators will have to do their job. I am not undermining that. But I think Indian markets have lots more saner. Problems of overvaluation -- Is it short-duration? Is it froth? Is it a bubble? -- all that debate can go on and silently I am sure the regulators will handle it.
The government has done well to bring back financial stability, especially after the days of the twin balance sheet crisis. However, in public sector banks, do you think certain reform agendas are unfinished?
Banks are now being nudged to be a lot more professional in handling their affairs. There are small asks from the institutions themselves because they would like to recruit people from the market. Ultimately we want high-quality professionals running the banks. The banks have now come to stand on their own. They can go to the market to raise money for their developmental activities. They are no longer looking to the government to infuse capital every year. So those will continue.
Global bond markets are excited about India. However, you have been very cautious in facilitating the inclusion of Indian bonds and global indices. Can you explain the thinking behind this?
There are two things. The fact that our external borrowings have always been well within the limit, and we still address issues of concern within the country, is something we will have to bear in mind. The participation in our bond market is a lot more buoyant nowadays, even within India. We have opened up to an extent. We'll watch that space. We are not close-minded about anything.
(Questions from the audience follow)
Is the government thinking of allowing private limited companies to set up schools and or allowing FDI into the school space?
The new education policies somewhat address this issue, but not the core issue of trusts and society format with which education institutions have to be run. I can see a lot of differences playing out in the way in which education is expanding in India.
The new education policy, to a large extent, has infused quite a lot of oxygen into the system. But on the core issue of whether we are going to be able to get out of that requirement of a society or a trust as a prerequisite for education institutions, I will have to wait and see how the HRD (ministry) is going to handle it.
Geopolitics has never been more uncertain and volatile than it is today. Now we are fairly insulated. But there's one thread where we do connect with the world, which is oil. Now, should the geopolitics worsen and oil prices go towards $125-130 a barrel, how does the government view this challenge?
I think the first answer for that is India's production from the offshore wells, which is now going up. There are monthly fluctuations, but I think the emphasis, given that we should also produce oil on our own, is a point that I would like to place on the table.
The other point, I think there's been this attempt to understand the government's numbers by asking, will you be concerned if oil prices cross $100 a barrel? Will you be concerned or have you made a provision in the budget if it is $110 a barrel? These are more like telling me, will you stop buying oil if it is at $120? No.
It's a question of how do I fund it. It's also a question of how do I not transfer the burden to the common people of India. It's a question of how much strategic reserve I have, so that if there is that kind of a spike, how long will it last, will I be able to use my strategic reserve, and so on?
So there is no one single answer to it. As long as all of us are conscious of it and policymaking is seized of that uncertainty, I think we will be able to face it.
Developed nations have much lower tax rates than India. As we progress towards Bharat, how do you see this trend coming along? What are the key indicators that you see that will result in taxes coming down?
Sitharaman: The upcoming July budget will have to take on board all these voices and whoever presents the budget in July will have to keep that in mind. But the fact remains that this is a country which saw 97% tax before 1991 with crazy annual increases. After 2014, Prime Minister Modi's only advice was that you should not increase taxes. In excise duty on crude petrol, there have been fluctuations with prices going up or coming down, but also with the consideration of the core direct taxation reforms and everything else, a second parallel alternative for taxes has been given where the rates are lower, and the process simpler, without any exemptions.
The grievance was that there wasn't a standard deduction. We brought that in as well. So please go into the second alternative. It's even simpler. It's even lower. But if it has got to be only seven crore (70 million) people paying tax but 140 crore (1.4 billion) people aspiring for good roads, and good airports, it's just not going to be able to function.
I understand the Laffer curve argument and that's what is playing out now. Collection efficiency and increased buoyancy on the tax fronts are all because of the Laffer curve principle. So I do take your point. But we will work it out.
What is your view on the issue of insurance mis-selling. Currently, insurance commissions are far higher than what people get in other financial products. For any person who walks into a bank, the first thing they are sold is an insurance policy because of this disparity. I know it's a regulatory issue. It should ideally be taken up by Irdai, but they haven't looked at this. So is the finance ministry looking into this?
On insurance, there are quite a few things which are matters worthy of discussion. The regulator is very active nowadays. I closely monitor it. I also look at how bank assurances are working. There are bank employees who also say we are made to do insurance. We can't see why. This option of several insurances being before me, so I can choose from them, gets narrowed down by the bank themselves, who promote their insurance. The questions that you have raised are all worthy of discussion, taking forward and trying to reform. And I will assure you that a lot of discussions on these things are happening.
Some states, especially the eastern states, need a good raise in income levels. Has the government got any thoughts on what to do in these states, apart from direct benefit transfers, building roads, and all those other things?
The government has already started working on this. We have announced the public sector enterprises policy and the restoration of the refineries. For the fertiliser companies in that area, bringing gas pipeline connections for all will bring about efficiency, which will serve the country's fertiliser requirement.
The eastern region will have to have a mixed bag of approaches, an approach which is not going to be straight one line, but one where various routes will have to be adopted. Public sector investments, capital investment, asset creation, etc.
We are also looking at how farms in these areas can benefit from modernization, ensuring that newer industries get there. According to our prime minister, states like Odisha, Jharkhand, Bihar, and West Bengal will have to become the engine of our growth.
You need power to pull the entire economy, which means we are just not trying to talk about uplifting them, but we want them to be so empowered that they trigger further growth.
This means our approach is not going to be one-lined. Our approach is not just going to be waiting for private investments or just setting up one mother industry and running away. It's going to be through all other ways in which that region can get what it deserves.
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Business NewsEconomy‘Indian private sector’s appetite for high risk opens up new opportunities’
First Published:31 Mar 2024, 07:00 PM IST
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