The Hindu Business Line : Participatory Notes to stay for now

In the current year I am committed to reducing the fiscal deficit by 0.3 per cent and the revenue deficit by 0.5 per cent and we will stick to that target. MR P. CHIDAMBARAM, FINANCE MINISTER

The International Monetary Fund's decision to give some countries higher quotas is questionable; there is no direct connection between participatory notes and fuller capital account convertibility; and too many Special Economic Zones could hurt the Government's revenues. The Finance Minister, Mr P. Chidambaram, addresses all such important global and domestic economic issues, in this exclusive interview with CNBC on the sidelines of the IMF and World Bank conference in Singapore.

Excerpts from the interview:

The IMF recently raised its GDP growth forecast for India this year to around just over 8 per cent. You have been saying that you see growth this year around 8 per cent. With oil prices coming down, are you revising your forecast or are you more optimistic?

No, at the moment I would like to stick to 8 per cent although IMF's economic counsellor placed it at 8.3 per cent. That has, in fact, raised expectations in India. We will have to do better to meet that standard. At the moment I would stick to my forecast of 8 per cent.

How sensitive is the Indian economy then to some of these global inflationary pressures that we have been seeing in other regional economies?

Only to the extent that interest rates harden. If interest rates in the rest of the world harden, then there could be a reverse capital flow or a slowdown in capital flows into India.

It will also have an effect on interest rates in India, which will harden and that means investments may slowdown. So we are not very happy about interest rates hardening, although we recognise that the rise in the rates is inevitable if one has to dampen inflationary expectations.

Is there a room for interest rates to move higher in India given the inflationary pressures?

I hope not. Inflation now is 4.78 per cent. It is expected to hover around 4.5 per cent for another few months, but there is ample liquidity in the system.

In the reverse repo, the Reserve Bank of India absorbs as much as Rs 40,000-50,000 crore, that is about Rs 40,000 crore in terms of excess liquidity.

But there is ample liquidity in the market and, therefore, I would be happy if interest rates don't harden.

Do you think that given we have seen how oil prices have fallen in the last several weeks, there could be room for the RBI to either pause or possibly even cut rates?

Not in the Indian context because unless we have passed through fully the oil price increase, the reduction in oil prices does not help us. It only means that the subsidy burden comes down.

We didn't pass through the full oil price to our consumers, therefore a $4-5 drop in oil prices doest not really help us to a great extent. It only reduces the burden of the subsidy marginally.

You mentioned about oil subsidy. How much pressure is that putting on the fiscal situation in India given that you issue oil bonds to help make up the revenue shortfall that these oil companies have faced?

Oil bonds are cashless transfers,whereby the debt is postponed. It's passed on to the next government or the next generation.

The bulk of the subsidies borne by the national oil companies and the upstream oil-producing company such as ONGC is borne by the exchequer.

So to the extent that money is not available for investment, I have to borrow. There is no other way. We cannot in a country like India, where there is a large number of poor people, simply pass through the oil price increase completely, although orthodox economist will say you should. It's practically not possible.

Some economists have expressed concern about the Government's ability to meet some of the fiscal and revenue deficit targets?

They are wrong, we have got an FRBM (Fiscal Responsibility and Budget Management) Act in place and we have been meeting the FRBM targets. In the current year I am committed to reducing the fiscal deficit by 0.3 per cent and the revenue deficit by 0.5 per cent and we will stick to that target.

One of the big issues revolve around the insurance sector and the possibility of raising foreign ownership limits to around 49 per cent. Will this happen?

We have promised to introduce a comprehensive law in insurance. One of the clauses on that Bill will be to raise the cap from 26 per cent to 49 per cent. That is, of course, a contentious issue. We will do our best to mobilise parliamentary support for that clause. What Parliament will do I cannot say, but this is a comprehensive law to amend the insurance laws.

How confident are you that Parliament will pass that?

How could I say? We have a majority in Parliament and if all our supporters vote for us, we should pass the Bill.

What is the Finance Ministry's stand on participatory notes (PNs)? We had a committee under Dr Ashok Lahiri, which recommended that PNs can be continued subject to stringent regulation. The Government accepted that report.

Then we had the committee on Fuller Capital Account Convertibility which recommended that PNs be abolished, but there is a minority view there too. So, while we examine the new committee's report, status quo will continue, that is, PNs will continue to be allowed in India. That's the position as of today.

How does that affect fuller account convertibility in India? Would it slowdown the process eventually?

In my view, this issue was peripheral to the mandate of the Convertibility Committee. I don't think allowing or banning PNs has any direct connection with convertibility.

I think while reporting on convertibility, the committee took the opportunity to slip in a chapter on PNs. I think it is peripheral to the main mandate.

Another hot topic is the approval of Special Economic Zones (SEZs), one of the biggest initiatives India has ever launched. There are some concerns about the revenue shortfall you are likely to face because of this.

We don't yet know. We have just approved 150 SEZs. I think another 112 or so are in the final stages and 150 more are waiting in the wings. Only four have become operational, three are in the IT sector, which already enjoys tax benefits.

So we will have to wait and see how many of these zones for which in-principle approval has been granted will obtain final approval and how many will be operationalised.

There are land, environment and other issues which they have to negotiate. Of course, as Finance Minister, I am concerned about any potential loss of revenue and, therefore, I have sounded a note of caution about proliferation of SEZs.

We are not against SEZs, I am a party to the government decision adopting the Bill, which has been passed by Parliament. But I am concerned about the proliferation of SEZs and, therefore, we have agreed to review the SEZ policy after certain number of SEZs become operational.

What about divestment. This was supposed to be a big source of funding a lot of social programmes in India. With divestment pretty much at a standstill right now, where do you expect to find the money?

The premise is not right. We were not going to use disinvestment funds for directly funding social sector projects. We are going to put that money in a corpus fund, and only the return from that fund will be deployed for the social sector. So it's not that money would have been directly available. Assuming a return of 8-9 per cent, it's only this return from the fund that would be made available.

That's a very small amount compared to the size of the Budget. But I do not think that has affected the allocations to the social sector. I would like to use that extra money for social sector. That, of course, has been put on hold now, pending a review. But I am told that the review will take place in the next few weeks.

As I understand, India at least this time around isn't seeing any large increases in IMF quotas. What happened to this reform of the IMF voting issue?

No, we have made our positions quite clear. We are not opposed to increasing the quota of any underrepresented country. Therefore, we have no quarrel with China, Korea, Mexico and Turkey getting small increases. But we think that the exercise was purposeless.

The reforms should have taken place first, the new formula should have been constructed and, on the basis of the new formula, whichever underrepresented country deserved an increase, should have been given an increase.

This is tokenism and doesn't really assure that the second stage will go through. Anyway we have expressed our view. We have said all right the vote is behind us but the argument is still valid and, therefore, we will work with the management.

The countries have supported the resolution but we will hold them to their promise that they will complete the reform process in two years and have a formula, which reflects the current economic rate and current economic realities of countries in the 21st century and not in the early 20th century.

How confident are you that this new formula will be achieved?

I am not very confident. I have been assured by the IMF management. I have been assured by Secretary of Treasury and Chancellor Gordon Brown that they will push through the reform in two years.

I have promised to cooperate, I am not going to sulk and stay away. I am going to involve myself even more with the discussion and in the construction of a new formula. So let's see what happens.

What's the stake for India?

Plenty. In MER terms we are ranked ten or eleven in the world. Our GDP in PPP terms is ranked four and yet we do not get an increase in quota. How is that acceptable?

What about the issue of the World Trade Organisation and multilateral trade talks that has been the rallying cry for the IMF at this year's meeting. What role do the Finance Ministers play in trying to get the negotiators back to table and get the Doha Round moving?

I don't think that Finance Ministers at an IMF or World Bank meeting play any decisive role as far as the Doha Round is concerned. Back home, in their own Cabinet meetings, when the Commerce Minister brings a proposal, the Finance Minister as a member of the Cabinet perhaps influences that decision to some extent by taking part in the discussion.

But from India's point of view, we have said this repeatedly that unless the European Union and the US resolve between themselves how to address the issue of removing trade distorting agricultural subsidies, we do not see how the Doha Round can progress.

As and when the issue of trade distorting agricultural subsidies is addressed in a satisfactory manner, surely they can expect countries such as India to make a much more attractive offer in services and in non-agricultural market access.

If they do, India will indeed be willing to make concession in services.

Not concessions, but a better offer. These are not concessions. These are offers and acceptances. We are willing to make a better offer but surely the developed countries cannot subsidise their agriculture by several hundred per-cents and yet expect us to offer market access.

I was talking to the minister from Switzerland, who said agriculture is a tricky issue for her. I said its tricky for me too. What is the percentage of your population engaged in agriculture, and she said 2 per cent. And to what proportion of GDP contribute to agriculture, she said 1 per cent.

I said if 2 per cent and 1 per cent can make it very difficult for you, imagine in my country nearly 60 per cent of the population is directly engaged in agriculture. That's not only their livelihood and contribute 17-18 per cent to GDP. How much more difficult it is for us? I think one has to keep a sense of proportion when discussing these issues.

Foreign banks still face an ownership cap and do not have the same market access as in, say, Singapore?

Why is Singapore always the right model for banking? Our banking system is one of the strongest in the world. We have a legacy of a strong public sector banking system and most people in India even today repose great faith in public sector banks. So we have said that public sector banks will continue.

Foreign banks are allowed to come to India in one of three ways — branches, wholly-owned subsidiary or acquiring stakes in private sector banks. Now they are welcome to open branches; many of them have opened a large number of branches.

We do better than our obligation under WTO, or they can come through the WOS route. To get a stake in a bank, up to 5 per cent can be acquired. For more than 5 per cent, regulatory approval is needed.

Foreign investor say that India needs to open up its sectors a lot more and has sort of stalled some of the economic reforms?

Not correct, what sectors are they talking about? Barring five or six sectors all the sectors are open to foreign direct investment. Mining, petroleum, road construction, sea ports, airports, telecom, power are open to FDI.

I think we are evolving a model where domestic private sector, foreign private sector and the public sector can compete with each other.

I don't think we are not open to the FDI, if someone can tell me which sector is closed to FDI, then perhaps I can respond better and tell him when that will be opened. But there are hardly four or five sectors that are closed to FDI.

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