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The Rediff Business Interview/ Dr Shankar Acharya

Dr Shankar Acharya is today the longest serving senior bureaucrat in the ministry of finance, having been the chief economic advisor to three finance ministers from 1993 - Dr Manmohan Singh, Palaniappan Chidambaram, and the current incumbent, Yashwant Sinha.

The ministry at the moment is basking with its latest Budget, the second by the ruling Bharatiya Janata Party-led coalition government, which seems to have gone down well with the people. Amberish K Diwanji met Dr Acharya to hear his views on what their expectations are once the applause dies down. Excerpts from the exclusive interview:

Let us start with the positive aspect. The Budget has seen very little criticism and the stock markets have soared. The MoF must be mighty pleased with this. Did you expect it?

We knew we were doing a good budget, but one can ever say one knew what the reaction would be. Certainly we are pleased with the positive response, and not just in the stock market but also from commentators in the press, from economists.

How would you describe the Budget?

It is a good budget from the macro point of view. It is good from the reformist point of view as it brings in many tax reform measures. It is good from the poverty alleviation point of view, both for agriculture and rural credit and for human development in the rural area.

Now let us look at some of the criticism. There has been a lot of comment about the fudging of statistics and figures, especially with regard to the fiscal deficit, the interest rate, and growth rate. What do you say to that?

I have to clarify that the changes in the various estimates were not done by us in the MoF but was already done and announced publicly in the first week of February by the Central Statistical Organisation. Once that comes out, we have really no choice but to follow suit as another part of government.

But surely it was very convenient for the MoF that the change took place just when the government was facing embarrassing statistics on various counts?

I must correct you that none of the changes were really very embarrassing. The CSO put out figures based on both the old base year and the new base year, all of which were listed in the Economic Survey. As a result of that, the estimates of the country's GDP were roughly higher for the new base year by just about 9 per cent, if you take the common years of 1993-94 to 1997-98. For the fiscal deficit, the Budget estimates target for 1998-99, which was pegged at 5.6 per cent of GDP last year, was down to 5.1 per cent. Now this is a change of only 0.5 per cent! Similarly, the finance minister has, in his speech, pointed out as per the old series, the actual fiscal deficit worked out to 6.5 per cent of GDP. So we handled it in a transparent way. We can appreciate some people finding it a little confusing, but at no time was the attempt to fudge or mislead.

The other change we have made is in the small savings area garnered through post office savings, etc. Three quarters of it is for the states, the central government only works like a bank. We felt it necessary to have an accounting change. This also is the reason for the fiscal deficit coming down to 4.4 per cent of GDP on this basis.

Should we believe the finance minister when he speaks of arresting the fiscal deficit?

I think we have been quite conservative in our expectations, having announced revenue-raising measures in the Budget, both on the direct taxes and indirect taxes. On direct taxes, we have announced a small surcharge on income and corporate tax, and a surcharge on customs duties. We are also raising Rs 46 billion via the additional excise duty on diesel of Re 1, which only takes the price back to what it was two months ago (when the government had hiked petroleum prices, but later rolled back the hike on diesel after protests). Something about 90 billion is coming in through the new measures. Plus with the underlying buoyancy as the economy grows, certainly revenues will go up.

On the expenditure side, we have made a determined effort to contain the growth of non-plan expenditure. We will have to wait and see if we meet the targets, but there should be no doubt about our determination to limit the fiscal deficit.

Won't the hike on diesel have an inflationary effect?

Two months ago, the price was pretty much what it has become. Half the funds generated from this extra excise duty is to be allocated for road building. Surely, if the price (of diesel) two months ago was what it is now, it will not have too much of an impact. Also, prices are declining, so there is no reason to think that it will have a significant impact expect when the price index does record the slight change.

Will the Budget be instrumental in reviving growth?

I think so because it does several things. First, the tax reforms by cutting down from 11 rates to just three. This will be conducive to productivity and growth.

Second, the reduction in fiscal deficit by about 0.6 per cent, not counting the statistical effect, for the coming year, will ensure that the government's borrowing from the market is that much less. It may not appear much, but if you do the calculations, you find that by cutting by this margin, the government is borrowing Rs 120 billion less. This means that there is now available Rs 120 billion in the marketplace for companies to borrow. This will reduce interest rates and two days after the Budget, the central bank governor was able to announce a cut in the bank and repo rates. This has percolated down to the primary banks lending rates, and will stimulate investment and growth.

Third, I must also point out that we have had a good agricultural year. The CSO has estimated agriculture value added has grown by more than 5 per cent in 1998-99. And whenever we have had a good agricultural year, the following year has benefited from the higher purchasing power in the rural sector. Thus, this year should gain from the rural consumption.

Fourth, this Budget had a very strong measure for housing. This comes on top of the repeal of the Urban Land Ceiling Act a few months ago besides the steps announced in the last Budget. Hence, I think a momentum will be built up to push up housing activity, which in turn will give a boost to steel and cement, two sectors that have had a bad year.

Putting all these together -- tax reforms, reducing fiscal deficit and its effect on interest rates, agriculture gain and the housing sector moves -- should help the economy get going this year in a big way.

Agriculture was good last year, hence your optimism. But what if it fails this year? After 11 years of normal monsoons, a bad monsoon probability keeps growing.

First, agriculture was not good last year. The value added in agriculture last year (1998-99) fell by one per cent from the previous year (1997-98). Second, unseasonal rains late last year hurt crop production to some extent.

Second, I cannot predict what the monsoons will bring this year, but even if it is a bad monsoon, I wouldn't worry too much. The point is that the purchasing power of agriculture seems to lag by a few months and the fact that we already have under our belt a good agriculture year in 1998-99 augurs well. Obviously, if we have a bad monsoon this year, it will have an effect the following year.

The Budget has put greater thrust on agriculture. What is the MoF looking at in the long term from this vital sector?

There are two or three things done for agriculture in this Budget. The first is watershed development in a way that it can be most effective. The other big area is rural credit where a number of initiatives have been taken to ensure that credit to agriculture will be stepped up. These are the two areas where the central government can play a crucial role.

If you take the broader picture of rural quality of life, the new initiative goes beyond mere agriculture. It concerns human development, covering education, health, food security, shelter and employment. There are two themes here. The first is convergence of the various government projects so that there is more synthesis in the effort. The second is that this government has sought to give more authority to the village-level councils, the gram panchayats. The minister has said that this is the 'Year of the Gram Panchayat'.

Now this harks back to the 73rd and 74th constitutional amendments of the late 1980s, which set up village councils. The government is seeking to give more teeth to these councils so that they have much more say in these five areas.

One criticism against the Budget is that it has done little to actually revive industrial growth. Why this disdain for industry? For instance the hike in excise for steel.

Let me say that many in industry have appreciated the government's steps in the Budget. They have specifically applauded the moves on indirect tax reforms, which, I think, is very historic. This Budget pushes through excise tax reforms in a decisive way, and this is very good for industry. Industry has fewer litigation problems, lesser administrative worries, etc. Now it is also true that when you do this kind of a reform, you cannot provide too much sector specific tax reforms. It is not logically possible, and this might have upset some. Yet others appreciate our effort at tax reform.

The one sector where we have had old style special package is the information technology area, such as lowering customs duties for a wide range of products so that this sector can forge ahead, as it is already doing.

The finance minister is looking to the IT and pharmaceutical sectors as areas where we can be superpowers. Can you tell us what the MoF has in mind?

Well, information technology is one area where we are already leaders in the world. We have our natural advantages in this sector and this government has put much effort into this sector. The National Task Force on Information Technology has made many recommendations and other initiatives planned include the employees stock option schemes, all of which are needed to further help this sector become a global leader.

Similarly for the pharmaceutical industry, some of which are in the process of going multinational and becoming global players, our minister concerned is going into special R&D and tax dimensions to help Indian companies. Already, the initiative has been taken to allow automatic foreign direct investment up to 74 per cent, which was mentioned in the Budget. These are our strengths on which we need to build upon.

What exactly is this second phase of reforms that the government spoke about? What does it entail?

We will go to Parliament with a discussion paper on the second generation of reforms, hopefully in this session itself. It is too early for me to talk about it right now.

The Budget has been praised but doubts remain about the ability of the government in general and the MoF in particular to implement it. For example, in the insurance bill, the government finally agreed to cap all foreign investment at 26 per cent rather than the earlier planned 40 per cent. This only highlights the pressures within the party and government. So should we remain guarded about the future?

Let me point out that the pending legislation is not exactly stuck. There has been forward movement, such as in the Urban Land Ceiling Act. During this one year, this government has introduced various bills of a reform nature. The power sector reforms bill to set up regulatory authorities at the central and state levels has been passed. So there is no reason to be as pessimistic as you are being.

And the second generation of reforms is precisely to indicate that there are broad challenges, which we wish to indicate, and to get going on them.

The government's divestment initiative appears to be stuck? And it has gone in for cross holding, which only gives the government more money but does not really divest shares from the public sector?

I don't think it is fair to say that divestment of public sector units is stuck, nor has the government taken the easy way out by seeking cross holdings. The latter is limited only to the energy sector where a very strong case can be made for upstream and downstream units to have cross holdings in each other for greater symbiosis. Three transactions out of four, including VSNL and Concor, which were mentioned in the previous Budget speech, have been put up for divestment. The fourth is due this month. Looking ahead, my minister is seeking a target of Rs 100 billion and on strategic sale through GDRs and in the domestic market.

What is the aim of the gold bonds?

Indians hold a lot of gold in their private possession, primarily for security reasons. Yet, in holding this gold in private, they are running a security risk. The gold scheme invites people to deposit their gold with the government and earn interest by doing so, besides also gaining some tax benefit. After a few years of deposit, they can take their gold back. But they don't have to take the gold back, they have the option of taking money instead. Our hope is that a lot of people will take advantage of this scheme and we hope to mobilise idle gold for beneficial purpose.

You are the longest serving senior bureaucrat in this ministry and have seen three finance ministers come and go. How do you think the reform process is going? Where is it headed?

I'll try and be as objective as possible. As you pointed out, I have served with Dr Manmohan Singh of the Congress, P Chidambaram of the United Front, and am now with Yashwant Sinha of the Bharatiya Janata Party-led alliance government. I do think that if you take the half a dozen or so budgets and some interim budgets with which I have been associated, you do see an enormous continuity of economic policy. Broadly reformist, broadly to move India ahead in economic terms. This speaks of a de facto consensus with the broad parameters of economic reforms among all political parties. Sometimes it is lost in the competitive politics, which is but natural in a democracy, but there is no doubt about the continuity. And I continue to remain optimistic about reforms.

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