The negative response came barely hours after Yashwant Sinha presented Budget:2000. The Sensex crashed nearly 300 points; corporate India displayed its utter dismay, and economists expressed serious concern over
the huge fiscal deficit. Unfazed by the criticism, Sinha defends his third-
in-a-row budget. Excerpts from an interview with BT's Ranju Sarkar and
Alam Srinivas.

Q. It's ironical that in your previous budget, you had raised more resources from indirect and direct taxes than this one. Yet, there's apprehension in the corporate sector. Why?

A. I don't know. That's a question you should be asking those who are feeling unhappy. My own feeling is that given the fiscal situation that I faced, I had to launch a three-pronged strategy to contain that problem.

The first was cutting back on government expenditure, which also seems to have been misunderstood. The second was reducing the subsidies' burden. And, the third was raising resources. Now, if you look at the options I had, as far as taxation is concerned, they were extremely limited. I have not made any effort to raise revenue as far as Excise duty is concerned. Whatever additional duty is being raised is purely accidental, and is because of the rationalisation of duties.

Since I had imposed a surcharge on Customs duties last year, my options were severely limited. So, I have done nothing at all to raise additional duty in Customs. We have, in fact, lost some money (nearly Rs 1,400 crore) as a result of having to reduce import duties down to World Trade Organisation (WTO)-bound rates, as well as reducing duties on food and petroleum products.

So, I was looking at direct taxes as a potential source of revenue since that is the non-inflationary way of raising resources. My own judgement was that, instead of an across-the-board hike in surcharge, it would be better to look at aspects that did not spread the burden and appeared to be more equitable. I have depended on the Minimum Alternate Tax (MAT), that had got distorted over time due to various exemptions. I, thus, decided to change the formula so that companies that were outside the tax net could be brought within it, and moderated the impact by reducing the tax incidence.

The second was the dividend-tax. If I could identify one aspect of my budget that is responsible for this disappointment, it is the dividend-tax. But, here again, there was a theoretical justification for doing what I did. While wages and salaries are taxed at the rate of 20 per cent, the interest income from fixed-income mutual funds and dividends are being taxed at 10 per cent.

But then, aren't you taxing the profitable and the efficient corporates?

You always tax profits. The more the profits, the more the tax. Can you think of a system, where you tax loss-making firms?

Wasn't the entire argument of reforms meant to move towards a lower tax rate regime that would lower the burden on efficient and profitable companies?

At a corporate tax rate of 35 per cent, and a maximum personal income tax rate of 30 per cent, I think the Indian tax rates are one of the most moderate. I really don't think anybody has any reason to complain about tax rates.

Prior to the budget, you had warned of the alarming fiscal situation and the tough choices facing the nation. Yet, you have only budgeted for a marginal fiscal correction this year-from 5.60 per cent to 5.10 per cent of the GDP. Why?

The reason is simple. I had a Rs 24,000-crore burden which was unusual. One was the Rs 13,000-crore hike in defence expenditure. The other was a Rs 11,000-crore burden due to the interim recommendations of the 11th Finance Commission. If you take these out, the fiscal deficit would be less than 4 per cent. I have also not gone to town with government expenditure as my critics tend to think. If you take the above 2 expenditure heads, the increase in the non-Plan expenditure would be less than 2 per cent.

But everyone was expecting that, on February 29, I would say that the government would be half its size on March 1. All those who were thinking along those lines are not living in the real world. There's no way that the government can just announce that we are getting rid of 20,000 people from tomorrow onwards. So, we have to wait for the natural attrition to take place, and control fresh intake during that period. That is the real world.

But do you have a plan of cutting government spending?

When I am saying that I have not allowed the non-plan expenditure to go up by more than 2 per cent, I think I am doing my job as well as I am expected to do.

If you look at the Rs 13,000-crore hike in defence expenditure, most of the money is going in meeting raised wages, salaries, and pensions. Of course, there's a small increase in stores...

Most of the additional money will be spent on recouping what we lost during the Kargil War in terms equipment, ammunition, and other wherewithal. A part of it will be spent on acquiring new equipment that we need to face the kind of enemy we have. So, it is not that suddenly the establishment expenditure, the salaries and the allowances are going up.

You have attempted to reduce the food subsidy by differentiating between Above Poverty Line (APL) and Below Poverty Line (BPL) recipients. But experience has revealed identification problems. How will you minimise the leakages?

This mechanism was evolved in June, 1997, when the government introduced the targeted public distribution system. It has its problems, but there's no other way of doing this. How do we distinguish between BPL and apl? Simply by issuing a red card to the BPL family. (Laughs!) There are other government schemes, like the Indira Awaas Scheme, which are targeted at BPL families. So, the administration-in good, bad, or indifferent ways-has already identified the BPL families. So, it's not correct that it is absolutely unimplementable.

I am not bothered about the reaction to the dividend-tax or the change in mat. Such criticism will come and go. I am more concerned about whatever little I have done with regard to food and fertiliser subsidies. I am going to face more problems on those front. My real problems is to protect the little toe-hold that I have created in reducing subsidies. And that is the battle that I am trying to win.

How are you trying to convince your coalition partners about the need for reducing subsidies?

I am trying to talk to them. I have talked to them, and I have tried to carry convictions. If they have any problems, I will continue to talk to them and tell them about the problems we are facing. They are also in power in their own states; they are also facing similar problems.

You want to phase out the fertilisers subsidy in the medium term. What do you mean by that? And since the Hanumantha Rao Committee already provides a roadmap for the withdrawal of the subsidy, why do you need a fresh schedule?

Because the Hanumantha Rao Committee report is yet to be accepted by the government. And based on the Committee's recommendations, a roadmap has to be prepared. The medium term could involve 2-3 years.

But while you are talking of downsizing government or curtailing subsidies, you are also creating ministries and departments like the Ministry of Tribal Welfare and the Department of Drinking Water Supply? Doesn't this send wrong signals?

This is absolutely unfounded. I read somewhere that I have created two ministries. But both the Ministry of Tribal Welfare and the Department of Drinking Water were created in October, 1999. I have merely said that I am making more allocations to them in order to enable them to discharge their responsibilities. And when you have a new department, you may or may not have a new minister. The Department of Drinking Water is a part of the Ministry of Rural Development. No new minister has been appointed although we have a new minister for the Ministry of Tribal Welfare. You post a new secretary, but you don't appoint new joint secretaries, or deputy secretaries. You just redeploy staff. This is a popular myth that every time a ministry is created, hundreds of crores of rupees are spent on them. But we, in the Ministry of Finance, make sure that the new ministries are managed within the posts that already exist.

What is the basis on which the new Expenditure Commission will function?

We have already made public their term of reference. It's a one-year term, and I am expecting it to begin functioning within a month and submit its report from time to time, may be once in 2 months, so that we can act on it.

But the Prem Chand Committee has submitted a study on government expenditure, addressing almost all issues, and steps needed to curtail it. Wasn't it enough to act on those recommendations?

No, it was not. When I talked about the Expenditure Commission, or when P. Chidambaram (the former finance minister) talked about his Expenditure Commission, the complaint against us was not that we were creating a new Commission. The complaint was why aren't we setting it up. Chidambaram failed to set it up. It also took me some time-almost 12 months-because of political reasons and others. What we need to remember is that we have to understand the current situation before we can start making plans.

You think that the Prem Chand Committee recommendations are not relevant...

No. They are relevant in parts. But we need to take a fresh look before implementing them. Also, from the point of view of implementability, it is not that it (the Expenditure Commission) should give us a report and we should put it on a shelf. And, like the Prem Chand Committee Report, it should gather dust. We must have reports on which it should be possible for us to act. And that is the kind of the practical report that we expect it to give.

Coming back to the corporate sector, you have budgeted for a 34 per cent increase in corporate-tax next year. Do you think that will derail the recovery we have witnessed in the past year or so?

What is the burden? I have assumed a certain buoyancy. But I am not saying that whether that buoyancy takes place or not, I am going to raise the taxes from 35 per cent to 65 per cent and collect them. What can be questioned is not the rate, but the buoyancy.

I have not put a burden across the board because I did not want the recovery to be affected. Take mat or the dividend-tax. The total amount of money that we expect to raise from these is around Rs 3,000 crore. I don't see why the corporate world, which has such massive presence, should crib about contributing Rs 3,000 crore. I remember captains of industry asking me to go ahead with the Kargil Tax, and assuring me that they would bear the burden. There's no reason for them to complain against it now. The burden of Kargil will fall in 2000-01. That's something the people ought to know.

By not mentioning a disinvestment target, or naming the PSUs where disinvestment will take place, are you consciously trying to delink it from the budget?

No. Those who are talking about delinking the process from the budget do not understand the accountancy principles of government finances. Who is the owner of public sector undertakings? The Government of India. Where does the money of the government go? Into the Consolidated Fund of the Government of India. If I say, we will put it in banks, will it make sense?

There was a great deal of misunderstanding about the money that had come in the past too. They thought as if the finance minister had pocketed this money, and that meeting the fiscal deficit with it was a big sin. And that I should pick money from the trees to meet my deficit. I told Parliament that we have received over Rs 18,000 crore from disinvestment till now. Against that, over Rs 34,000 crore was given as budgetary support to the PSUs alone. Critics who say that the Finance Minister should do this, or spend the disinvestment money here and there,don't realise that much more than what has been raised has been spent on PSUs and social sectors. Therefore, in this budget, I have said that we will use the disinvestment money to retire our high-cost debt, increase spending on social sector, and to restructure the PSUs.

What was the thinking behind not mentioning a target for PSU disinvestment?

The target of Rs 10,000 crore has been mentioned. Last year too, I had mentioned a similar target, and named the PSUs for disinvestment. If you announce these things prematurely, you build up an opposition towards that proposal even before you have done your homework. It is not a good policy at all. Thus, I have not done it this time. But I have reiterated that we will bring down the government holding in certain PSUs to 26 per cent or less, depending on the enterprise. And we propose to go ahead with the disinvestment plans in the case of PSUs on the basis of the recommendations made by the Disinvestment Commission.

Is the government considering the proposal of unbundling the assets of loss-making PSUs and selling them separately?

I don't think anyone has so succinctly stated the public sector policy of the government in 4, brief, 2-line paragraphs. I have said that we will restructure, and revive the PSUs which can be revived. Our score is 20, including that of sail. In the last 2 years, we have restructured at least 20 PSUs. Those that cannot be revived will be closed down after coming out with a voluntary separation scheme. We will create a special purpose vehicle, unbundle their assets, and sell them.

But you said that while the government will reduce its stake in banks to 33 per cent, the banks will retain the public sector status...

The banks are a different kettle of fish. I am not treating banks at par with other PSUs. Banks are not corporate entities, and were nationalised under the Banking Nationalisation Act. They are governed by the Banking Regulation Act. But there is a need to recapitalise many of them. If I had the money, I would have given it to them since I am the owner. But I don't have the money. The Narasimham Committee went into this question, and suggested that we allow the government equity to come down to 33 per cent. I have accepted that on 2 conditions: one, that I am not going to disinvest but tap the market to raise the bank's equity-base. And two, that I won't change the public sector character of the banks.

What exactly does that mean? That the public sector character of the banks won't change?

That means that present levels of controls we have over the banks will continue. We will still appoint their chairman and the directors. And those who are saying that I can't have my cake and eat it too (laughs), should realise that I will do it through a legislation. I will change a few provisions of the Bank Nationalisation Act. In the UK, for instance, there's the concept of golden share. The government holds just one share, which gives them certain rights and responsibilities.

Services constitute nearly half of the GDP today. But as long as they remain outside the tax ambit, the tax-base will be narrow. What were the practical problems that prevented you from taxing the services or the agriculture sectors?

Agriculture, I cannot tax.

But you could have made a beginning...

This is a constitutional arrangement that agriculture income-tax is an item on the state list. For God's sake, I cannot tax agriculture. As far as the services sector is concerned, I have discussed the matter with the state's chief ministers. And we have decided to take a comprehensive look at the complexity of taxes-services tax imposed by the Centre, and the professional tax by the states-so that we can rationalise them.

You have announced the setting up of a lot of committees and commissions...

That's the way to work.

Is that a problem because of the coalition?

It is not a problem with a coalition government. Why should committees and commissions be a problem with coalition?

With the government continuing to borrowing over Rs 1,00,000 crore, do you think interest rates can come down significantly?

I have borrowed more than Rs 1,00,000 crore this year but, early this year, the RBI had reduced the interest rate by 1 per cent. A similar kind of borrowing also occurred in 1988-99. Moreover, the increase in borrowings from Rs 1,00,000 crore to Rs 1,10,000 crore is not such a catastrophe.

The problem is also that the combined fiscal deficit of the Centre and the states is almost 10 per cent of the GDP, which is almost back to the 1990s kind of situation...?

Please go and ask this question to those people who accepted the Fifth Pay Commission recommendations. What broke the back of the state finances? The Fifth Pay Commission. What has put an unbearable burden on the Government of India? The Fifth Pay Commission. And those are precisely the people who are saying that Yashwant Sinha has lost control over government expenditure.

Experts feel that the huge government borrowing is crowding out private investment.

The banks today are flush with funds. And what about the money that was mobilised by the mutual funds in the past one year-from less than Rs 2,000 crore to over Rs 30,000 crore? There's money in the system. Those who want to make the fresh investment, can go out and make it.

Let us also realise one thing. We had created a situation where fresh investments were made, but the demand did not keep pace with the supply. Demand did not grow, with the result that we had the spectre of additional capacities in most sectors hanging over us. And that is what led to this feel-bad factor and the slowing down of the Indian economy. It will take time for demand to catch up with supply and for fresh investment to take place.

Which is why the manufacturing sector was expecting sops from the budget...

They were expecting sops and expecting the hard decisions to fall on somebody else. It couldn't be. In a democracy, one has to be equitable. And this is exactly what I have tried to do. Look at my figures. I have saved about Rs 6,000 crore by cutting back on subsidies. I have raised the same amount by way of additional taxes. As far as taxes are concerned, I have not put the burden on poor people, I have put the burden on those who can afford to pay it.

Going by what you've done, would you be able to maintain the fiscal deficit target of 5.1 per cent in the next year?

At this point of time, I can only say that I will do my best. But I know that if you look at the record of most people, most finance ministers, there have been slippages, including mine.

Won't the Excise duty rationalisation create more confusion since you have the special duties over and above CENVAT? And then you have the MODVATable and the non-MODVATable duties.

If I feel the saddest with regard to any point in the budget, it is excise. For the first time, I have created a vat regime in the country. The special duties are there for two reasons: one, most countries with a vat regime have special duties. Two, given the complexity of the budget this year, there was no way I could have lost revenues.

On the second point, I am unable to understand why it has been misunderstood. For all the items which are in the nature of raw materials and intermediates are now at 16 per cent CENVAT. And they are MODVATable. All those items which are covered by special excise duties are final products. And final products are not covered by MODVAT. And, I have gone out my way to explain that if you go out and buy this watch (points towards his watch), you will not get MODVAT. But if the watch-maker went and bought this strap or the watch assembly, he will get MODVAT. That is the principle on which MODVAT works. There was some confusion with regard to the automobile sector which was clarified the next day. And, although I have kept the Excise duty on intermediates like POY and PFY at 32 per cent (16 per cent CENVAT plus 16 per cent special duty), MODVAT benefits are available to their users.

Since the trend is upwards due to the rationalisation of the Excise duties, do you see the rationalisation having an inflationary impact?

Where is the inflationary impact? I collect Rs 70,000 crore from Excise, and if you exclude the modvat change that I have done for capital goods, you will find that the impact of the increase or this rationalisation is less than Rs 2,000 crore. And it is product-specific. It is not across-the-board. So, where is the question of the inflationary impact?

There's a general feeling that the budget did not do enough for the manufacturing sector. This is crucial as the growth of the knowledge economy hinges on a sustained growth of the real economy?

This is not true. When I talked of hard decisions in this budget, this is exactly the point that I was making. And I would like to make this one final point. The budget of 2000-01 was not one in which any section should have looked for concessions. This is not a time for concessions. This is the time to ask oneself what I am doing for the country instead of cribbing about the little burden which has been put on some people. This is my final submission of what I have done.

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