Finance Minister Jaswant Singh

With just three months to go before he places Budget 2003-04, Finance Minister Jaswant Singh exudes optimism about India's economic growth prospects and pragmatism about balancing economic policy with political compulsions. Last fortnight, as Johann Sebastian Bach's music played in the background in his tastefully furnished North Block office, Singh spoke to BT's Sanjoy Narayan and Ashish Gupta. Excerpts:

What are your main concerns about the economy and what is top-most on your agenda?

I think it is to move further forward in the process of fiscal consolidation and restoring and bolstering the confidence of both investors as well as citizens. I am really not dissatisfied with the growth that we have witnessed in the recent months-from April to September. And if we look at the figures for manufacturing, industrial growth, exports and the other indices, they all bear out my optimism. Now, I need to concentrate much more on manufacturing. I think the sectors that encourage employment need to be given a push. Certain sectors of the economy, which are showing early signs of revival, like steel and some traditional sectors of the economy, like textiles, too need to be given a push. We have just had a very testing period of drought and so I have to address myself to the agricultural sector. It is a big agenda but I do not know how in a country of India's size you can have anything less than a big agenda. A big country always needs a big agenda.

You talk of taking growth forward and both, Prime Minister Atal Bihari Vajpayee and the Tenth Plan document, have mentioned an 8 per cent growth every year. What do you see as the specific policy measures that could achieve such a rate?

I don't want to repeat what I have just said about the demonstration of growth in manufacturing, in industry and others. But please reflect on some factors that are vitally important in assessing the growth potential of India. The last six months or so have witnessed possibly the most adverse combination of circumstances in the economic management of the country. We had a stand-off with our neighbour; we had really the most testing and damaging shortfall in the south-west monsoon for decades.

Moreover, not only has the global revival not demonstrated itself but also there are disturbing signs of recessionary possibilities. Germany, for instance, is not growing, the US economy has not taken off and Japan is faltering-all the economic powerhouses. And given the poor condition of the powerhouses, combined with the political uncertainty that are attendant upon the Gulf and the Middle East question, things have been extremely difficult. But if despite all this, the country can grow at 5.5 per cent, it is no mean achievement. I have figures that show that GDP growth has accelerated from 4 per cent in 2000-01 to 5.5 per cent in 2001-02 and 6 per cent growth in the first quarter of the current year.

Prices are under control, we have close to $ 65 billion in foreign exchange and the Reserve Bank of India Governor informs me that the current inflow of foreign exchange is around $ 500 million per week. I don't know how foreign direct investments are computed but there are reports that India may be extremely conservative while computing its FDI. If we go by the IMF standards, the FDI inflows should be substantially higher.

One of the chronic problems of the Indian economy is the large fiscal deficit and especially cutting down on government's profligacy. How will you tackle this issue?

First, what you term as profligacy of government expenditure cannot be treated as an index to reduce the post of two secretaries in the government or prevent them from using STD facilities. This is rubbish. These are not expenditure factors but efficiency factors. Secondly, we have to move away from the mindset of an "economy of want'', which we were in all these decades to an "economy of surplus''. This is a mental transformation that has to take place, which is unfortunately not happening. Because of that there is a constant reticence to accept that things might actually be better.

Of course, the fiscal deficit must be kept within control and it is my assessment that in the current fiscal, two-thirds is revenue deficit and a third is really the fiscal deficit. But economists will say that fiscal deficit is fiscal deficit. But the fiscal deficit is not much because of the profligacy of government expenditure but because of other factors. There is a need to reduce the gap between expenditure and revenue; raise revenue without being coercive. To enhance the revenue collection, the tax structure must be so reformed that it moves into an "impersonal tax administration'' with minimum interface between the assesses and the tax officials.

There are basically three large items in the government expenditure such as subsidies, interest payment and security-related expenditure. I think we have to move on the subsidy front as we are moving on the interest front by retiring the more expensive debts by swapping it for the lower interest-bearing loans.

What are your views on the Kelkar Committee's recommendations on direct and indirect taxes that seem to have sparked off a debate?

Let us be very clear in our minds that it is not yet a report but consultation papers. Secondly, these are not the government's viewpoints but those expressed by a group of talented and qualified people who feel that this is what we should be doing. My whole endeavour in doing this was to open out the entire budgetary taxation process to the public. And I have done it for the first time in the last 50 years. Now these recommendations will go through the churning process-the churning of ideas, with some agreements and some disagreements.

There are also certain issues that are difficult to accept right away. For example, as a matter of broad approach I don't think that there should be any measure contemplated that would reduce the income due to a citizen, particularly the lower tax payers and the middle level. Then there are certain sectors that need promotion like housing and tourism. If I were to think in terms of promoting them and they run counter to the recommendations then they may get a second look. It is not the government's viewpoint but this is how I look at it.

Let me also explain that these consultation papers have three elements. One of the elements is how to improve tax administration; the other is the element of modernisation, computerisation, and outsourcing. The third is the element of tax structure and the rates. And quite understandably, nobody has paid attention to the boring aspects of the first two parts. The third has some kind of sex appeal so everyone pays attention to it!

You are the first Finance Minister who has taken the initiative of involving the opposition to achieve some kind of consensus on the reform process. Will this approach work?

The consensus-building approach will work. I am absolutely convinced about it. After all, the economy is nobody's personal fiefdom. The management of India's economy is, of course, my responsibility because I sit in this chair and it is also the government's responsibility. But the consequences are borne by everybody. So if the entire political class is consulted it is very good. But will we achieve unanimity? Of course not. We will arrive at what I would call an LCM (lowest common multiple) of agreement. Having found LCM we will try to move to the HCF (highest common factor). I am not very good in arithmetic but this is the aim.

Two hurdles to private domestic as well as foreign direct investment are imperfect markets for power and labour. How will you resolve these?

Of course, power sector reform is vital. Of course, labour reforms are vital. But, simultaneously, important-and which, unfortunately none of you refers to-is the reform of the mindset of the civil service and the bureaucracy. It is a very important factor. Then there are the other factors. We are a vast European Union-sized continental economy. We will have these diverse viewpoints, divergent viewpoints. It is a question of bringing it all together.

There is no alternative to reforms if we need to grow and is there an alternative to growth? There isn't. Can you grow without higher production? You can't. Can you have higher production without reforms? No, you can't. So I think it is as simple as a mathematical formula.

The disinvestment process seems to have run into some kind of a rut in the recent months because of opposition from within the NDA. What is its current status?

I think we need to dispel the fog on disinvestment. The government is committed to reforms, I have just said so. Disinvestment is an integral part of economic reform and cannot be separated from it and must continue. Some of the NDA members are now questioning whether what has been done under disinvestment matches our requirements? Can we improve it or have another course correction? However, I think very shortly all that is going to be sorted out and disinvestment shall continue.

Don't you think that your job has become that much more difficult because of the forthcoming assembly and general elections?

I think we have accepted elections as a reality. But if you examine India's history in the last four years, you will see that elections have been happening somewhere or the other every year. And if every year because of that (elections) nothing had to be done, then the best thing is really what some of the states are doing-do nothing, keep quiet. But, the second aspect of the thing is that there is nothing like a pure economy.

In a democracy, it is all a part of the political economy. All governance is really a challenge of finding a right balance between two equally valid and competing requirements. Most of the time you have equally valid and competing requirements and in a country like India more so. But you are not constrained by political compulsions since it has already been factored in and made a part of one's existence.

With so many companies now coming under the lens for accounting frauds, corporate governance seems to be a major issue today. What steps are you taking to ensure compliance?

Corporatised activity has to be in accordance with the norms and regulations. The Department of Company Affairs is not interested in doing a policing role. However, as far as serious frauds are concerned, we are far ahead in our examination and finalisation of a Serious Frauds office. What is it that we need? We need an independent, multi-disciplinary body because serious frauds take place in various ways. We also need a trained team of specialists to do this. Secondly, there is a need to re-examine the entire issue of auditor-company relationship. Soon after I got this responsibility (of the DCA), I set up yet another task force and that task force has completed its job. They will give us the report and we will reform that also. Third, is the time consuming procedures, nature or the character of the disciplinary proceedings and also action against chartered accountants I am addressing this issue but it is slightly more complex and time-consuming. The fourth is about penalties and levies; they are really laughable. They have no relationship whatsoever with the crimes committed. So these are some of the areas that I have to address. I have already begun work on it.

Recently, we have seen bailout packages for three of the four domestic financial institutions and sometimes twice. What is the lasting solution for their troubles?

The lasting solution is just what is being done. What has been done in the case of the Unit Trust of India, for example, or the steps taken for the IDBI now with the Cabinet approving the repeal of the IDBI Act are lasting solutions. The government has not done any bailouts but fencing in of the liabilities permanently and once and for all. The bifurcation of the UTI into Unit 1 and Unit II and the issuance of the ordinance that ensures that Unit II will be at NAV (net asset value) -based mutual fund operating in the market.

However, wherever the government gives its word, it must keep it. Unfortunately, over the years, what has happened is that the developmental financial institutions lost their identity a bit, particularly the UTI, which was unable to make up its mind what it wanted to be. Was it a unit trust, a mutual fund or a developmental financial institution or was it a retail financier. And because of this kind of schizophrenic pulls and pushes this has resulted in the current mess. Now it is very clear what Unit I is and what Unit II is. The IDBI will be a domestic financial institution but there will be extreme restrictions on what it does. I am afraid that on IFCI we will have to be a little more drastic. And I am waiting for the final meeting on the IFCI case because I have to have the view as other financial institutions are also shareholders. We met just two days and I am expecting a report soon. And as soon as I get the report I will have a package for IFCI too.