A day after presenting liberalised India's second dream budget, Finance Minister Yashwant Sinha is walking on sunshine. He's being eulogised by everyone and even trenchant critic and author of the first dream budget, former Finance Minister P. Chidambaram, gives him 6 out of 10. In this interview with BT's Seetha, a beaming Sinha explains the considerations behind the budget, and is confident that it will not be derailed.

You had promised a growth-oriented budget, a promise you seem to have kept. But why have you kept the GDP growth target at a modest 6.5 per cent?  

A. It is not 6.5 per cent. If we look at the GDP figures we are working on a nominal growth rate of 12.5 per cent and the nominal growth rate is GDP growth rate as well as inflation. We have not clearly stated what will be the growth rate and what will be the rate of inflation because we leave this mix so that as the year passes, exigencies of the situation can be taken into account.

Do you see growth being driven by investment demand or consumer demand?

Both. By reducing taxes I am trying to propel demand and by giving tax breaks, I am trying to promote investment. It is a combination of both. And interest rates will play a very important part in this.

But will investment demand happen? There is a lot of overcapacity in industry...

When I talk of investment demand, I do not refer only to the FMCG sector, etc. I am referring basically to infrastructure, which is crucial for the progress of this country.

Stepping up public expenditure is the key to that. But though, you have hiked the capital expenditure, the non-plan component is higher than the plan segment.

The increase is in selected sectors of infrastructure like roads and power where we have hiked public investments. Certain amount of increase in non-plan expenditure becomes inevitable because of interest payments, defence expenditure, and subsidies. But I am happy to say that in this fiscal year, we have been able to keep the non-plan revenue expenditure under strict control, and we have achieved one of the lowest expenditure growths in the last 10 years.

Most of the growth drivers you are talking about are measures in the medium-term. In the short-term are you are relying on sentiment?

I am not relying merely on sentiment. While these steps are medium-term measures, they are also happening today. A lot is happening on the roads sector, ports sector, in the power sector (we have signed memorandums of understanding with five state governments). There are things happening on the civil aviation front, the petroleum sector. So, it is not all medium-term. There are things happening and we have to accelerate the process.

The budget doesn't seem to have done very much to pull in Foreign Direct Investment (FDI).

I feel FDI will come if we can show the world that India is a worthwhile destination in terms of growth rates, practices and procedures, better economic management, and pushing reforms forward. And the budget does all that.

You have further liberalised the capital account. Are we moving closer to full capital account convertibility? Is that within your frame of vision?

I have that in my frame of vision. But the international experience in this regard confirms our belief that one has to approach this issue very carefully and in a calibrated fashion so that we are not overtaken by events suddenly. This is part of that calibration.

The lowering of interest rate on small savings has been a long standing demand. But is it wise doing that at a time when inflation is moving upward?

I have kept a close watch on the inflation situation. Core inflation is what affects the common man. So, while I have reduced the interest rates this year, I've also said that it should be linked with inflation. I will appoint a committee that will suggest ways of doing it. I want to take the interest rate fixation of the contractual obligations of the government also to the non-political arena so that it is decided not just by the finance minister but by an expert committee.

Do you see the phase-out of the Administered Price Mechanism (APM) pushing up inflation by the end of the year.

Much will depend on international prices. The indications at the moment are that the international prices should soften in the course of the year. And one is hoping that if this happens, then the burden will not be as much as it is at the moment. But if there is a subsidy, then quite clearly that subsidy should form a part of the GoI budget rather than any other account. The oil pool account will not be there after the APM is dismantled.

The major subsidies continue to be a huge item of expenditure.

We must recognise that there is merit in the food and fertiliser subsidies. When I sat down to prepare the budget, it occurred to me that every year, every government, has thought of dealing with subsidies only in one way-by reducing them. Taking the political flak for it and ending up in failure. So, what I decided to do this year is a policy shift-both with regard to fertiliser, as well as food subsidy. In the case of fertilisers, we are going to implement the recommendations of the Expenditure Reforms Commission. But these are not things that can be tackled in a hurry. But I would also like to say that reduction or increase in subsidy does not have to be reflected in the budget. It is an administrative decision, which the government can take whenever it needs to.

You have talked about flexible labour laws, downsizing. There are fears that all this will lead to jobless growth. Are these fears justified?

I don't think so. I think the rapid growth of the services sector in the Indian economy is a clear pointer to the fact that jobs have been created in the past and they will continue to be created in the future. Of course the capacity of agriculture and of the organised industrial sector to provide more employment is limited. Therefore, in a country like India we should look to more and more self-employment opportunities. The growth of the services sector is a right step in that direction.

You have done a lot for the agriculture sector in terms of infrastructure, improving credit flow. But there are a whole lot of other structural issues in the sector, things which are not in the realm of the central government. Are you confident of moving towards agricultural sector reforms?

I think there is far more reform mindedness now in the states than there was in the past. In fact, I will have no hesitation in admitting that in many areas the state governments are ahead of the central government. I am confident that the movement of reforms will go forward with the full cooperation of the state governments.

You have promised banks more managerial autonomy. But the experience of the navaratna Public Sector Undertakings (PSUs) has not been very happy.

I think autonomy is a state of the mind. It should depend upon the mindset of the minister and the bureaucracy to ensure that. I am committed to the autonomy of the public sector and the banks. We should only do what is necessary for us to discharge our Parliamentary accountability. Beyond that we should not do anything to micro manage the bank or the PSUs from here.

Many of the measures you have taken in the budget are really putting things on record-labour reforms, privatisation. Most of it is out of your hands and has more to do with other ministries, state governments. You are assuming a reforms mindset much beyond the finance ministry.

You must understand the nature of the budget. It is not the budget of the finance ministry. The finance minister presents the budget on behalf of the entire government. It must be looked at as a national document. It must set out the policies which the country is going to follow for the next 12 months. Secondly, we do not include in the budget anything on which no action is contemplated. There is not a single para in the budget, which is not followed by action or indication of action in the next 12 months.

There is a fear that despite taking the best of measures, a lot of things will be politically determined. How much do you share this fear of political risk?

I don't think there is a political risk. The opposition is making its usual noises. There is a larger constituency outside. Opposition parties will take a narrow view, take political advantage. We shall reason with them and try and build consensus. At the same time we would like to reach out to the larger constituency-the people of India, and convince them that what we are trying to do is in the larger national interest.

Also, look at the results of the assembly byelections. The opposition parties have been making such an issue of agricultural prices being down because of the imports, which is not correct. But it has not cut ice with the voter. So, ultimately, we come to the conclusion that good economics is also good politics. And certainly, bad economics is not good politics.

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