A week after her and the second Narendra Modi-led government’s first budget, finance minister Nirmala Sitharaman sat down with Hindustan Times to discuss the budget’s vision for growth, the steps it has undertaken to boost investment and consumption, and some of its contentious tax measures. Edited excerpts:
Ahead of the budget, there was a view that you could afford to slip a bit on the fiscal deficit because at this point the primary concern is growth. What was your thinking when you were working on the budget? You stuck to the fiscal deficit target. Was slippage even an option?
The emphasis on growth, the impetus for growth, doing everything the economy needs to grow, as they say, to revive animal spirits (although I wouldn’t want to use that expression) – all this was before us. There was also an Interim Budget passed in February. There’s also the other bookend (as I’d like to call it) that this is the last year of the 14th Finance Commission. So there were these two bookends I had to operate within. Some of our vision was already laid out in the Interim Budget. I had to ensure that none of my government’s flagship programmes, which are essentially welfare programmes, stop because the objective was to also ensure that consumption was bumped up. One of the ways to do this is to make sure our flagship programmes continue because they put actual money in the hands of people.
If my objective was to bump up consumption because with that you kick-start the cycle, then this established welfare-driven route of putting money in the hands of people, and in this case effectively as well thanks to Direct Benefits Transfer – I had to keep that as the top priority. The other thing I told myself was that I had an FRBM (Fiscal Responsibility and Budgetary Management Act) before me, and as a minister it is my business to comply with it. And if the glide path [for fiscal deficit] has already been given, how can I violate that?
So I made sure the consumption logic would work – possible through various flagship programmes where money goes into the hands of people – which together with public investments in infrastructure (which have been a constant since 2014) would revive growth.
It was fairly clear what I had to do. I had to give the big picture; send a clear message that I was going to look at bumping consumption up; and that the forthcoming budget would look at the expansion of various other things.
But within this, my messages were also non-money related ones – on reforms.
Was there even a debate on the fisc? Even if only in your own mind.
The debate was more outside than inside the ministry. All of us witnessed the fairly credible debate on how today’s need was to loosen the purse strings, that no one would blame us for a slippage, and that once the economy recovered, we could get on to the path again. It’s a very strong argument but I wanted to be a stickler for the rules and the law; also because that sends a very strong message about discipline.
The focus seems to have been on reforms like you said; measures to make it easier to do business so that private investment will fill the gap …
We have not just spoken about it and left it there but also shown paths, the areas where we want to bring in private investment. Railways is one area I mentioned, where we want more public private partnerships. Disinvestment is another… Also, for the first time in independent India, saying that we would borrow abroad (India is among the bottom of countries in terms of external sovereign borrowings; and our foreign exchange position is very healthy right now; and interest rates in some countries are low), therefore reducing the pressure on savings – where the (fear in the past has been that the) government is sucking them all out and no private firm can borrow.
One of the reasons why people were recommending the government not worry about the fiscal deficit is because the Indian private sector is in no shape to invest. The balance sheets of almost all Indian business houses are loaded with debt – even those of the good ones. A lot of their investments have been made and they do not appear to be in a position to make fresh investments for at least a couple of years. So where will the private investment come from?
That’s why we are looking at promoting India’s infrastructure investments overseas; allowing states to look at options of borrowing from outside; our own external borrowings; making sure the NBFC [Non Banking Finance Company) crisis is addressed, so that small-level investments can happen.
And foreign investment? You’ve eased FDI norms…
That’s right. We’ve given scope for more now.
The debate on external borrowings isn’t new, but we have always been extremely conservative about it. It obviously exposes us to some risks…
On this there was quite a lot of debate. Abroad, there are quite a lot of markets that are saturated. [That are] Flush with funds but don’t have meaningful returns from any new investments. This comes up often in our bilaterals. And yes, a lot of thought has gone into our decision.
Still, several people, including at least one former Reserve Bank of India governor, have said that the risk is far too high and that we shouldn’t be taking it.
There are divergent views on it. Some say it’s a great idea and that India should be a bit more risk-taking. And that if we don’t take it now, with our foreign exchange position being healthy, when we would take it? We will weigh our options – not to reject – but to cautiously move ahead.
Would you set limits for this?
Maybe, but it’s too early to speak on this.
Prior to this you were the defence minister. There’s a feeling in some quarters that the defence budget hasn’t increased.
That’s not true. It has gone up, but perhaps not as much as some people wanted. But most of us are missing out on the fact that for the huge import of equipment, platforms, I have cleared the defence ministry of the headache of a BCD [basic customs duty]. After GST [goods and services tax], they had to pay this and then expect the government to give it back.
I have exempted the ministry from paying this duty – in effect it is money in your hands. The [defence] ministry is quite okay with the budget. There are four heads in the defence budget. In three, capital, revenue and pensions, I’ve given them a clear increase. There’s one head, civil, where there is a slight fall. But you have to add BCD also.
When you look at the budget math, some of the tax targets look stiff. How confident are you of meeting them?
If anything, between the Interim Budget and now, a very realistic assessment has been made of our tax targets. Everyone who thinks we have set stiff targets is probably only looking at GST collections, which slowed down during the elections, for whatever reason. I think we have given ourselves absolutely achievable targets, and after taking everyone on board.
What about GST collections? Do you think they could move up?
There is a perception among the middle-class that you’ve let them down?
I don’t think there is any reason for that feeling…
They’ve been hit by the increase in diesel and petrol prices. And they were also looking for some tax benefits.
To expect a change in that [tax benefits] in four months? In the Interim Budget, they got relief.
One of the provisions in the budget that has been debated a lot is the tax on the super-rich. It turns out that it will also affect some of the foreign portfolio investors [FPIs] who invest in India through trusts. You were obviously aware of this when drafting the budget…
The target was not the FPIs. When you have individual assessees, even if they are Hindu United Families earning between R2 and R5 crore as one category and above R5 crore as another category – it is there that we wanted to bring this surcharge on the tax paid. Collaterally, it also hit the FPIs because they either register themselves as companies or as trusts. Trusts do come under this. There is an option for FPIs to be registered as companies. I’ve come to know that that kind of conversion, from a trust to a company, is very painful, very cumbersome. The issue lies there.
So, will you do something about it?
Well, that’s where it is; I’ve not taken a call on it.
One of the things talked about ahead of the budget was that you were considering an estate tax or inheritance tax.
Never. That wasn’t even on the cards. I have no idea how that rumour came about.
Your big target in the budget was growing the economy from $2.5 trillion to $5 trillion. What will make this happen?
One is attracting investment. We are constantly opening up and easing out.
Two is looking at ways in which Indian industry and investors are motivated. We are making sure banks can fund this growth. That the production and manufacturing sector gets all the facilities it needs. The Indian consumer and the agricultural sector are our top priorities. Infrastructure is the top expenditure head for this government and we see this having a trickle-down effect. With all this, we hope we will be able to reach the target.
Do you think there is interest in India, that foreign investors want to invest here?
Actually, I think all the negativity, the cynicism about India having slowed down, are mostly domestic. If you go outside people think this is the most happening place. You may have slowed down to 6.8%, but you are the fastest-growing economy; more than China. People do believe India’s human resource capital is incomparable. Those who understand rules-based economy look to India.
The NBFC issue that you talked about is something you have been thinking about. Do you believe the one-time relief [a partial credit guarantee on purchase of high-rated pooled assets] you have announced for six months is adequate?
Well, even before the budget, we started monitoring the issue. Actually it wasn’t one issue. Some issues were governance-related. Some were related to solvency, liquidity. Some NBFCs had overstretched themselves. The housing NBFCs had issues of their own. So we said we should consider shifting their regulation to RBI. The second was to create a window – for the first 10% loss arising from pooled asset purchases of NBFCs, the government would provide a backstop.
Would you consider extending it?
We have to see how it goes. This is actually a major response by the government.
In principle, a 42.7% peak income tax rate. Is it too high for a country like India?
Ideally, we should bring it down. Ideally, but we have to see when the timing is proper for this.
Jul 12, 2019 05:31 IST