In an exclusive interview with Shrimi Choudhary and Arup Roychoudhury, Union Finance Minister Nirmala Sitharaman said the Centre had kept the promises made to states and hence there was trust at the recently-held GST Council meeting. On broader economic issues, Sitharaman said while there were still uncertainties on the expenditure side of things, she was confident of a healthy tax revenue buoyancy in FY23. The FM said the high level of government debt-to-GDP ratio should not be a concern against the backdrop of two years of the Covid-19 pandemic. Edited excerpts from the interview:
It’s a difficult time to be a finance minister. The world is recovering from a pandemic, the Russia-Ukraine war has stretched global supply chains, leading to high energy and food prices. Rising inflation and interest rates have led to a fall in markets, bringing economic distress globally. How do you look at it?
It’s certainly an extraordinary time. It’s also been abnormal to the extent that we had to think of giving almost five ‘mini Budgets’ during 2020. That wasn’t the end of the story. The Russia-Ukraine war caused a major disruption in supply chains, including a surge in metal prices, which are now cooling down a bit. But prices of all essential items were going up.
It’s definitely an unusual combination because the West is saying they have not seen such an inflation for 40 years in some countries. And, with inflation at that level, they are also not able to come up with solutions; they are going to have a near-term solution for themselves. These were the very economies that printed money during Covid, and some of them were ready to splurge.
And I would say splurge (consciously), because they wanted to convince themselves and also convince certain vocal constituencies that money had to be spent; money had to be given. If the intentions were good, the consequences are now for all to see.
Those very economies also showed an extraordinary willingness to spend and thought that would bring relief from the pandemic.
What was India’s model during the pandemic?
We had our way of handling the pandemic and that was very much tailored to the uniqueness of the Indian economy. We have a large number of MSMEs, spread across several sectors — both traditional and technology-advanced machine-using industries. Our solutions had to be very much variegated (one kind of solution for one area). We have taken a variegated approach to each one of those sectors according to their requirement, one at a time while coming out of the pandemic-induced lockdown. We took an approach which was a bit labour-intensive from the policymaking side. We did so to reach all sections.
If that was one big challenge, this complexity, which is coming out of external factors now, even as we are coming out of the pandemic, is posing a challenge, which is not in our hands to even calibrate as we are handling it.
The external factors, all of which require understanding and responding like the way we have come up with in terms of taxing those exorbitant windfall gains that some of them are having. Also, to be sure, our inflation is nowhere near what western countries experience. But even this will be burdensome on our people, because you have people with very low income who can't afford to have that kind of a burden on themselves. So we are addressing inflation with a sense of urgency and sense of priority. Even if it is well within 7-7.9 per cent or well within 8 per cent or 9 per cent, it is not any sacred number, whereas 6 per cent is a sacred number for me. We still want to bring it down to somewhere close to 6 or below 6 per cent.
But what are the ways of doing this? India has had, between two crop cycles, the problem of food inflation, particularly of perishables. Add to that problems of petrol and diesel prices because of global pricing, we've definitely been affected every time, over several decades, because of these factors. But now we also have additional factors of input costs, not so much the supply itself. It’s available, but at a very high cost. Our understanding of inflation and its causes now, as well as how we handle it, is very proactive.
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RBI’s financial stability report stated that the recovery is gradual, but uneven and that a durable commencement of the capex cycle remains elusive. What is your view on that?
I'm not commenting on their observation of the recovery being gradual but uneven. That’s their domain. I read it and take it into my scheme of things. But on this point of capital expenditure not happening or insufficiently happening, or uneven or elusive, we are in the first quarter and first quarters are notorious in that many things don't happen. The first quarter lethargy is something which the Centre and the states will have to work on.
One major thing that I want to highlight here is that, according to the earlier perspective, once money had gone off to states, it meant expenditure was taking place. Now, with us moving to a single nodal account system, where money goes, when exactly it is needed, and how it is spent, all of that is being monitored.
How was the response from states in April-June on the Rs 1-trillion capex loans?
Our point was that states could come up with any project — greenfield or brownfield, or pending projects which are incomplete or so on. We said you use it for anything, but it has to be for capex. By the time the finance ministry gave the guidelines, it was late April, and by the time states sent their projects for evaluation, it was early May. But now I am confident that we can distribute that amount by end-September. Even during the pandemic, because we adopted this method of spending capital assets, we spent through capital expenditure to ensure economic revival. And states really showed that absorption, which you would have never otherwise imagined.
What are your plans for banks and insurance companies? You have been speaking about it since the 2021 Budget.
We are going on with the plans of bank privatisation. We’ll keep going. If you remember, by the time we got ready with the LIC IPO, the market had started turning. But we stuck to our decision. I would compare a privatisation plan to the Jagannatha Yatra. So much effort goes in searching for a tree, then it is chopped, then it is brought with fanfare, and there are specific days when the wheel is made, and each year there are different dates for when the chariot gets ready. In all this, if we say that we have not had enough crowd, so we cannot do the Yatra, can the process be stopped?
Do you have a muhurat in mind for bank privatisation?
We'll keep going. The preparation for the Rath keeps happening. When the Rath is ready, we will have to go. The Banking Regulation Act amendments should come soon.
The banks that you are looking to privatise, will you exit them completely?
The ones which I can privatise, I can get out of fully, because there will be some in this sector which will remain PSBs. But, while I want to let go, whether I would want to retain some minimal stake and let go of a majority strategically — all that is part of a decision-making process.
States are expecting a road map from the Centre on the compensation issue, not necessarily to extend the period but some measures to address the revenue shortfall. What’s your take?
During the GST Council meeting, two days went in focusing on the Group of Ministers’ reports. Compare that with the days when the Centre and states were worried about how it would be seen through. At that time, compensation seemed to be the only agenda of interest. Now, we have done two days of work picking up on complex findings and recommendations by the panels without a sense of cynicism or negativity. The next day, one or two states raised the compensation matter which we agreed to take up. A few others joined in and that is how the discussion on compensation began and ended like it did….
Any road map?
I've heard what they had to say. Technically speaking, the compensation was for five years to ensure a compound annual growth rate of 14 per cent in revenues under the GST regime. And I am conscious of Covid-affected revenue growth. So, those two years cannot be taken to measure any kind of growth percentage, but before that also, and after that, when revival is happening well — about 8 to 9 per cent is the most the best-performing state has reached.
Do we see any rate rejig exercise this year, keeping in mind the current circumstances?
I haven’t even reached that stage yet….
How has your experience as the GST Council chairman been?
I’m very humbled by this experience. It’s a wealth of experience. And the way in which each one feels focused and committed is amazing. The GST Council, despite all the undermining that many parties do, and in spite of their members sitting there, is such a fantastic institution.
The GST Council meeting, the way it went, shows that it is moving in the right direction. Was there any ground work?
We constantly keep talking to them about the agenda – talking to the officers, calling them over. Even if one state has apprehensions, we call them and have their views before we actually put it on the Council meeting agenda itself, and so on. This particular meeting went the way it did because trust had not been let down. We’ve not failed on the promises.
Moving away from GST, what’s your view on the NSE matter?
We are conscious that it is a well-built institution, it has a role to play in the Indian economy. The NSE and BSE have made big contributions to the stock market. So, nobody is interested in damaging them. But equally, it cannot be that buccaneers can just go there, do what they want and get away, hurting the confidence in the market. When this happened, a lot of questions remained unanswered. And that's what the CBI is going into. And that's what the regulator Sebi is also looking at. It was felt that sufficient action hadn't been taken by Sebi at the time it happened. Probably some token action was taken, but it didn't address all the issues related to the scam. And there are layers which were not tested by Sebi at that time itself. Those layers cannot be left without being inquired into.
Economists say there is a problem with demand. And there is not enough done to revive demand deficiencies. You think demand will be taken care of through your capex route?
That’s the route we have chosen. We are seeing the results, such as composite PMI, it is going up month-on-month except in one month. The route we've chosen to stick to is expenditure. It may take some time, but we are seeing the results.
How comfortable is the fiscal situation given the external factors?
It looks comfortable but the challenges are before us. We don't know where the fertiliser prices will end up. We don't know how long crude oil prices are going to be at elevated levels, even if I purchase more from Russia. I still will have to think about the other costs involved. So, there are uncertainties for which I still have to keep myself ready.
How optimistic are you on nominal GDP and revenue buoyancy?
I am quite optimistic. Our revenue buoyancy is at 1.5 per cent now. We have seen a 30 per cent increase in tax collections in FY22; the indirect tax collection in the first two months of FY23 is up 36 per cent. I hope to maintain that.
What would be your message to those states that keep arguing that the Centre uses a variety of instruments to generate revenues, but not in a shareable format. There will be criticism tomorrow that even the windfall tax is in the form of a cess…
Even for oil-marketing companies – who bears the burden when they go through bad times? The Centre or states? That is my simple and straight answer. They try to spread a misunderstanding every time that we don’t share resources. When things go wrong, I have to import fertiliser and also take the burden of OMCs. Sensationalising such things is very quick and easy...
Ratings agencies and the RBI have raised concerns of general government debt-to-GDP ratio. What would you say to that?
I think, to be fair to states and to the Centre, we should not treat it with the same yardstick as during normal times. India, particularly, had a very severe second wave and the economy was impacted. The economy is now reviving. In such a situation, if you try to bring the debt down, there can be a negative impact on growth prospects. So, while the debt-to-GDP ratio is a very powerful indicator, one has to be conscious of the reality.
The central bank digital currency is in the works. Given the complexities, where are we on that?
A lot of discussions are taking place on the matter. The central bank has, from the beginning, expressed a lot of concern about digital currencies. And, it is not just India's central bank, but also the central banks all over the world. That is one side. The other is the fintech side of things, where we have repeatedly said we want the blockchain technology encouraged. It has its benefits. But we will have to take a call on whether we want to allow its use for creating private currencies.
A lot of the credit for GST goes to how your predecessor – the late Arun Jaitley - brought together competing interests of various political parties, centre and states. How do you view carrying his legacy forward?
I never dreamed I'll be able to fill those shoes, they are too big to fill. One of the things that the Prime Minister decided was to name the National Institute of Financial Management after him. And it was decided to hold an annual Arun Jaitley Memorial Lecture. It could not happen in 2020 and 2021 because of the pandemic. But this year we will be holding it.
Apart from the lecture (to be delivered by former Singapore Deputy Prime Minister Tharman Shanmugaratnam), we also wanted to hold a conclave of globally renowned economists, bring them in, and have them sitting under Chatham House rules and discuss the economy. And we wanted to make that a calendar event for the Ministry of Finance.
You have faced a pandemic and now global uncertainty due to the war in Europe. Mr Jaitley faced conditions which were much more benign. Do you sometimes wish you had his luck?