There is scepticism in some quarters that the Budget for 2010-11, while spreading cheer, may be skating on thin ice. For instance, some of its assumptions will give way if the non-tax revenue projections turn out to be castles in the air. However, Finance Secretary Ashok Chawla would have none of it. If anything, he expects to overshoot the targets by a fair margin. Faced with the doubts expressed by Business Standard, he responded by painting a vibrant picture. Excerpts:
The Budget's deficit reduction plan largely hinges on 3G licence auctions and divestment, which add up to around Rs 75,000 crore, or about 1.1 per cent of GDP. There are views in the telecom industry that the 3G licence revenues may not be as much as has been estimated. What is the basis on which you came to this number?
Our understanding is, and this is not just from the telecom ministry but some segments of the industry, that Rs 35,000 crore (Rs 350 billion) are in fact probably on the lower and conservative side. That is the perception the telecom industry has. This is an open auction. We will see the results in a month and a half. The perception is that the actual amount of money we are getting from 17 circles, where four blocks would be auctioned, may be even higher than what we have estimated.
How much more?
Well, one estimate given to me was Rs 45,000 crore. But, you know these are all numbers up in the air and we cannot be sure until the auctions take place. Similarly, on the divestment side, I would not like to say that the number has been pitched low. But, if you see from what has happened in the last five-six months after the divestment process or the sale of equity to the people started in September, we are getting Rs 25,000 crore. Once the momentum is built, Rs 40,000 crore are not a difficult or an unachievable target. So, as far as the numbers go, I do not think there is any cause for anxiety at this stage over whether these numbers would actually be reached or not.
On divestment, have you finalised a list of PSUs that would come up for equity sale?
This is a question that many people at many forums have asked. The short answer is yes, there is an idea of the early-bird companies that will come up for divestment, but a lot of them have not been identified. This is a process that will be finalised by the divestment department and the respective ministries concerned. They will decide the companies and the quantum of shares to be sold. You need a certain level of preparedness on the part of those companies. You need to ensure that everyone is on board with the idea. Then, of course, is the question of sequencing the process and a programme in which almost every three or four weeks, there will be some entity whose equity would be on sale during the next year.
What criteria will you use to identify the early-bird companies?
Well, the criteria have been spelt out in the Cabinet. Companies that are not listed need to get listed with 10 per cent of shares to be sold. Obviously, companies, which are doing well, will, therefore, stand the rigours of the marketplace. Whether this will be 10 per cent, eight per cent or seven per cent, what will be the sequencing and what will be the timing, etc, will be decided. There is going to be a roadmap.
By when will this roadmap be finalised?
I do not think the roadmap will be finalised in a sense that on one day you would know the names of all the companies to be disinvested.
How many companies have been identified?
I would not know the exact number. The Department of Divestment has some feel on that. But, even they may not give you a specific number.
On the question of your total borrowings of Rs 3.45 lakh crore, how do you want to sequence your loans programme?
One thing the Budget has done is to put out in the public domain the amount of total government borrowing needed during the year. We also told the people through Parliament that the total deficit does not need to be borrowed, so that the market gets a sense of our borrowing. The actual calendar will be finalised in consultation with the Reserve Bank of India. We are looking at a meeting with RBI sometime in March or definitely before the first of April to finalise the borrowing plan for the first few months of 2010-11.
What will be the guiding principles of the borrowing plan next year?
The broad guiding principles will be the same as were followed this year. We will look at the calendar in a manner in which we do not cause stress to those, other than the government, who want to borrow from the market. We also look at the state governments' cycle of borrowings, which traditionally is somewhat backloaded. Therefore, we would like to leave those periods out.
There was a proposal to create a public debt office, some years ago. Are you moving in that direction or is it still an idea?
No, it is more than an idea. We are moving in that direction. The decision of the government, in consultation with RBI, is that we have set up what is called the back office. This is within the finance ministry. The idea is now to have a middle office and a front office which will finally do the entire work. The plan is, we should have the entire rollout of the plan in the next 18 to 24 months. We are in the process of finding a physical location of the office, because the idea is not to keep it in North Block.
Will it be autonomous, as proposed, or will it come under the finance ministry?
Well, there are two views on that. We have not yet taken a full and final view. One view is that it should be autonomous and set up under a legislative provision. The other view is that there is no need for a legislative provision. And it can be an executive office. It can function on its own, subject to the overall supervision of the finance ministry. That issue on the organisation structure and control part is not fully decided. But, there will be a separate debt management office, which will exist independent of RBI.
So, the next year's borrowing programme will be done by the new debt office?
The next year's borrowing plan will be finalised by RBI. Perhaps, the year after will see the new structure in place.
On the question of deficit reduction, revenue deficit is still an area of concern, as you are out of sync with even what the 13th Finance Commission has recommended. How do you see that situation?
This is certainly an area of concern for us. We looked at this aspect when we were finalising the Budget numbers and working out the ratios. It might tend to imply that we are borrowing to meet our revenue expenditure needs. That is not really the case. A part of the problem is that the government's accounting system is such that money which goes to the state government from the Centre as a transfer is going into actually creation of capital assets, but goes as a revenue grant to the state government. That is at least 15-20 per cent of the total amount.
The medium term fiscal policy statement says there is a case for a review of the definition of what constitutes revenue expenditure. Is that what you propose to do now?
Yes, we propose to do that, not so much to cover up the issue of revenue deficits, but to get a full idea of what the arrangement in terms of accounting classification is today and how we need to change it.
By when do you propose to put in place the new system of defining the revenue expenditure?
That is difficult to say. We hope to set up a group soon, get a report from them and then we need to work this out. This will require changes, if at all they need to be made, after consultation with the Planning Commission and the Comptroller and Auditor General of India. It is not something which can be done expeditiously or overnight. That is part of the problem. And, that's something, built into the accounting process. Nevertheless, the idea is that revenue income should be far more than revenue expenditure. And, we should get to that stage in the not too distant future.
The medium term fiscal policy statement also talks about the need for expenditure reforms. It argues that tax buoyancy will be limited in the coming years and more stress should be laid on expenditure reforms. What is your game plan on that front?
There are two things. One is wherever money is being spent, the idea is to get the maximum out of this in terms of physical outcomes. We have been trying to do this for the last few years and it has now become a bit of a routine, as we come out with outcome budgets. But, that philosophy or objective certainly remains, that we must have physical output or outcomes commensurate with the kind of money being allocated.
The other aspect we bore in mind while finalising the next year's Budget is that this is still not a time when we can compress expenditure, certainly not Plan expenditure, where we have gone for a 15 per cent increase. In non-Plan expenditure, we have tried to keep it low, to about six per cent, which in nominal terms is hardly an increase. But, in the medium term, as we go ahead, we need to take another look at expenditure and at the items which can be controlled and those items are mainly subsidies and the interest payment on past borrowings. As the fiscal deficit is brought down, the incremental interest payment burden also gets lower. The interest burden as of today is over 23 per cent of the total expenditure.
What kind of reforms in subsidies do you envisage?
Let me clarify that the objective of the new fertiliser subsidy is not straightaway to do away with subsidies. That is not even what is coming out in the numbers. The provision for fertiliser subsidies for next year is almost the same as this year. It cannot wither away all of a sudden. The idea is to have a more scientific method of being able to pay subsidies in conformity with the needs of soils and the agro-climatic zones. On petroleum subsidies, we have to see what view the government takes on the specific recommendations made by the Kirit Parikh committee. And, those recommendations are in the public domain.
It suggests linking petrol and diesel to market prices. For kerosene and LPG, where a lot of time has lapsed since the prices were last raised, the committee suggests that based on certain parameters and indices, you need to increase their prices also. Finally, whatever is decided will determine the extent of petroleum subsidies. On food, I do not think there is anything specific on the table at this point in time. It is a fact that if you need to build a good buffer stock for the public distribution system, there will be a financial burden, which the state has to carry.
On the Kirit Parikh committee report, one of the proposals pertained to levying a specific duty on diesel cars. What is the status on that?
This will be decided by the government as a whole. Even the other proposals will have to go to the Cabinet. So, we will have to wait and see what the other components of the package on Kirit Parikh committee get approved.
On capping the debt, what is your timeframe for a new status paper?
I think the finance minister has said that a report would be ready in six months or so. And then, he will report it annually.
Will the new Council on financial sector stability and development replace the High Level Coordination Committee for the financial sector?
The high-level committee will remain. That is basically an operational committee for the regulators. The idea is not to get into their area of activity and their area of legal competence. The Council rises above that and brings together these regulators. The basic idea is that the same set of regulators will be in the Council, which will probably be chaired by the finance minister. And, of course, the finance secretary, who is also an invitee to the HLCC. This brings them all together under a more broadbased umbrella and which will then be able to look at issues which go beyond different regulators which covers the whole financial and economic system.
This is also because these are issues which, in many countries, have not remained confined to the financial sector and have gone to the real sector. And, because they impinge on fiscal policy, governments have had to bear the burden of putting money into their institutions. All that is not here today. But, we need to keep that in mind and, therefore, we decided to have this Council, which will be serviced by a full-time secretariat. This Council may meet once or twice a year and, if necessary, more. This will not curb the independence of regulators or the HLCC. It is just one more apex layer in this architecture.
Do you need a legislative structure for the Council? All regulators are set up under an act of Parliament, so doesn't it make sense to give the Council also a legislative sanction?
Not at this stage. Not necessary. I do not know what happens later. We may move later in that direction. The Council will not mandate that this is what a regulator must do. It brings together everybody so that everybody is on the same page. If something is round the corner, they see it and alert the system. A part of the problem is that we have to stay alive to the problems that may come tomorrow.
On new bank licences, we get a sense that the eligibility criteria may be changed. Is that right?
I am not quite sure about that. I think while there may be some discussion between the finance ministry and the regulator, ultimately the regulator will decide the benchmarks.
But, if the objective of granting new licences is to ensure geographical inclusion so that more bank branches get opened in rural areas and the data on new banks show otherwise, shouldn't the norms be changed?
I think this will be a call that essentially will be taken by the Reserve Bank of India, in consultation with the finance ministry and other stakeholders. Ultimately, whatever conditions are laid down by the regulator they will stand and what the prospective applications will have to conform to. The objective is not to dilute the eligibility criteria.
Have you given up the idea of mergers of PSUs, since you have given a lot of equity capital for banks, almost Rs 16,000 crore?
You see, they are all operating in different planes. You need to beef up their equity before a certain period of time and take them to a certain level of credit adequacy. Now, while consolidation may or may not happen, the banking system will decide. But, we need to have that equity and cannot simply wait for consolidation. The consolidation process can certainly happen going ahead. There is a broad range of financial institutions to respond to the ever increasing demand in the economy.
Markets have responded favourably to the Budget. In retrospect, do you think you should have gone for a steeper reduction in the fiscal deficit?
I think the reduction in the fiscal deficit has to be reasonable and something we can achieve. So, we might do slightly better than what we have projected. But, there would not have been much point in being overambitious and not achieving it. We would like a high degree of credibility in our numbers, as we have shown in 2009-10.
