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The Rediff Business Interview/ Dr U Shankar

'Even after buying gold, people have money. It will come out if Budget gives the right signals'

Part I

Dr Manmohan Singh has called for a fiscal restructuring a growth rate of 7 per cent. Is this realistic?

It is possible. But remember the revenue deficit is 3 per cent of the GDP for the Central government and for the state governments, it is another 1.5 per cent. Therefore, 4.5 per cent of the deficit is being used for current consumption. That means the capital expenditure is reduced automatically. The casualty then is the physical and human infrastructure.

If we are able to balance the revenue budget as some of the states are doing and as Tamil Nadu has done in 1984, it is possible. Fiscal deficit is revenue deficit plus government borrowing. There is nothing wrong in the government borrowing money and using it productively in investment or any other purpose, provided they can earn a rate of return at least equal to the cost of borrowing. Unfortunately, it is not happening.

The Indian experience is like this: they have invested more than Rs 3 trillion in central and state enterprises and they are getting a return at 3 per cent. The government also borrows too much from the market so that the private investment money is reduced. The burden on the government will go up because the public debt and interest debt go up.

So, the question is, in this political economy, will the government be able to undertake public investment in a large scale? You also cannot forget the inordinate delay in decision making and the various pull and push factors that influence the government. That is the reason why we should go in for the service of the private sector in areas like PDS. But, of course, the government cannot expect the private sector to fill the gap immediately. In this transition period, the government has to come in, either fully or as joint venture.

Experts feel eight per cent of GDP must be reserved for infrastructure. Comment.

It is possible. India has the potential. But we have to simplify the procedures. We must change our rules and regulations.

If Manmohan Singh were the FM now, would he have done that?

Manmohan Singh himself was very honest in admitting that he had to operate in a political economy. Reason is very simple, every minister wants to spend more money because they are concerned only about their performance and the performance of their ministries. So, the finance minister is always under tremendous pressure.

So, Dr Singh has suggested two things. The problem here is that we have too many interim budgets and one Budget. He has suggested that we need to have an interim budget only in the case of emergency. Now what is happening is there are a lot of announcements about new programmes after the Budget is over.

They are not accounted for in the Budget. It is not possible. You need fiscal discipline.

The present government has announced a six-lane national expressway connecting north-south and east-west. From where do you think the government will get the money for the project?

The creation of such a national highway is a very good thing because that will speed up transport, reduce the time involved in transportation, reduce congestion and also will create a lot of demand for steel, cement and the other industries which are now in a recession period. It will also create a lot of jobs. Unfortunately this was not a part of either the Ninth Plan or the Budget. The question is how to get finance for the project.

There are two ways. One is, you can operate toll ways. Allow the private people to construct it and collect charges. If you don't want to do that, you have to find money indirectly. One proposal is increase the tax on fuels. But that will create some problems. Also, there is nothing wrong in having a toll way. It is only the question of selling the idea.

But soon after the announcement of the expressway, the government reduced the price of diesel.

This is the problem with the government. The international price of crude oil has been falling and that is a biggest advantage for us. The government has announced a policy that they will realign Indian prices other than that of kerosene and LPG with international prices.

What they have done was, when the international price fell, they reduced the price of the diesel. They need not have reduced the price. In fact they have not reduced the price by 100 per cent but only by less than 40 per cent. That is why there is a lot of surplus in the oil pool account.

They should have told the public that the advantage created by the external climate has been diverted. I think that is what the finance minister is going to do now. Then again there is a co-ordination problem. The petroleum minister wanted to become popular then. Therefore the Cabinet must take decisions with the national interest in mind.

The growth rate in 1998-99 was far from the projected seven per cent. What went wrong?

The growth rate was dismal for two reasons. One was the recession in most of the capital goods industries. In fact, industrial production growth was not even five per cent. We have quite a lot of money available in the system.

Banks have surplus funds but they don't want to invest money in the private sector. They are putting money in the safe government securities.

People feel uncertain about everything and many things promised by the finance minister have not materialised. For example, the Companies Act has not been amended. The Foreign Exchange Management Act is still not passed. The Expenditure Commission has not materialised. The promise of a national policy on agriculture has still not been released. Legal reforms are very important. Unless they are done, people cannot plan anything.

There is a view that people have stopped spending now. Why?

Because of two reasons. One, the present income tax. They catch hold of anybody who spends. Two, there are no attractive investment opportunities. The primary market has ceased to exist. So, they have to go to the secondary market. As a result, the money is going towards gold. India is importing a lot of gold now. India is the largest importer of gold now after the US. This year, the largest single import may be gold, to the tune of Rs 300 billion.

Is it not a dead investment in a recession-hit economy?

Yes, it is an unproductive investment. People still have money. So, if the Budget gives the right signals, money will come out because money is not the problem.

The finance minister has said he will demystify the Budget. The time of presentation has also been advanced from 1700 hours to 1100 hours, as if to shatter the colonial mindset.

That is the main reason for the change in the timing. The stock market will be there and they can watch it. It is more of an attitude to discontinue a process, which has been followed for the last 50 years.

Both the prime minister and the finance minister are warning the people about a tough Budget. Will it really be a tough one?

I think they are just preparing the people for a tough Budget and make it not very tough later on.

'Budget likely to pave way for wider income-tax net'

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Budget 1999-2000

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