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PC's interview with Financial Times - Part I

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Martin Wolf, the FT’s chief economics commentator, speaks to P Chidambaram, India’s finance minister, at Crowne Plaza on January 29.

FINANCIAL TIMES: What is India’s growth potential now?


P Chidambaram: The first-half growth in this fiscal year was 9.1 per cent: first-quarter 8.9 per cent and second-quarter 9.2 per cent. The third quarter was also pretty close to 9 per cent. So what does this mean? This means that India has moved from 7.5 to 8.4 to 9.0 per cent in the three years of our government.

What could have caused this shift? World output has been good: Indian output of manufactures and services has done splendidly, but I think the more important thing that appears to have happened is that the savings and investment ratios have moved up sharply. In 2004-05 investment was 30.1 per cent of GDP. Now the investment ratio may be close to 34 or 35 per cent of GDP.

What do we have to do? We have to sustain this investment and saving ratio. That is the key. We will need to sustain this investment to GDP ratio, which means an incremental capital output ratio of roughly four. So we can grow at 9 per cent if we keep investment at about 35 per cent of GDP. This means we must keep the environment very enabling for investment, both domestic and foreign: ample liquidity, good flow of credit, opening up more sectors which are closed or too tightly regulated, opening up to foreign direct investment and looking for innovative financing especially in infrastructure, where there’s a huger appetite for investment.

FT: Where are the savings coming from?

Mr Chidambaram: The bulk of the savings are coming from households – in 2004-05 when we had savings of 29.1 per cent, public savings accounted for 7.2 per cent and private savings for 20.0 per cent, the balance being errors and omissions. This roughly continues today. But let me tell you that public sector enterprise savings have improved: they are now positive, which means that they are making profits, largely led by oil companies. Government dissaving is still there: there is a revenue deficit. This will come to 2.1 per cent of GDP this fiscal year, ending 31st March – I am confident we will meet the target. Revenue is buoyant.

FT: What about the current account deficit? Would you be confident with an increase, provided it were covered by long-term capital inflows?

Mr Chidambaram: Yes. It is now about 1.3 per cent of GDP. That is quite modest.

FT: What about the role of foreign investment? What are you expecting it to be this year? And what are you looking for? What are your aspirations?

Mr Chidambaram: We do not have full-year figures yet. That is what we are trying to get a fix on. But year-on-year inflows into India are up 50 per cent. Therefore, I believe it is possible that if we continue to liberalise and make the environment attractive, more foreign direct investment will flow into India.

FT: You are looking for more investment infrastructure. Could you tell me a little bit about what you have achieved so far?

Mr Chidambaram: Let us take it sector by sector: roads, 100 per cent is open to foreign investment; power, 100 per cent is open to foreign investment; telecoms, up to 74 per cent can be held in operating companies; petroleum, 100 per cent is open to foreign investment; airports, there is a restriction – you have to have a mix of a domestic investor, Airport Authority of India and a foreign investor, but that does not seem to be an obstacle, because there are enough bidders for our airports modernisation; seaports, 100 per cent open to foreign investment.

Having said that, which are the areas where we need to attract foreign investment: mining, 100 per cent is open to foreign investment, but the law and the procedure is very restrictive for prospecting and actual mining – the law is very restrictive.

FT: Is this now a consensus in India? Investors will be worried about security if they are investing enormous quantities of money.

Mr Chidambaram: It is not enormous. You see $7bn, $8bn, or $9bn in a GDP of close to $800bn is not an enormous amount of money. So there is no reason to fear FDI.

FT: But you are seeking to get above this?

Mr Chidambaram: The fear that foreign investors are going to take over the economy is not justified at all. In terms of our GDP, the flow of investment into India is very small at about 1 per cent of GDP. Even the left parties say they are not opposed to foreign investment, provided it brings new technology, additional capital and adds to employment, which is OK – that formulation is quite acceptable to us, though there are other reasons why foreign investment can also flow.

Therefore, barring a few people who are passionately committed to "self-sufficiency" and "self-reliance", most people understand that there is an important place for foreign investment in India and, in a way, the outward flow of investment from India has also changed the mindset.

There are now significant outward investors among India companies in pharmaceuticals, in foundries, in telecommunications, in software and now in steel. These are all areas in which Indian business is now confident that it can acquire businesses abroad, raise the money and has the capacity to manage it. That is also changing the mindset in India.

FT: The flow has been about $9bn. What are your aspirations?

Mr Chidambaram: In infrastructure alone, we need to get about $20bn to $24bn a year. So there is still a huge gap.

FT: If you look at what has happened so far, what has happened already?

Mr Chidambaram: In telecoms the success is visible. We have over-achieved targets we have set for ourselves over the past six or seven years. In power – the ultra mega power projects, two of which were awarded on December 31 and the two that will be awarded by March 31 and the three more which will be awarded by June – should bring us a large quantity of foreign investment. These are each 4,000 megawatts of power. In roads, there is a good deal of investment, but not in very large quantities. I think there are very large opportunities in the roads sector. In petroleum, there is a modest amount of foreign investment. In mining, it is near zero so far. So experience has been very varied. In ports there has been a good deal of foreign investment. In airports, we have only awarded contracts to modernise two – Delhi and Mumbai are both attracting foreign investment.

FT: And there have been encouraging signs of increased efficiency.

Mr Chidambaram: Even a simple matter of the parking fees in Delhi has increased four times, since the management has changed.

FT: What about the organisational problems of the power sector – have they been solved?

Mr Chidambaram: There has been some progress, albeit not entirely satisfactory. Most electricity boards have not yet been unbundled. Generation, transmission and distribution have not yet been unbundled. Some are resisting unbundling. Now unless you unbundled these activities, you cannot address the inefficiencies that attach to each of these activities separately. The greatest inefficiencies are in the distribution side. Unfortunately, our experience of private sector distribution in Delhi has not been a pleasant one. The private sector seems as incapable as the public sector was, at least as far as Delhi is concerned. In Calcutta the private sector distributor has done a good job and in Mumbai the private sector distributors are doing a good job. So I think overall the capacity to generate power is there, the capacity for transmission and distribution is still to be built up.

FT: When you talk to foreign investors, what complaints or worries do they express to you?

Mr Chidambaram: None of them are very serious concerns. In the mining sector they want a clear statement of policy. We have a mining policy in the works. It will be announced in the near future. Otherwise, foreign investors want reassurance that policies are stable, tax policies are stable, doing business will be easier. We try to help them. If they have a complaint it is about infrastructure, it is about roads, railways and power, ports. I tell them that these constraints are opportunities. Those who invest in these sectors recognise the potential. Those who invest in other industries, point to the infrastructure and ask us when the road will come, when the railway network will come.

Therefore with POSCO, we have assured them that there will be five major roads and five major railway lines in place by the time POSCO goes into production. That is the kind of attention we have to pay to detail because infrastructure is indeed a constraint for major projects.

FT: Are the state governments now on board with this sort of agenda?

Mr Chidambaram: By and large they are on board with this sort of agenda. Take, for example, a state like Orissa, which realises it could become potentially the richest state in the country, thanks to the mineral wealth it has. But it has to improve governance and speed of decision-making – all states have to do this. Take, for example, Bengal, it is now attracting foreign investors: the Salem Group from Indonesia is a major foreign investor, Mitsubishi is a major foreign investor – most state governments have changed their view on private investment, domestic and foreign.
PC's interview with Financial Times - Part II

FT: The general view is that your government should stay in power for a full term, which gives you still a substantial time in office. What are your aspirations for that period ahead?

Mr Chidambaram: I want to achieve the FRBM (Fiscal Responsibility and Budget Management) targets by 2008-10: the central government’s revenue deficit will be wiped out (the current deficit) and the central government’s fiscal deficit will be brought down to 3 per cent of GDP. The state governments are doing just as well. They may well wipe out their aggregate revenue budget deficit this year.

FT: So that’s 6 per cent fiscal deficit overall. That’s eminently sustainable with a growth rate of 9 per cent.

Mr Chidambaram: States will be a little below three.

FT: How much through adjustment in revenue and how much through spending?

Mr Chidambaram: Largely revenue driven, but some part of it is coming through expenditure management.

FT: Will this require fiscal measures of any kind?

Mr Chidambaram: Yes, it will require measures like weeding out exemptions – because there are too many exemptions in our tax code. The second major task is to introduce the nation-wide GST (general sales tax, a form of value added tax]) by April 1 2010. We are working with the state governments. The bulk of the work has to be completed under this government. We already have a VAT. The central sales tax will be phased out on April 1 2007. If that goes well, then states are on board to introduce GST by 2010. This is a major goal to be achieved. I also want a new tax code, which is more non-discretionary, taxpayer friendly and technology driven. I want to reduce the interface between the tax collector and the taxpayers. Work is under way on this, for example, in customs, 80 per cent of clearances are now on the Electronic Data Interchange, and we want to replicate this in excise duties (which is a VAT) and direct taxes. We want to have a networked Department of Revenue.

FT: You recently reduced tariffs. Do you have any more plans in this area?

Mr Chidambaram: Yes. I would have done this on February 28. We just advanced it by five weeks. It was part of the package being prepared for the Budget. We have reduced the average tariff on capital goods to 7.5 per cent, on many raw materials are between 5 and 7.5 per cent. We are now pretty close to Asean levels now.

FT: Do you have any more plans for tariff reduction?

Mr Chidambaram: You will have to wait and see.

FT: Are there other areas of priority?

Mr Chidambaram: Yes, there is financial sector reform, there are key bills pending: the banking regulation amendment bill; the pension bill; and the proposed insurance bill. These are more difficult issues. We have to build consensus. But I think we will be able to build a consensus.

FT: It was suggested that you would make the rupee convertible. Where have you got in your thinking on that?

Mr Chidambaram: We have got the second Tarapur Committee report, which encourages us to go on the road of fuller convertibility. I don’t think there will ever be full convertibility. So the phrase is fuller convertibility. So we move towards that. The rupee is convertible on current accounts; for the foreign investor, the rupee is fully convertible. Restrictions apply to Indian residents. Three months ago the RBI (Reserve Bank of India) liberalised many transactions. So I think we will move along the path suggested by the Tarapur Committee in a series of incremental steps.

FT: But you don’t see a moment when you will say that any Indian can take money out freely?

Mr Chidambaram: I don’t think any government says that.

FT: We do!

Mr Chidambaram: Even reporting requirements are restrictions. Any Indian traveller using a credit card, we don’t ask any questions any more.

FT: Do you aspire to see the rupee as a major international currency? And do you aspire to see Mumbai a major international financial centre?

Mr Chidambaram: We want to see Mumbai a major international financial centre. We have a group headed by Mr Mistry looking into it. The report should come to me, I think, in the coming week. We want to look at this report and see what needs to be done to make Mumbai a major international centre. So all these things point in the direction that we want the Indian economy to take its place as one of the world’s largest and most efficient economies and the rupee as one of the major currencies. That’s the goal, isn’t it?

FT: There was much discussion of climate change in Davos. Is this on the radar screen for your government? Is it a serious policy issue? Do you have views on what should follow Kyoto for India?

Mr Chidambaram: We are not signatories of Kyoto. It is possible that post-Kyoto the developed countries will recognise the requirements of the developing world. We are prepared to assume our share of the responsibilities and obligations, provided the world recognises that we have a right to grow and that means that we will consume large quantities of energy and, second, that we need to be given access to clean technology, including civilian nuclear energy. If these two points are recognised, I have no doubt that India and other developing countries will come forward to assume their share of the responsibilities. But we are not the largest polluter: our carbon emissions are still very small. We are prepared to reduce our emissions, provided we have access to clean technologies and alternative sources of energy. This is the position that I have taken consistently. One of reasons we invested so much in the India-US deal is that it gives us access to civilian nuclear technology
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