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Finance minister Nirmala Sitharaman says a “deeper, wider and open-minded” discussion is required on GST compensation that states are set to lose this year under law. “It is just not that the Centre has stopped the GST compensation extension,” she tells
Deepshikha Sikarwar & Bodhisatva Ganguli in an interview. The government will look at taxes on fuels if prices shoot up, she says. Edited excerpts:
Some analysts feel that the RBI may be behind the curve in raising rates. What are your views?
These are judgements that observers can make. Are they in a hurry to make these or should they be waiting for some time to assess if the decision by the MPC (monetary policy committee) is right, or they (RBI) are behind? I think, between the government and the RBI, there is an understanding that we have to be watchful of what’s being done by the US Fed or the ECB (European Central Bank). This mindfulness and watchfulness of what is going on has been well understood between us and the RBI for nearly 6-8 months. Therefore, the calls that we are taking — MoF (Ministry of Finance) or the Reserve Bank on its own. The RBI is seized of what is in the economy in terms of liquidity and exchange rate fluctuations. I don’t think I will jump to a conclusion. Two of us are seized of the matter and lessons of the taper tantrum have been more than once read through. We shall avoid mistakes of that kind.
If inflation doesn’t abate, there is a fear that the US Fed may tighten aggressively, and a similar situation may play out here as well…
I understand your observation that the US Fed is behind the curve given that the US economy is, or the European economies are, having an inflation of the nature that they have never seen or endured in 2-3 decades … in the case of the US, the last four decades. Their complexity is vitiated by the fact that they had interest rates being absolutely rock bottom or even negative for a very long time prior to the pandemic. And just about probably when they were going to correct or do anything came the pandemic. Now, the course correction, which they are doing, is a slightly different exercise from what we are doing here.
We are looking at interest rates that have never reached that level ever. Second, the pandemic, and of course for a country that has less fiscal room. Now, of course, revenues have been improved; you’re looking at a situation where actually the bottom layer doesn’t suffer by any quick action. Inflation is not much beyond the band that we should be considering. Yes, it keeps going up and down but it’s coming down when we’re taking measures and we have to rein it in there when it comes down. So, the picture there and the picture here have different colours and hues. The ways in which we have to handle, it will have to be keeping those differences in mind, not exactly reflecting the steps that they’re taking. But, of course, can’t suffer for the mistakes they may make.
There are apprehensions of a sharp rise in fuel prices after assembly elections. Is there a cushion on your revenue side to undertake another tax cut to provide relief?
I will have to see how it goes. This is not to say it is not important. The composition of the CPI (consumer price index) basket and the impact of fuel in it is also something which I would want you to study, because repeatedly there are these arguments that fuel spills over onto the economy because of transportation of food and also the logistics. These play into the final essential goods which are consumed and their prices get influenced because of the spill-over. This is also something that I want you to study. We have to bring in certain other factors because food, which is going to the poor, is subsidised. Public transport is subsidised very clearly. So, this is one side of this story. The other, of course, is the composition of fuel in the CPI basket. You will also notice that particularly in the last one or two years, we are noticing a not-so-parallel path between the WPI (wholesale price index) and CPI. It is the CPI which affects my consumers. So, this is a very complex, layered issue, and to peg it only with the fuel price will mislead us. Equally, it is the oil marketing companies which determine the price based on the 15-day average of what prevails outside. You had very big hikes in prices globally because of supplies being contained. The production is not increasing at all. It came down during the first period of Covid because all countries came to a halt. Now to get it back to where it was, there is a hesitation it seems. So, I would think we’ll have to look at it from various angles. So, we are interested in bringing the CPI down. We are interested in having essential goods at an affordable price but that only done through fuel is also something we will have to see. That’s not to say I won’t consider … if the fuel prices are shooting up, we’ll have to look at that as well. I’m not saying no, but I want this debate to be a lot more calibrated.
The concept of green inflation is also cropping up globally. Do you see that as an issue for India?
It will, if not now. It will have an impact. That is something I flagged in the autumn World Bank meeting when I did say that I’m concerned about it because of the transitional energy requirements, which require a lot of investment. We did make an announcement in the last budget, not just this one. We had spoken about the requirement for the hydrogen mission. We need to invest in hydrogen. We need to invest in the storage of renewables. These are absolutely critical for your transition. Meanwhile, you also need quick fix natural gas, which is now going through a lot of ups and downs in terms of supply and price. So, the transition energy exercises that all of us will have to do to keep up with the commitments, also that we’ve given, requires a lot of investment. Immediate issues are, how do we meet it, the investment requirement and also the immediate requirements of natural gas, renewable energy. So, there is not just a lot of sourcing of it, not just pricing of it, but also the transactional elements of it.
In your post-Budget meetings, you tell the industry to seize the opportunity and to invest here. What are they telling?
They agree with me, but beyond that, I have not heard anything. They agree with me and they also say yes we are in it, which is very good to hear from their side. I strongly believe they will come in. I don’t see visible or apparent hesitations.
Many sectors are yet to reach 75-80% capacity utilisation, the threshold when they start investing…
I’m not sure that is the case in many, maybe in some. I’ll take this example because I’ve been talking about it earlier. The cement capacity that lies in South India is actually being fully utilised. They’re also ramping up their capacities, but they also have a problem which has to be fixed. There’s a lot of cement being produced in the South because the raw materials are available there. The Government of India has placed a lot of importance on infrastructure spending. The sector doesn’t have to worry about, will there be demand if I expand capacity. But from the South, for cement to reach middle India or northern India, logistics costs are absolutely humongous. The industry says it. They give you data to prove it. They have a problem about not enough rakes being available. If the North doesn’t get enough cement, they tend to import. And when they import, they obviously import through the ports which are on the coast. Now if the coastal areas are not just confined to Nhava Sheva or Pipavav, there are also ports in the east coast and so on. And that imported cement will not just go through a bubble to the North, it can filter into the market closer by. So, these are actually structural problems. Private investments may happen now if you remove these structural issues. There is a problem of structural obstructions which we will have to address.
Are higher import tariffs a solution?
May not just be that and probably may not be that at all. But the solution also lies in the free flow of goods which are available within India for all parts of the country. Why should the luxury of good quantity cement being available in the South be not extended to the North because, after all, we want infra built up. If within India, flow of essential raw materials happens without obstruction — cement to reach the Northeast, oil from Northeast to the rest of the country. These are problems like an elephant in the room. We need to address it.
Your capex plan has a strong component from states. Will they have the capacity to complement the Centre’s support given that they would be losing GST compensation this year?
The 14% GST (compensation) by law was to be given for five years by which time the states were slowly going to have to have their own structure to generate income. Nobody is stopping the compensation but the law that we made ourselves. And nobody has made anybody’s finances worse for what it was before, but for the pandemic. And if two years we have effectively lost in strengthening our revenue generation, we have to now see further to generate it. The very quick option is you extend the compensation cess. We have extended it already. Beyond July 22, the GST Council has already extended it till March’ 2026.
So, are you telling me to put compensation cess not just on sin goods, but also extend to other commodities? I’m sure you don’t want to suggest that. Second, are you suggesting for the sin goods, which is 28% already, to raise it? Will that be, from the equity and taxation principle, right? Are you telling me that beyond 2026 also you keep giving in 14%? I’m sure from the point of your fairness and also from the point of your elected democracy, I will not be in a position to go on say for the next fifty years, can I or anybody for that matter? So, what is it that all of us are talking about when we say GST compensation is going away? I think a deeper, wider and open-minded discussion is required in all these. It is just not that the Centre has stopped the GST compensation extension. It’s for us to have a lot more substantive discussion than to think that somebody is being denied. It’s easy to say that the Centre’s denying us. No, we are all in it together and I constantly keep reminding myself — and if it benefits the others also — in economic matters or policy matters of finance, there’s no place for politics. A country has to benefit. All of us are in it together.
Are you confident in the administrative capacity of states to carry out the much higher levels of Capex?
When the finances are improving, I’m committing to spending more money. It is going to the states. The Centre, after all, doesn’t do its projects anyway, except for union territories. This money, which I’m borrowing, and actually going to have to spend, is going to the states. Even this 50-year interest-free finance that I’m giving is for capital expenditure. So, I’m not asking you to spend your otherwise little precious money on this. To feel as though you’re going to get indebted to the Centre — that’s one of the arguments which the honourable minister from Tamil Nadu has said. Indebted to the Centre? What does that mean? We are all in this together. And, under the Constitution, the Centre and states are equally part of the decision-making process. So, who is getting indebted to the Centre? If I have chosen to have 35% of what I’m giving in the budget to infrastructure, you may not give. You don’t need to get it, that’s your decision. But to see the amount given to the states as a 50-year interest-free amount and saying that you become indebted to the Centre is a bit perverse. After all, after 50 years, what is this amount going to be even if you have to give it. End of the day, for all you know, the government might then say no it’s a grant given you created an asset. If you don’t want it, don’t take it. I’m not compelling you. I become indebted to the Centre is a very strong point that is being made. Don’t become indebted to the Centre, you do it on your own. No harm in that. Nothing is imposed from the Centre. It is the way in which some of the states have responded, we thought we should keep this momentum. There are many states like in the Northeast, which don’t even have that much in revenue and are happy.
Is it time for GST rationalisation?
I really appreciate the GST Council. It has been repeatedly said that it’s time that we look at it in detail. That’s why when we took up three or four issues, it was decided that not just these three or four issues, but overall look at where we started when we launched GST, when the revenue-neutral rate was about 15%. Neutrality has come down to 11%. So, it is actually affecting the revenue that you can otherwise generate without hurting. And, therefore, rate rationalisation is something which the council thought will have to be comprehensively looked at. That’s why they’ve now got a group of ministers looking into it. Once it submits its report, I will take it to the council.
You could have a Ukraine tantrum. If Russia does invade, the West would impose sanctions on it. What are your views on that?
I think we have made our stand very clear that we want a diplomatic solution to it, particularly as the economies are coming off the pandemic. We cannot afford a crisis in hand. I look forward to having a solution in hand, a quick, diplomatically settled solution.
Several political parties have promised freebies in state elections, such as free power. As a custodian of the country’s finances, what is your view on this?
From 2014-15, with the UDAY scheme, the Centre came in to help the state discoms to help them transition from red to where they could pay their dues. That was the first attempt. The principle being, we want to help the state discoms to get over the backlog and have a professional approach to buy and sell electricity. Under the Atmanirbhar package, we said we will allow additional borrowing if you can install smart meters. Even in this budget, we have said that. We are not stopping anyone from offering a freebie, but make a provision for it in your budget.
Where are we when it comes to privatisation of state-owned banks?
We would be taking it up. We made a commitment in the last budget with the principle which governs (privatisation). Banking is part of the strategic core sector, which means the government will be still doing the business of banking. Which means a bare minimum presence will be there and I’ve also been saying that India needs several more banks like State Bank of India. We need to have banks brought together. In the last tenure and even this tenure of PM Modi, bank amalgamations have happened. We have gone with this idea of banks which can come together, keeping in mind the technology that they use, cultures of the two banks which are getting merged are all respected. The attempt is to be in the banking sector — banks coming together to create larger banks and making sure that the Indian economy is serviced by them in the size and scale that is required. First thing is that the ‘prachar’ (propaganda) that goes on, that this government is going to sell off all its banks. We have already said that banks are part of the core sector. We shall be in the banking sector. For those two banks we have not named, but said we will go towards privatisation, we will do it.
What is your view on reservation for locals in the private sector?
It is also for each of the states to think about it. Ultimately, the economy needs peoples’ movement. People from different areas bring different strengths. States have benefited from workers who have come from different parts. But that said, it is up to the states to understand this.
Privatisation of PSUs continues to face legal challenges, particularly if we take the case of Hindustan Zinc. What is the government proposing to do to provide comfort to bureaucracy?
Yes, because that was picked up again. Certainly, that gave the sense of uncertainty and a hesitation in the bureaucracy saying that legitimate policy-driven decisions would also now be questioned. It did cause a bit of consternation in the minds of bureaucracy. But we are actually sitting with the bureaucracy to speak to them and to see that it is all being open and transparent, policy driven, when there are GoMs (group of ministers) which are also after the bureaucratic-level decision-making to support a decision. There shouldn’t be hesitation if there is political support based on a policy. So that’s now actually post this Hindustan Zinc matter. We have spent a lot of time explaining to the bureaucracy that they should not hesitate because we are going as per the policy and there are no individual discretions which Prime Minister Modi has ever entertained. and therefore, when it is a transparent process, we have assured the bureaucracy they should not hesitate to take decisions.
On the NSE matter, was Sebi behind the curve?
The government is very keen about the perception among investors, about institutional credibility. We will not entertain or tolerate such opaque practices. And, this (NSE issue) is a classic case of absolutely opaque, discretion-based decision making beyond the realm of law. I am looking into it to see if Sebi has had enough application of mind in dealing with this, and post application of mind, have they taken adequate corrective steps. Have they really told the NSE at that time about what has gone wrong and has Sebi taken the necessary punitive action?
Is there a need to further strengthen the regulatory framework in view of the recent events?
I am always in favour of strengthening the regulatory framework without making it, you know, suffocating. But even with the existing powers to regulators, use them fully, use them timely and use them to make sure that the bite of the regulator, when it is required, is adequately felt. Unless that is done, any further tightening can lead to suffocation, but not produce the necessary result. So I am strongly of the view that even with what is existing in Sebi, even with the regulatory powers they are vested with, have they handled this, as I said, adequately, properly, sufficiently? And my worry is the perception outside is probably that they have not. I’m not saying it’s my view. I need to see it.
And the interest of the government is to not weaken any institution. The NSE after all is a vibrant exchange. The NSE after all has had exponential growth. The NSE is also seen as a place where a lot of global action can happen being located here. We can’t do anything which is going to hurt them from the point of view of their image or their perception. But yet, how did the NSE look the other way when things were not really happening transparently? And, how did Sebi handle it? Was it sufficient? These are questions in my mind. We don’t want to undermine any institution … Be it the NSE or be it Sebi.
Is the crypto legislation on the backburner in view of India pressing for a global framework on these products, or will these go together?
It’s not on the backburner. These two are different processes and both equally important. And our framework or our legislation is not on the backburner. As I said, the consultations are very critical for me to be sure that I get everybody’s views on board, irrespective of what the final call we are going to take. Yes, it’s right that we need global action because of technology not respectful of any national boundaries or else. The Prime Minister himself has said that this global action may be required. So, that’s one thing but for us we are not behind the curve and on the job.
If you ban cryptos, the only way you can enforce it is by criminalising it. This would mean that cops would enforce it. How desirable is it to create another criminal offence?
I would not be going in for elaborate consultations if I had made up my mind whichever way. We want to have a discerned decision, that’s why we are doing this. Consultation is going on. We are looking at every aspect.
Isn’t that a legitimate concern?
It is a legitimate concern.
On central bank digital currency, will anonymity be built into the currency?
The RBI is working on it. Even on these central bank-driven currencies, there are quite a few issues … of the technology … is it going to be used just for the wholesale transactions or also for retail. The RBI is also in detail getting into what is being said, what is being felt by the stakeholders, what’s the experience elsewhere. They’re looking into business. I’m sure they will take all these into consideration.
In terms of policymaking, is there a need for a framework for both the Centre and states to deal with future exigencies like the pandemic?
I suppose that was the idea in the Prime Minister’s mind when he interacted with the states, not just once but during the process several times. It is for states together with the Centre to constantly and in real time take a call on how to handle any such exigencies.
Is there a case for a generalised advice to states not to go in for a lockdown that hurts the economy as most people are vaccinated?
Five months ago, as the second wave was subsiding and the vaccination process was strengthening, an advisory was sent to the states to now focus on local containments rather than have a larger area of towns locked. Vaccination has actually strengthened us so the level of containment need not be far too wide than any particular area in which there is a large presence of infections.
Is there a case for a sweeping look at laws to decriminalise them?
There is very intense work going on. I had spent a lot of time myself on it when ease of doing business 1.0 started; we started reducing such compliances. Then, when we looked at the Companies Act — sections that had criminal offences. In fact, one of the first amendments to the Companies Act, which in 2019 I came up with, was to make a number of criminal offences compoundable. There are still a few more, not just in the company law, but there are others as well. There is definitely going to be a look into it by the government. We started doing it for ease of doing business, but we also now realise that at least the central government should remove many of these. We are also working with states on this.
Many political leaders and even you during your reply to the budget discussion drew comparison with the previous regime. Why is there a need to dwell on the past so much?
The need arises for us to remind the past for those who stand up and pontificate that you can’t handle the economy. That has been said in so many words — oh you can’t handle the economy. You don’t have an understanding of the economy. Whether I have, or our team has, in the last few years or not, proven (the understanding of the economy)? I am not claiming to know everything, but we are normally consultative. We consult states, stakeholders, we take everybody’s inputs and keep making policies accordingly and therefore when it goes down with the level of transparency, that has the Modi stamp on it. It has now been eight years, tell me if there’s been even one whisper of wrongdoing by this government or of a corrupt practice. But people who were wallowing in corruption, people who were completely full of wrongdoing, people who gave up managing the Indian economy and left it as one of the fragile five, people who resorted to total paralysis and even couldn’t manage the inflation of that time, when despite all this, they stand on their feet in the house to say you don’t have an understanding of the economy, do they need to be reminded or not? Media doesn’t do that. So, the reminder is for people who stand up there and lecture to me. The reminder is there for them to know that there has never been corruption here whereas you wallowed in corruption. And that is why this is necessary for me to remind.
And even today, where they are in power in the states, the methods or their modalities have not changed. Their practices, even today, are corrupt and not in favour of the poor who are suffering. Would you ever pardon a state which exploits even on a free vaccine given to them? Would you ever pardon a state which doesn’t even take action against its own government which threw vaccines to the dustbin? Whose money was it? And they stand up today to lecture to us.
Would you even ask a question of Dr. Manmohan Singh … I personally hold him in high regard … (He) speaks up only when there is election in Punjab and tells us that the economy has to be handled this way or that way, when he looked the other way. In fact, he turned a blind eye when 2G happened, when coal scam happened, and when NSE happened. The NSE today is their legacy. They gamed the system. Dr Manmohan Singh who held the position of a finance minister and as a Prime Minister did not even question his own finance minister as to what is happening in the NSE. And, these are people who stand up and ask Prime Minister Modi about how to handle the economy. Are they suggesting that Prime Minister Modi doesn’t know to game the economy for personal benefit, which is what they did? I will keep reminding. You may fault me for it. These are people who should be told the facts. I’m telling the truth to them in their face now.
The NSE is essentially their own making. There was a Prime Minister, who was finance minister, who knew many things about their economy, had people who manage their economy according to his own description, who knew how to handle the economy. Is this handling the economy? If gaming the system is managing the economy, we are not in here for it. BSNL is another reminder. They couldn’t even give the national telecom company 4G. They could not even tell MTNL sorry you don’t need to pay this amount but run your business profitably. They took Rs 11,098 crore from them, which was a cash-rich company which became a loss-making company overnight. Is this managing the economy well Dr Manmohan Singh?
This needs to be reminded. Your two hands will not have enough fingers to remind you about the way the economy was exploited — Air India, BSNL, MTNL, 2G, coal and Antrix Devas, a total fraud. You gave away permission for some technology which is probably not even available today. Actually, managing the economy through all these unseen unknown unjustifiable illegal methods is what they knew. Dr Manmohan Singh, you should have said this during your Punjab campaign, although it was only via VC. So reminding is necessary. In economy or policy matters of finance, there’s no place for politics.