Indian finance minister Pranab Mukherjee sat down with Emerging Markets in Delhi in September. What follows is the full transcript of that interview:
Emerging Markets: Why do you think India has managed to bounce back so quickly while the economic rebound in more developed markets has been halting and sluggish?
Pranab Mukherjee: Policy measures initiated in India during the crisis helped in minimizing the effect of crisis. The expansionary fiscal stance helped offset the impact of slugging private consumption and investment demand on growth. The accommodative monetary policy stance of the RBI created an overall liquidity and interest rate condition that was conducive for growth.
The Indian banking sector has been largely dominated by public sector banks. The exposure to toxic assets by the banking system as a whole has been limited.
Over the years, India has followed a gradual and calibrated approach towards capital account liberalization and sound regulatory framework which prevented the exposure to many of the problems faced by developed countries.
EM: How strong and widespread is the economic recovery in India? Obviously the top line figure looks very good with GDP growth accelerating past 8.5%. But how widespread and inclusive is that growth?
PM: The quarterly estimate of GDP for 2010-11 released at the end of August 2010 places the growth in real GDP at 8.8% in the first quarter of the current fiscal with agriculture recoding a growth rate of 2.8%; industry 10.3% and services by 9.7%. The sectoral growth rates in Q1 of 2010-11 compare well with the average in the pre-crisis period. On the demand side, while real growth in GDP at market prices (at constant 2004-05 prices) has grown at 10.0% as against a growth of 5.2% in Q1 of 2009-10, the growth in private consumption demand at 3.8% and in investment demand at 7.6% is showing signs of regaining their earlier momentum. Looking ahead, we have had a good monsoon so far and the business sentiments are positive and broad based, which should allow the growth to retain its inclusive and cross sectoral momentum.
EM: Outside of India, do you see the global economic recovery losing momentum and what does that mean for India?
PM: The global recovery was better than expected at the beginning of the year. However, global growth and trade has slowed in the second quarter (April-June) compared to the first quarter. In August we have seen some improvements both in the US and China, but some moderation in Europe. The conditions remain somewhat uncertain, with some downside risks. I expect the picture to clear once the 3rd Quarter results become available in October. As far as India is concerned, our growth story remains intact as it is primarily driven by the domestic economy. In fact, the emerging markets will be supporting the global recovery.
EM: You have been selected as Finance Minister of the Year for Asia by Emerging Markets, following a survey of regional economic experts. That's a great honour. Why do you think your peers were particularly enthusiastic about your performance this past year?
PM: It is a great honour. I am grateful to my peers for recognizing the effort made by us to keep the Indian economy on an even keel, even when the economic meltdown was at its peak in other countries. I think our policy response to the crisis was seen as prompt, unambiguous and concrete with a clear medium term road map. The fact that it worked in getting the Indian economy rapidly on its "pre-global crisis" growth path may have added to our credibility.
EM: What do you see as your key achievements as finance minister this past year?
PM: Restoring growth to the pre -crisis level, regaining the investor's confidence in India' growth story and maintaining the Governments policy thrust on inclusive growth with rapid social and rural sector development. We have managed to clock a growth rate of 8.8% in Ql of this year and managed unprecedented increase in public outlays for social sectors and rural development. At the same time we are well on our way to fiscal prudence and consolidation in the medium term.
EM: How concerned are you about inflation domestically? And to the extent you are concerned, what steps can be taken to tackle it? Is there anything the Finance Ministry can do on its own to combat inflation or is this largely in the hands of the RBI?
PM: The Government is very concerned about the current price situation. We have taken a number of short term and medium term measures to improve domestic availability of essential commodities and to moderate inflation. Because of these measures, inflation in food has declined to 10.60% in August 2010 from its peak of 16.22% in February 2010. We are also focusing on strengthening the public distribution system to supply the essential commodities at a subsidized price to vulnerable section of society to protect them from rising prices.
The monetary policy measures of RBI have also focused on tackling inflation and inflationary expectations. The RBI has modified the monetary policy, gradually raising the policy rates in five phases to contain inflation and anchor inflationary expectations, while not hurting the recovery process. However, inflation management has become more challenging in a globalised world where the markets are interlinked and interdependent.
EM: How concerned are you about India's fiscal deficit and what steps are you taking as finance minister to rein in the deficit?
PM: I have always maintained that we have to come back to the path of fiscal prudence without compromising our growth momentum. We cannot lose sight of the fact that much of recent success in raising our growth trajectory has come about due to the adherence to FRBM targets, both at the Central and State levels. Fiscal prudence is critical for maintaining a stable balance of payments, moderate interest rates and steady flow of external capital for corporate investment.
For the current year I am confident that we will meet our fiscal deficit target of 5.5% of GDP. We have the benefit of better than anticipated non-tax revenues from 3G auction. As such, it should not be difficult to achieve the target of 4.8% of GDP envisaged by the Medium Term Fiscal Policy Statement for 2011-12 and 4.1% by 2012-13.
EM: Some measures the UPA government has taken on the fiscal front --from de-regulating the fuel prices, to the new tax code --have been controversial, praised in some quarters and criticized in others. Can you talk a bit about these and how you respond to some of the criticism, for instance on the fuel subsidy issue, that while this is good for India's growth, it hurts the poor in the near term? And on the tax code, how do you strike the balance between revenue generation and stifling business growth, while at the same time trying to simplify the tax structure?
PM: Fuel subsidy burden beyond a point is not sustainable and it also leads to inefficient allocation and use of scarce resources. We have attempted to put in place a sustainable system of subsidization taking into account the level of crude prices. The pass-through even now is partial with a definite level of subsidy. Only the barest minimum burden has been placed on the budget of poor households which when and compared to many neighbouring countries is still at much lower levels.
On the issue of DTC, the first draft released in August 2009 for public discussion had stated that the indicative tax rates would be subject to the finalization of all the proposals in the draft. It offered a package deal. The original package in draft DTC was a lower tax rate with MAT on assets and high Capital Gain Tax with no exemptions. After detailed discussions with all stakeholders, the draft has been revised. The bill that has now been introduced offers a package of a moderate tax rate with no MAT on assets, no long term Capital Gain Tax on equity and continuation of exemption in certain situations. It is before the Parliament where it would be further discussed.
In the Bill, we have tried to maintain a balance for need for investment and for widening the revenue base. The DTC will be a simplified law and will create a conducive business environment for investment and growth in the country.
EM: In general, how do you see the balance between India's need for growth and its need for financial responsibility?
PM: In the long term, growth and financial responsibility go hand in hand. However, growth cannot be pursued for its own sake. It has to be a means to an improved well-being for the people. For a developing country like India there has to be a delicate balance between the growth and financial responsibility objectives in the medium term. While we cannot afford to lose the growth momentum, we also cannot compromise its sustainability in the medium long-term. Growth is a fuel for employment generation, poverty alleviation and also for focusing on the social sectors. At the same time, there are significant sections of our population who need direct public support to meet their basic needs.
EM: India has seen large foreign capital inflows. How do you view such inflows? Do you see them more as a benefit to the Indian economy or more of a potential risk, in that money which flows in from abroad might just as easi1y flow out again if there is another global retrenchment?
PM: India is one of the fastest growing economies in the world, which makes it attractive to the foreign investors. We need investments for infrastructure projects and we welcome the foreign investments. We have received a report of working group on foreign investments in India. We are undertaking a wider consultation on it. We intend to provide a conducive business environment to attract foreign capital and at the same time maintain the stability in the market through an appropriate regulatory regime.
EM: Where do you stand on the debate currently raging globally between those who advocate fiscal austerity as the way to further economic recovery and those who favour further economic stimulus?
PM: Economic stimulus was important to rescue the global economy from the financial crisis and resulting economic slowdown. Fiscal stimulus is important when private demand is low. But, there is a limit to which governments can expand their debt burden. Therefore, there has to be some strategy for (a) increasing private demand and investment and (b) exiting from the stimulus. The issue therefore is of calibration of policy measures keeping in view the sensitivity and the needs of the country context. In G20 forum India has suggested staggered withdrawal of fiscal stimulus, not all carrying it out at the same time or with the same intensity. Countries that have adverse market conditions due to their sovereign debt, have to start first while others can begin later. But, all must lay down their medium term path clearly and credibly.
EM: How do you assess the risk of a sovereign debt crisis in the developed economies?
PM: The sovereign debt crisis in peripheral euro zone is serious, and markets responded adversely. Given the likely growth in these and the other developed economies, the current debt levels are a matter of concern. But, as you know, there has been an agreement in Toronto during the G20 Summit to halve the fiscal deficit in advanced countries by 2013 and bring debt to GDP ratio within manageable levels by 2016. The path for corrections has, therefore, been laid and Governments have taken corrective measures.
EM: How does India view efforts at global financial governance reform at the IMF and World Bank?
PM: The World Bank has completed the process of Voice Reforms as per which India's vote share has increased from 2.77% to 2.91% making India the seventh largest shareholder of IBRD. In this process, an additional chair has been created for Africa. India had supported this Voice Reforms and has been at the forefront of raising the financial resources both for IBRD and IFC.
The international organizations have to reflect the views of developing countries and also their increased contribution in the global economy. I am sure that the intended reforms will reflect the emerging economic world order.
EM: India is now part of the G20. But many smaller, less developed nations have complained that the G20 is an exclusionary, undemocratic and non-transparent body that has left them standing on the sidelines. How does India respond to such criticism? How does India square its new role in the G20 with its traditional foreign policy role as a champion for the less developed world? Has global poverty reduction now taken a back seat to other issues at the G20?
PM: Let us see this in perspective. The G7 was the forum where the global economic deliberations used to take place at Leaders level. When the crisis happened, the platform shifted to the G20, which was also raised to the Leaders level. In Pittsburgh the G20 was declared as the premier forum for international economic deliberation. For the first time, at Leaders level, emerging markets and developing countries are part of a forum that is more representative than the G7. The G20 has been effective, both because it represents economies that make up about 75% of the world economy and trade, and because it continues to be manageable in terms of numbers for meaningful deliberations and for quick actions. But, I take your point.
What is important is to have a good quality outreach. This has already begun to some extent by inviting heads of regional groups particularly from Asia and Africa during the Summit. For the Seoul Summit, development agenda, which is typically for the LDCs and the poor of the world has also been taken up in the G20. India, which still has a large population of the world's poor, is actively participating in the G20 agenda and bringing developing economy perspectives to the table.