Sunday, October 30, 2011Significant financial reforms on the way
Pranab Mukherjee, known as a man for all seasons, returned to the finance ministry as the nation reeled under rising prices. The Union finance minister speaks to Sanjay Basak and Pawan S. Bali on the steps being taken to boost growth at a time of turmoil in the external economic environment.
There has been no major policy reform in recent years from this government. Industry is looking up to you for this. FDI in retail has been pending. When can we expect this to materialise?
It is not correct that there has been no major reform. Let me list matters that have been addressed. The legislative agenda for reforms in the financial sector is quite significant and includes the introduction of major bills in Parliament.
Some of these are Banking Laws Amendment Bill, Factoring and Assignment of Receivables Bill, Pension Fund Regulatory and Development Authority Bill, Insurance Laws Amendment Bill and Life Insurance Corporation Bill. These are expected to be passed in the Winter Session.
The Financial Stability and Development Council has been made operational. The Financial Sector Legislative Reforms Commission has been set up to rewrite financial sector laws and bring them in harmony with the new liberalised environment in the country and in keeping with global best practices.
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Besides, the RBI is in the process of issuing additional banking licences to private sector players. Indian mutual funds have been allowed to directly attract investment from FIIs. Ceiling for investment by FIIs into corporate bonds has been enhanced from $5 billion to $25 billion.
The group of ministers has taken a view on the B.K. Chaturvedi committee related to coal sector and the Ashok Chawla committee on allocation and pricing of natural resources. The Public Procurement Bill is being drafted and will be introduced in the Winter Session. This bill will contain broad principles on procurement policy, standards and procedures and will be applicable to all ministries/departments, Central public sector enterprises and autonomous/statutory bodies funded by the government. This will go a long way in bringing about transparency and efficiency
in procurement procedures.
In your last Budget you spoke of taking specific action on the agriculture front in order to eliminate middlemen and artificial pricing in farm-to-fork delivery of agricultural produce. What specific actions do you intend to take on this front, particularly as regards corporate farming and reducing food subsidy, or at least ensuring that subsidy reaches the right farmer?
Please remember that agriculture is a state subject. The Centre can at best facilitate and complement appropriate action at state level. We need to reform the Agriculture Produce Marketing Act in the states and create a more efficient supply chain linking the farmers with consumers. On food subsidy, or subsidy in general, our intention is to leverage information technology to improve targeting so that over time there is economy effected in government spending.
We are close to launching a pilot project on a new system of LPG distribution based on the recommendations of the task force for direct transfer of subsidies on kerosene, LPG and fertiliser headed by Nandan Nilekani. This should lead to considerable savings in subsidies. The committee headed by Soumitra Chowdhury has submitted its report on NBS (nutrient-based subsidy) regime in urea.
The recommendations are being pursued. This will complete the reform in NBS and lead to balanced fertilisation which will have a positive impact on agriculture production and soil health. In the medium term it will moderate subsidy outgo also.
What is the government’s definitive plan of action to counter inflation?
Monetary measures being taken by the RBI do not seem to be having any visible effect. Industry is calling for the finance minister’s specific intervention.
Does the government need to reduce its spending to take care of fiscal deficit? Won’t the proposed Food Security Bill make it even tougher for the government to reduce the fiscal deficit?
The overall inflation is certainly a matter of concern to me. It has been unacceptably high and has also fluctuated significantly in 2008-09 and 2009-10. There is no easy way out of it. Inflation is caused by mismatch of demand and supply, particularly demand overshooting supply.
During periods of rapid growth and structural change, as India is currently experiencing, inflation does occasionally tend to increase.
We have seen this happen in all emerging market economies that have gone through such periods of policy changes and of rapid growth, such as China, South Korea, Vietnam, Argentina and Brazil. Sustained high economic growth in the recent past has fuelled improvements in purchasing power in both rural and urban areas. This has increased demand for certain goods and services, which has translated into persistent high inflationary pressures for those goods in the economy.
The slow supply response, along with weather-induced shortages in the food economy, has resulted in significant challenges for inflation management. More importantly, the shocks from the supply side in the domestic economy have been reinforced by those emanating from the global markets in the form of high commodities prices. These shocks have come one after another, preventing a full recovery from inflationary spikes.
Since late last year inflation has become more generalised. Therefore, there is a role for monetary policy, fiscal policy and for structural policy to bridge the demand-supply gap and address the underlying factors to control inflation.
As regards government spending, we are already on a path of fiscal consolidation and we hope to meet our fiscal targets for the current year as well. In respect of food security, as and when required we will find the required resources to meet the government’s obligations.
The European crisis is fast spreading across the EU, with Germany and France being the only exceptions. The US economic recovery is very sluggish, with unemployment rates continuing to be on the rise. In Asia, Japan has not managed to get over its economic mess. You seem to have deliberated on this extensively at the G-20 finance ministers’ meet in Paris.
The situation is still grave. In the last meeting of the G-20 finance ministers in Paris we resolved to recommend to the European countries to first have a credible assessment of the solvency issues, and said we would then try to find the supplementary financing arrangement.
But views were expressed very strongly against the rollback of the IMF’s New Arrangement of Borrowing. It was decided that the rollback will take place as per schedule and quota reform of the IMF will be completed by 2012. European countries themselves will have to make a credible assessment of the extent of solvency, and ways to resolve it. After all, the sovereign debt crisis is to be resolved by the countries concerned. This is the approach we have taken. But it will have its impact.
The first quarter (GDP growth) figures show only Turkey had double-digit figures. China and Mexico were nine per cent plus. While India was fourth, it was well below 7.7 in the first quarter. There will be some slowdown in growth. However, I would like to point out that the whole world will not collapse like in the 1930s.
There is a basic difference between then and now. Then we were colonies, we were suppliers of raw material and consumers of finished products. Finished products were made in the countries of our colonial masters. That was the case of a larger number of countries which are today described as emerging economies. But after the Second World War most of these countries have been liberated, there has been some sort of industrial revolution.
They in their own way are developing their developmental strategy.
They are closely linked with the world but are not dependent on anybody. Therefore there will be a slowdown but the edifice will not completely collapse. This aspect has to be kept in mind.
The oil economy has remained volatile in the aftermath of the Arab Spring. Business plans of most Indian oil companies have gone awry with oil prices at over $100 per barrel.
Do you see a case for continuing with oil subsidies or do you see merit in a truly free market regime?
There should be a free market economy. But there is the inflationary pressure to think of. Through the free market you can’t bring down the inflationary pressure. Imported oil prices need to come down to check inflationary pressure, and that doesn’t depend on us.
It should be kept in mind that despite the enhancement of the prices of diesel, LPG and kerosene, we are still providing a huge amount of subsidy. Petrol prices have increased no doubt, but the fact is that we are having substantial imports as our indigenous production is very low, 33-34 million tonnes. Our requirement is more than 100 million tonnes.
The second point, which is quite worrisome, is that demand for oil had earlier increased because of a massive economic recovery in Europe, the US and Japan. However, in these advanced economies the recovery process is now very fragile and poor but oil prices are still going up.
The excessive liquidity in the market is now being converted into commodities like oil. That means financialisation of the commodities is taking place with the excess money injected into the system. The central banks of countries releasing these large amounts of money in the market should think about the impact.
An impression has gained ground that policymaking and bureaucratic decision-making has stalled in the wake of the Anna Hazare campaign.
A “perception deficit’’ has gained currency with regard to the government. The recent letter written by top bankers, corporate leaders and eminent citizens calling for good governance seems to be the barometer of the citizens’ mood.
How would you reassure them?
In any vibrant democratic system there should be constant dialogue between the people and the policymakers. If they feel uncomfortable with something, they will draw the attention of the government. We can assure them that the government will take steps to tackle the problem. But solving difficult problems requires time.
The solution is not simplistic. As far as corruption and good governance is concerned, a series of steps have been taken. A GoM headed by me was appointed in January, finalised the report in April and sent it to the Prime Minster. It has been released now and action has been taken.
These include establishing fast-track courts for criminal cases to take appropriate and expeditious action to issue sanction to prosecute public servants, to dismantle discretionary powers of ministers and various authorities as these normally lead to corruption. People are using instruments like the RTI to ensure proper government action and transparency so that there is no room for dubious dealings.
Wherever this was detected, legal actions were taken. Prosecutions are on. It is not correct to say that the government is insensitive to these issues. Action in the 2G spectrum case and the Commonwealth Games prosecution started long before Mr Hazare’s agitation.
Even the Lokpal Bill was being drafted before that. It was in fact drafted several times and several governments were involved. But the political system and political institutions have their own way of functioning. You cannot destroy systems and well-established institutions and create anarchy. People should express their views and the government should address concerns. I can assure that the government is doing that. But institutions should not be dismantled, they should be strengthened.
UPA-1 had a successful tenure. Are you satisfied with the performance of the UPA-2 government in the last two and a half years?
The taste of the pudding is in the eating. Let UPA-2 complete its term, then people will be in a better position to ascertain. Not today, it is too early.
