In an interview with the Financial Times, Palaniappan Chidambaram, India’s finance minister, spoke of his determination to control pre-election public spending, support for foreign investment and plans for further financial liberalisation.
He also told Lionel Barber, the editor of the Financial Times, and James Blitz, diplomatic editor, of his political ambitions. Here is a transcript of the interview that took place on Tuesday in London during a tour to promote India among investors.
Barber: So, the interest rates cut today by Central Bank, it looks as though your campaign [for monetary easing] is bearing fruit. I just wonder, Minister, whether that’s actually the problem with interest [rates] rather than other structural problems in the economy which are leading to lower than expected [economic] growth rates.
Chidambaram: This is a debate that goes on in every country, more recently Japan. High inflation penalises the people. Equally, low growth also penalises the people. So one has to do a trade-off between inflation and growth, and I have argued – my colleagues in Government have argued – that perhaps a monetary authority should lean a little more in favour of growth. When they should do that, to what degree they should do that is their call. They have taken the call now, they have given the reasons, I have read the statement and I welcome the decision. But interest rates [are]… one issue that India faces. There are many other issues that have to be addressed and I hope we can address them in the days ahead.
Barber: Are you talking about corruption, bureaucracy, environmental permits, labour laws?
Chidambaram: Those are issues but I think there are issues that have greater moment. For example, how do we get stalled projects off the ground? How do we raise the savings ratio? How do we get domestic investors, both public sector and private sector, which are sitting on piles of cash, to begin the investment cycle again? These are key issues. Also the issues that you mentioned – environmental clearance, forest clearance, other approvals, bank finance for projects – these are other issues which have to be addressed too.
Barber: Now, I wouldn’t expect you, Minister, to reveal your hand ahead of the budget, but could you give us some idea of what you’re looking at, and also, crucially, because I know you’re doing this world tour to sell India to investors, can you give us a reassurance, to the investors, that you’re not going to have … a spending splurge ahead of the election next year?
Chidambaram: I am quite willing to reveal my hand. It will be a responsible budget. After identifying the problems of August [when concerns about India’s fiscal deficit were growing] and subsequently, and after taking a number of steps to address those problems, how can the budget be anything but a responsible budget?
I have drawn the red lines. The red lines are that the fiscal deficit for the current year will be no more than 5.3% and the fiscal deficit for the next year will be no more than 4.8%. That’s a red line and I will not breach that red line. We have taken measures to contain expenditure, especially subsidies [for example, on fuels]. We have taken measures to augment revenues, especially through tightening tax administration. We have promised the people that next year we will aim for a higher growth rate – between six and 7%. So I think all that we have said and all that we have done points to a responsible budget. The budget can be nothing except a responsible budget.
Barber: Minister, you refer to subsidies. Are you actually going to be strong enough, and you are seen as one of the strongest and most effective ministers in the government, but are you actually going to be strong enough to say let’s cut these fuel subsidies. The fact is, if the price goes up and down, let’s live with it. Are you strong enough to do that?
Chidambaram: I am not going to make any declarations from the pulpit. I would ask you to judge us on the basis of steps that we have taken. We have corrected diesel prices. We have made a significant correction in diesel prices. Five rupees a few months ago. That is ten cents to a litre. And then we’ve allowed the oil companies to make small corrections periodically over a period of time. We still have to correct another ten rupees, which is about 20 cents, and a beginning has been made in the month of January. …So, judge us by the steps that we take. And, in a country where there are still a large number of poor people, the correction can only be gradual and in small steps at a time. That’s the politically wise course to take.
Barber: But the direction of travel is clear.
Barber: And, at some point, you would like to abandon fuel subsidies, as a long-term goal?
Chidambaram: Not all subsidies can be abandoned. Take for example kerosene, which is the cooking fuel for the very poor in rural India. Now, ask yourself a question – what happens if you correct the subsidy on kerosene completely. It will make kerosene unaffordable to the rural poor and they will demand wood. If they demand wood, acres of forest will be wiped out in India. One has to balance these things and take a prudent decision. Some subsidies in India are indeed merit subsidies. What might appear to be non-merit subsidies from the vantage point of London or Frankfurt, some of them are indeed merit subsidies in India. So my approach, our approach is merit subsidies – we have to maintain a certain level of merit subsidies but non-merit subsidies we should eliminate over a period of time.
Barber: Now, another important issue is the current account deficit. …Do you think, and you have actually hinted that you’d raise [the tax] on gold imports?
Chidambaram: We have raised it. We did it a few days ago, from 4% to 6%. …we have thrown some sand in the wheels by raising the taxes. We have also announced a link between the gold ETF scheme run my Mutual Funds, and the gold deposit scheme run by banks, which we hope will unfreeze 15, 20 tons of gold, idle gold, and bring it into the market. So if that idle gold comes into the market, it will moderate imports. And we’re looking at some other steps to moderate the import of gold.
Barber: You talked about the importance of credit, and we’ve got our own problems, as you know, in this country, with bank finance so I’m not preaching here. But the fact is the government still owns large stakes in the banking system in India. What’s the point of that and wouldn’t it be better if you sold some of those stakes? Liberalised, took the measures to liberalise the economy in the same way that was done 20 years ago. …some people believe India is still profiting from those bold, sweeping moves.
Chidambaram: How is the public sector bank in which the government is a majority shareholder coming in the way of financial liberalisation? We have a number of private sector banks, which are successful, which are competitive. In two weeks from today, the Reserve Bank of India will announce the final guidelines for licensing more private sector banks. We expect that four to five licences will be granted. We allow foreign banks into India. We are liberal in granting branches to foreign banks more than what we are required to do under the WTO regulations. So we have, today, a variety of banks competing with each other – foreign banks, Indian private sector banks, public sector banks, cooperative banks which are under the supervision of the State Governments. So I don’t see why a public sector bank should be seen as an obstacle to financial liberalisation. It is not. …
Barber: …I’m sure you’ll be asked this lots of times on your world tour, but one of the complaints made by foreign investors in India is the uncertainty in either the tax regime or legal uncertainty, and there is a very prominent case involving Vodafone. With respect, I’m not carrying water for Vodafone, just so you know that, I’m just making a general point about legal and fiscal uncertainty, retrospective tax. Now, can you give any assurances to investors that this kind of thing can be resolved quickly, that maybe there’s a compromise which will increase certainty? What can you tell us about that? …
Chidambaram: …I’m happy to report that Vodafone has formally written to the government offering to engage senior government officials to find a way out of the problem. They have held two rounds of discussions with my Revenue Secretary and the Chairman of the Central Board of Direct Taxes. They are being invited to a third round of discussions this week and they expect them to come any time this week and I am looking forward to a resolution of the Vodafone issue. And I’m confident we will resolve that issue.
Barber: In the next month or so?
Chidambaram: I am trying to resolve it even sooner than that.
Barber: Really? Why are you so confident, minister?
Chidambaram: Because, for the first time, Vodafone has offered to engage the Government in a discussion to find a solution rather than persist with its Notice of Arbitration.
Barber: [You are visiting global financial centres on this trip.] What is your message in a couple of sort of succinct sentences, apart from India is open for business?
Chidambaram: My message is that India achieved a high growth and adopted the correct policies between 2004 and 2009. We were affected by the external crisis. It’s possible that we have made some mistakes too. The world thought that we had stumbled. If we have stumbled, we have picked ourselves up now. We are back on our feet and we are moving on the path of fiscal consolidation and structural reforms and promoting high growth. We hope to be able to repeat what we achieved between 2004 and 2009. And India is open, competitive, and it’s a place to do business.
Barber: What particular mistakes do you think were made?
Chidambaram: This is with the benefit of hindsight.
Barber: Of course.
Chidambaram: We had three stimulus packages. Now, there is an opinion today that the third stimulus package was perhaps entirely avoidable. Now, that’s a view. It’s difficult to say whether when the package was announced was it considered superfluous or was it considered necessary. But there is a view that perhaps a third stimulus package could have been avoided.
There is also a view that the guidelines could have been written in a different way. Again, that is the benefit of hindsight. I’m not saying there were mistakes, all I am pointing out there is a perception that we may have made some mistakes. And if that is the perception, it is my duty to correct that perception.
Barber: It’s interesting, minister, you are often regarded as somebody who is supremely self-confident and not a man readily who admits to mistakes.
Chidambaram: When did self-confidence become a vice?
Barber: Yes. I remember when we first met, in 2006, on my first trip to India, everybody was asking who is going to be ahead – India or China. And there were different views at the time. Now, partly because of the stumbles and some of the mistakes, people think, really, that the [Chinese] hare has moved quite a long way ahead of India. What’s your view now?
Chidambaram: I don’t deny it. I admit that China is ahead of India. But we are talking in London. China has its own system. India has its own system. Business has this amazing capacity to do well and successfully both in China and in India. Business can choose between China and India. Business can choose both China and India. But do I have a choice to choose China’s system? Do I want to choose China’s system? The answer is no. I want to continue with my system of an open, democratic plural society, and if we can achieve 9% growth between 2004 and 2008 why should I not hope that we can repeat it in the next few years and continue to grow at our old pace true to our potential and resolve our problems without having to be compared with China. I don’t think it is China versus India. I think, given the way world economies will grow in the next ten to 15 years, China and India, along with the United States and maybe a couple of other countries, will be among the top five economies of the world. And I’m quite happy that India takes its place among the top five economies without worrying whether it’s one notch ahead of China or one notch behind China. …
Barber: A couple of [other] things, if I may. The competition between Rafale and Eurofighter is something which has attracted a lot of interest here. Can India press ahead with the very expensive purchase of Rafale and, at the same time, press ahead with your deficit reduction programme, because it is a very expensive purchase indeed. Are you fully committed to it?
Chidambaram: Rafale was selected after a transparent bidding and evaluation procedure. Now, it’s well within the right of the competitor to say that Rafale is too expensive, that the other product is more competitive and better priced, but how can I second guess a transparent procedure, a transparent bidding and evaluation procedure, which finally threw up the results that Rafale will be selected? We have had the defence experts in this. We have had the air force involved in it. We’ve had civilian analysts involved in the process. And how can we find fault with the conclusion? If they find that Rafale at that price is the best product, it is the best product. …
Barber: …Thank you. Another question I wanted to put to you – I’m interested in perceptions of the United Kingdom from outside the European Union at a time when we are moving towards a referendum, an in/out referendum, which could potentially take us out of the European Union. From your point of view, from the point of view of India, how is that debate seen? Is there concern that we might leave the EU, and what would the impact be for the UK if that were to happen?
Chidambaram: There won’t be any direct impact. The UK is the third largest investor in India. The UK is one of our largest trading partners. We have had historical relationships with the UK and I don’t think that will be affected whether you are in the European Union or not in the European Union. But whether you should be in the European Union or not is a matter for your government and your people to decide. There are, I believe, clear advantages in countries working together and there are clear advantages in greater cooperation, common rules and regulations. That’s my view but who am I to offer a final view? It’s for the people of the UK and the government of the UK to take a call on that issue. But our relationship with UK will only get stronger whether you are in the European Union or not.
Barber: Two last questions. One is just a technical question, Minister. The inflow of perhaps hot money, certainly funds into the equity market, are you concerned about these volatile flows? … Possibly they increase the appreciation of the rupee.
Chidambaram: I don’t agree that they are volatile. You see, that’s the popular perception that FII [foreign institutional investors] money into equity is volatile. If you look at the cumulative FII in India since liberalisation, it has reached, I think, $244 billion. There’s a graph. $244 billion. Except for one year where the cumulative number dipped by half a billion, it has been a secular advance, which means FII money in India is not money in and money out. Net FII inflow has shown a secular rise, so it tends to remain for the long term. …Therefore I think while FDI has a higher priority, I don’t see any reason why we should be worried about FII money in equity. As far as the Indian experience is concerned, there’s been a secular increase, cumulatively, over the years. So I would welcome both FDI and FII in equity.
Barber: In terms of your own distinguished political career, do you see yourself as a future Prime Minister?
Chidambaram: No. …I have made it clear that I know my limitations. I live and work according to my limitations.
Barber: Do you know why I am asking this question, Mr Chidambaram? …Your name keeps coming up as somebody who can get things done. And the other person’s name, who keeps coming up, which I’m sure you know his name, is Mr Modi [Narendra Modi, the chief minister of Gujarat, a possible opposition BJP candidate for prime minister].
So this, again, this is purely anecdotal, there are a lot of business people who are saying we need a strong man or a strong person – I’d better be careful here – a strong person because India is not reaching its potential. And there’s at least 2.5%, 3% GDP [of extra] growth if we could get somebody strong to crunch decisions, force these things through the bureaucracy. So that’s the background, Mr Chidambaram.
Chidambaram: Thank you. As I said, I know my limitations. I live and work according to my limitations. And my party only two weeks ago has clearly declared that the leader of the party after Ms Sonia Gandhi will be [her son] Mr Rahul Gandhi. And all of us, including me, have expressed our solid support to Mr Rahul Gandhi. …