Interview with Finance Minister - CNBC TV 18

Finance Minister Palaniappan Chidambaram simplifies the Union Budget. Chidambaram informs that fertiliser subsidy has gone Up by Rs 5,000 crore.

He adds that total expenditure has been up due to fertiliser subsidy and interest payments. He says that the Fertiliser Subsidy needs to be delivered directly to the farmer. According to him, cutting customs duty alone is not a price restraining measure.

He further adds that ESOPs will attract FBT but the base has not yet been decided. He says that the government and RBI are not at loggerheads on fiscal policies. In his view, the dharma of the RBI is to ensure financial stability while the dharma of the government is to promote growth.

In an exlusive interview with CNBC-TV18, the Finance Minister clears doubts on FBT, taxation, etc:

Q: Yesterday, people who saw you giving the Budget speech, must have been rubbing their eyes in disbelief. Here was a man ten years ago with a much worse macro-economic situation took bold leap but yesterday he was a man sitting on a dream macro economic situation being virtually status quo?
A: Wrong, the dreams of 1997 and the dreams of 2007 are very different. I am lucky to be part of that dream and I am lucky to be part of this dream. In 1997, what was a dream, India must join the rest of the world, India must take wings, India must accept her share of responsibility to become a key driver of economic growth in the world, those were the dreams in 1997 and the engines that could have driven those dreams obviously was industry and services sector. The dreams of 2007 are very different, the growth today is a given, it is not a cyclical shift, it is a structural shift, given that the growth is a given and industry and services seem to be virtually on auto pilot, they are mature, confident enterprising, willing to take on the rest of the world. This is a time to dream other dreams namely to make growth more inclusive.


Q: I will come to your assertion that growth is a given which maybe a bit too facile and does not quite get reflected in your numbers but your Budget that very morning was born under fear. You ban forward trading in wheat and rice but here is a government, a Prime Minister, a Finance Minister who believes in the efficiency of markets and then you get scared?
A: I think you are drawing very facile conclusions. The economic divisions, which enjoys a large degree of autonomy has got a section on forward markets on the economic survey, which justifies forward market as a price discovery mechanism but there is another view. There is another view that there is too much speculation, there is too much trading in "thin" commodities and I am no expert to say, which view is right. Let me make that very clear, I am no expert to say, which view is right.

One month ago, the FMC restricted forward trading in tur and urad, tur prices have declined, there maybe no cause and effect relation but it has declined. We do not know, which view is right, which view is wrong in the given context, therefore we have appointed an expert committee, for I do not have to take a view now, I have to take a view only when the expert committee report comes to me.

Q: You have just made safe.
A: I have simply reported what the FM cited.

Q: Let me say why I believe that it is a status quo Budget, you had 20%-30%-40% unheard levels of growth in your tax revenues.
A: That is not because some kind God smiled on us, it is because our department worked hard.

Q: You had that much of a flexibility before you and you wanted to rein inflation, what then stopped you from bringing duties down to 7%-8%; in one fell swoop, you would have killed inflationary expectations in the economy?
A: Not correct, I will tell you why. When an economy is firing at near full speed when actual output exceeds potential output, cutting customs duties alone does not act as a price restraining measure because the demand is so high, you can still sell your product at the price that you are able to command.

Q: That’s a strange argument I am hearing from you. You have always said consistently that this inflation is far more supply induced than demanded?
A: You talked about cutting further I am answering that.

Q: You were giving me the reason for not cutting?
A: You must not get into an argument. You said that I should have cut custom duty further it will be in disinflationary.

Q: It would have killed inflationary expectations?
A: That is not correct. I will tell you why it’s not correct and that’s what I am trying to explain to you - agree or disagree that’s a different matter.

I have been advised by my economic advisors- you have to cut a customs duties that is disinflationary but the further step that you are suggesting - you cut it deeper is more disinflationary. We do not buy that argument that will apply only when there is industry working at less than full capacity. When industry is producing at full capacity in fact actual output is exceeding potential output and they have got pricing power. Merely cutting customs duties more does not make it more disinflationary.

Q: That’s the sub text of status quo is I am talking about?
A: That is an economic advise I have received and I think it is a sound advice.

Q: Another example - last year and the year before that we all applauded you for the kind of tax reforms and the convergence to the single rate that you talked about. We were all expecting this year that you would cut excise, move service tax up sort of converge to that single rate that you been talking about you didn’t touch it, nothing?
A: I will tell you why - how can I do that only a few days before the Budget we reached an agreement with State Government and given an outline of that agreement you do not know the details of agreement. Under that agreement we have agree to work together on a roadmap for GST. They have accepted in principle the GST, they have not yet agreed on a roadmap. At the end of that roadmap we will have to agree on a rate on which all taxes will converge. We have not agreed on the convergence rate.

Q: What is the Finance Ministry’s view on 16% CENVAT?
A: Well, there are 30 State Governments, there requires a constitution amendments, State Government have to ratify that amendment, I can’t thrust an opinion down the throat of State Government. The consultative process is not even begun; we have just reached an agreement to begin the consultative process. Once I know what the convergence rate will be then I have to move the excise duty, service tax and they have to move the VAT towards that rate. At this stage without knowing what the convergence rate is how do I move the service tax and the excise duty rate?

Q: But that is something you had spoken about last year, you said 24% and 32% rates you would start moving towards the convergence rates, now the convergence rates could be 15,16 and 18?
A: No, Kelkar has recommended 20 therefore there is no agreement yet on a convergence rate and without an agreement we cannot move either service tax or excise duty. If I reach a convergence rate agreement this year then next year we will make the movement.

Q: Surely you could not be thinking of 20%?
A: Kelkar has recommended 20%.

Q: That is a recommendation of an academic committee?
A: I have to consult everyone.

Q: Let me talk about your Budget deficit, what we were applauding or expecting as the big achievement of the Budget.
A: I have reached to fiscal deficit target every year.

Q: Yes you have but the kind of expectations that you had built up or the kind of numbers that the government was releasing, we were all expecting a fiscal deficit of about 3.4 because that is the kind of numbers that were coming. Your revenue expenditure has been out of control; you have got to admit that.
A: Not correct, we have shown Rs 25,000 crore more gross revenue than the BE figure. The numbers that are released month after month is gross revenue. 30.5% of that is mandatorily shared with the states, folks like you do not do that mental adjustment, 30% has to be taken out then what is left is 70% this includes income tax and corporate income tax, we have moved the last stake for assessment to December 31, which means refunds have to be done for the first time by March, so January, February and March is the refund period rather than April, May and June, therefore we adjust for the refund set up to be done therefore what we have projected is absolutely correct.

Q: I am just saying that you have a situation where your tax revenues are running ahead of your projections and clearly therefore if you have not been able to beat your Budget deficit by a huge margin, clearly your revenue expenditure is also going ahead of estimates.
A: My total revenue expenditure from 563 has gone up to 581, which means an increase of 18,000 crore but why is that increase of 18,000 crore. Fertilizer alone has already gone up by 5,000 crore, interest payments have increased by about 7,000 crore, so that explains.

Q: That explains it but that is not a terribly good thing for the government to be putting out because yes, you have met your target but your expenditures are not under control.
A: I cannot control fertilizer under the present system that is why I had revolted a paragraph to say that this system of delivering fertilizer subsidy is wrong, we have to replace it by better system, we have to deliver fertilizer subsidy directly to the farmer because I am aware.

Q: We have been talking about direct subsidies now for five or seven years?

A: But I am pushing the case but I have to carry conviction with every one. Interest is a function of rates.

Q: The kind of growth pessimism that you have built into your numbers?

A: Standard question everybody is asking without look at the numbers

Q: But 40% growth on that basis?

A: 40% growth, where did you get the number.

Q: 30-40% tax buoyancy last year?

A: That is not correct. 30% goes to the States; you have to look at net tax revenue to the Centre.

Q: But yet you are projecting lower than what you achieved last year?

A: I am projecting 20%, let us look at the numbers again - Rs 4,42,000 crore last year and Rs 5,48,000 crore this year. For your information, it took us 48 years to cross the first Rs 100,000 crore mark and here in one year I am going from Rs 4,42,000 crore to Rs 5,48,000 crore - a Rs 106,000 crore increase in gross revenue works out to a 20% increase; then why is 20% a conservative estimate? It is an aggressive estimate. My department of taxes says, every year you ask us to collect 20% more, we have done it for three years and you are asking us to repeat that feat year-after-year.

Q: One issue which may not be large on your agenda, where clearly the Finance Ministry seems to have got it completely wrong and that is Fringe Benefit Tax of Employee Stock Ownership Plans, or ESOPs? ESOPs are a capital asset, they are a wealth-creating assets and you are taxing them like income! Which canon of economic thinking can ever justify that?

A: Let me ask you a simple question, is ESOP a Fringe Benefit or not?

Q: Yes it is a transfer of remuneration from the company via a capital asset.
A: So if it is a fringe benefit it has to be taxed, I have not yet told you how we are going to calculate it, how we are going to tax it. All that will come in the rules. All that we have said is that ESOP is a fringe benefit and I am extending FBT on to it. You will have to wait to see how we determine its value, how we tax it, all that has to be announced once we come up with the detail.

Q: Therefore the media, which seems to be suggesting that 34% is going to be the rate of taxation on the gains realised on the date of exercising of ESOPs has got it wrong categorically?
A: I do not know whether it is wrong or right; all I know is that at the moment it is completely premature because I have not seen the detail calculations yet so how could the media claim to know what it is.

Q: Therefore it is not a given that they will be taxed at the income tax rate?
A: It is a given that it will be taxed at the FBT rate what the base will be, how the base will be calculated, how the tax will apply all that has to be worked out?

Q: I think that would come as a major relief because otherwise what seems to have been suggested and wasn’t denied strenuously yesterday by anybody is that you are actually going to tax capital assets at the rate of income tax?
A: Who is in a position to deny it or affirm it except me? You didn’t put the question to me yesterday.

Q: But I am talking to you now?
A: And I am telling you today- we have announced the policy that FBT will include ESOPs. Now what the ESOPs should be, how it will be valued, how it will be taxed all that has to be worked out.

Q: This government was increasingly getting seen to be too anti-urban?
A: No, not at all. Play what the three Presidents of the three chambers said this morning back on your television channel.

Q: I think what you said yesterday in one of your appearances was that ESOPs are largely given to senior managers - that is not correct. ESOPs have lead to an entrepreneurial upsurge in this country.
A: Did you know that many developed countries are moving away from ESOPs?

Q: That is for a variety of other reasons. The fact that ESOPs is a wealth creating measure. I do not think any country in the world taxes ESOPs at income tax rate?
A: There are countries in the world, which tax ESOPs. And all that I have said is, we will tax ESOPs.