Contrary to the common perception, Chief Economic Advisor to the Ministry of Finance Dr Arvind Virmani has painted an optimistic picture of the Indian economy.
He spoke exclusively to NDTV Profit's Sapna Das on the current economic situation, fiscal deficit and recommendations put by B K Chaturvedi committee.
NDTV: In Moody's recent review on India's credit ratings, the agency has noted that the Indian government is relying too much on RBI to control inflation. What is your view?
Dr Virmani: Recently, I was looking at the past economic surveys conducted in the last decade where it was amazing to see that for only two years controlling inflation was a primacy. Inflation is a primary concern for the government this year, as political system does not like it going beyond certain level. The monetary policy now has to focus on the issue of inflationary expectations. In this context, sharp expansion of the fiscal deficit can make monetary management more difficult. An average 8.9 per cent growth in the past five years was achievable through investment growth. It is quite notable that average investment growth was 18 per cent a year, double of previous five years. If investment growth falls 'very sharply' like 3-4 per cent then a little bit of fiscal stimulus can actually keep the demand going. This is one of the things that I have learnt in my 20 years of management advise that situation can change in six months. The rupee's appreciation and depreciation issue is a good example of this.
NDTV: Do you think that the fiscal policy actually is crowding out the effectiveness of RBI's monetary policy?
Dr Virmani: Let's go deeper into the fiscal deficit issue. Fiscal deficit appears when a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). You may recall at the budget time people had asked why there was no provision for the pay commission report and loan waiver scheme. At that point the finance minister had indicated that we have been conservative on the revenue estimates. Regarding the conservative tax revenue projections, clearly, the first three-four months in this fiscal data is pretty good and supports what was said earlier (thus much better as in the budget). As far as cash deficit is concerned, even taking into account the pay commission implementation the ministry is fairly confident that it will meet the fiscal responsibility and budget management (FRBM) targets.
Global analysts have focused particularly on below-the-line items like oil bonds, fertilizer bonds, and food bonds. These have to be budgeted in the sense that they are a call on the consolidated fund of India and therefore, according to the Constitution, they have to be approved by Parliament. There is no way that the government can issue these bonds without the approval of Parliament, thus, they will be in the supplementary budget. There was no estimate of this when the budget was laid down. That has created perhaps some confusion! Anyway when the supplementary is put forward that will become clear. Regarding high oil prices, you are aware that a three-member panel, headed by Planning Commission member B K Chaturvedi was appointed to look at the finances of the oil companies. Certainly the committee has looked into all these issues and it has given a solution to this problem.
NDTV: Would you be able to enumerate any of these solutions since you are also part of the B K Chaturvedi committee?
Dr Virmani: We have suggested that the report be made public and put on the web. But it is in progress. One of the things, which concern me, is the issue of transparency because of disputes related to real oil price and taxes. So we thought it would be very important to make the whole system transparent for everybody to understand. The main effort of the committee was to workout a process, which may be accepted by the government. As you know committees are independent and government may or may not accept the recommendations.
NDTV: What kind of actions that we expect from the government on Chaturvedi panel report?
Dr Virmani: The usual process is that appropriate ministry processes the recommendations and then put up to the petroleum minister, in this case.
NDTV: What is the kind of scenario you are witnessing regarding revenue collection? Do you expect buoyancy in the revenue collection to continue to help the government meet FBRM target?
Dr Virmani: I don't want to speculate in the positive direction. The ministry is confident of meeting the FBRM target but I don't want to commit on that. The off-budget liabilities require the recommendations by the panel on oil. My 20 years of experience of government is that there are often delays but the government does take right decisions.
NDTV: What is finance ministry's view on current drop in oil prices?
Dr Virmani: I am very cautious because there are many oil experts who are not willing to commit on it. Obviously I am happy, but it is very easy to confuse cyclical changes with the changes in trends. Too many people do that but I don't want to fall into that trap. If this trend continues for couple of months then I would certainly start taking it into account in determining future of inflation and policies. I am also not sure that if oil prices have peaked.
NDTV: What is your analysis of mid term economic growth?
Dr Virmani: The RBI has brought the GDP growth down to 8 per cent and the economic advisory council is quoted as saying 7.5-8 per cent. But to my view it will grow at 8-9 per cent and according to available information the possibility of it reaching close to 8 per cent is quite high.
NDTV: The government has planned an auction of 3G policy licenses, so what kind of disinvestment proceeds is the government expecting?
Dr Virmani: If an auction takes place then certainly we should have good collections.
NDTV: We're talking about public shareholding in the listed companies to stabilise at 25 per cent, and the government is apparently very close to finalizing these norms. What is you view?
Dr Virmani: There are varying norms across the world and each country has to find its own definition of what a public listed company is. As of now the kind of number around which there is a consensus seem like a good number.
NDTV: Finance Minister P Chidambaram has introduced commodities transaction tax (CTT) on futures and options traded on commodity exchanges in this year's budget. Do you think its implementation will be anti-inflationary or pro-inflationary?
Dr Virmani: I am kind of purest on taxation. In my way of looking at it, there are certain principles of taxation and one of those is that transaction taxes are not consistent with theory. But practically, we do all kinds of things in India and many of them we justify in terms of tax evasion. I generally feel very uncomfortable with that.
NDTV: Thank you for talking to us.