Finance minister Palaniappan Chidambaram says that the fertiliser subsidy, which has gone up by Rs5,000 crore, needs to be delivered directly to farmers. According to him, cutting customs duty alone is not a price-restraining measure.

In an exclusive interview to CNBC-TV18''s Raghav Bahl, this evening, he also clarified that employee stock option plans (ESOPs) will attract the fringe benefit tax but it has yet to be decided whether it would be at income tax rate as being speculated. (Watch Video: Interview with finance minister)

He also says that the finance ministry and the Reserve Bank of India are not opposed to each other on fiscal policies. In his view, the "dharma" (duty) of the RBI is to ensure financial stability while that of the government is to promote growth.

Yesterday, people who saw you giving the Budget speech must have been rubbing their eyes in disbelief. Here was a man, who ten years ago with a much worse macro-economic situation took a bold leap of faith, but yesterday sitting on a dream macro economic situation was presenting a virtually status quo budget?
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, the dream was 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 were 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.

I will come to your assertion that growth is a given which may be a bit too facile and does not quite get reflected in your numbers. Your Budget yesterday was born under fear. You banned 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?
I think you are drawing very facile conclusions. The economics division, which enjoys a large degree of autonomy, has 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.

Let me say why I believe that it is a status quo Budget. You had 20 per cent, 30 per cent, 40 per cent… unheard levels of growth in your tax revenues.
That is not because some kind God smiled on us. It is because the department (Central Board of Direct taxes) worked hard.

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 per cent or 8 per cent? In one fell swoop, you would have killed inflationary expectations in the economy?
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.

That''s a strange argument I am hearing from you. You have said consistently that this inflation is far more supply induced than demand.
You talked about cutting duties further. I am answering that.

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

It would have killed inflationary expectations?
That is not correct. I will tell you why it''s not correct and that''s what I am trying to explain to you. You can agree or disagree, that''s a different matter.

I have been advised by my economic advisors to cut customs duties. That is disinflationary. But the further step that you are suggesting, that cutting 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.

That''s the sub-text of status quo that I am talking about?
That is an economic advise I have received and I think it is a sound advice.

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. But you didn''t touch it. Nothing.
I will tell you why. How can I do that when only a few days before the Budget we reached an agreement with state governments and gave them 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.

What is the finance ministry''s view on 16 per cent CENVAT?
Well, there are 30 state governments. This requires a constitutional amendments. State government have to ratify that amendment. I can''t thrust an opinion down the throat of state governments.

The consultative process has 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?

But that is something you had spoken about last year, you said 24 per cent and 32 per cent rates and that you would start moving towards the convergence rate. Now the convergence rates could be 15 per cent, 16 per cent or 18 per cent?
Kelkar has recommended 20 per cent. 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.

Surely you could not be thinking of 20 per cent?
Kelkar has recommended 20 per cent.

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

Let me talk about your Budget deficit that we were expecting as the big achievement of the Budget.
I have reached to fiscal deficit target every year.

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 per cent because that is the kind of numbers that were coming. Your revenue expenditure has been out of control; you have got to admit that.
Not correct. We have shown Rs25,000 crore more gross revenue than the BE (budgetary estimate) figure. The numbers that are released month after month is gross revenue. 30.5 per cent of that is mandatorily shared with the states and folks like you do not do that mental adjustment.

The 30 per cent has to be taken out. Then what is left is 70 per cent. This includes income tax and corporate income tax, we have moved the last date 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.

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, your revenue expenditure is also going ahead of estimates.
My total revenue expenditure from Rs563,000 crore has gone up to Rs581,000 crore, which means an increase of Rs18,000 crore. But why is that increase of R18,000 crore?

Fertilizer alone has already gone up by Rs5,000 crore, interest payments have increased by about Rs7,000 crore, so that explains.

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.
I cannot control fertilizer under the present system that is why I had devoted 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.

We have been talking about direct subsidies now for five or seven years?
But I am pushing the case. But I have to carry conviction with every one. Interest is a function of rates.

The kind of growth pessimism that you have built into your numbers?
Standard question everybody is asking without look at the numbers.

But 40 [per cent growth on that basis?
40 per cent growth? where did you get the number?

30 per cent - 40 per cent tax buoyancy last year.
That is not correct. 30 per cent goes to the states; you have to look at net tax revenue to the centre.

But yet you are projecting lower than what you achieved last year?
I am projecting 20 per cent. Let us look at the numbers again. Rs442,000 crore last year and Rs548,000 crore this year. For your information, it took us 48 years to cross the first Rs100,000- crore mark and here in one year I am going from Rs442,000 crore to Rs548,000 crore - a Rs106,000-crore increase in gross revenue works out to a 20-per cent increase.

Then why is 20 per cent a conservative estimate? It is an aggressive estimate. My department of taxes says, every year you ask us to collect 20 per cent more. We have done it for three years and you are asking us to repeat that feat year-after-year?

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 asset and you are taxing them like income! Which canon of economic thinking can ever justify that?
Let me ask you a simple question, is ESOP a Fringe Benefit or not?

Conceded. It is a transfer of remuneration from the company via a capital asset.
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 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.

Therefore the media, which seems to be suggesting that 34 per cent as the rate of taxation on the gains realised on the date of exercising of ESOPs, has got it wrong?
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.

Therefore it is not a given that these will be taxed at the income tax rate?
It is a given that it will be taxed as the FBT. What the base will be, how the base will be calculated, how the tax will apply all that has to be worked out.

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?
Who is in a position to deny it or affirm it except me? You didn''t put the question to me yesterday.

But I am talking to you now?
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.

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

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.

Did you know that many developed countries are moving away from ESOPs?

That is for a variety of other reasons. The fact is that ESOP is a wealth creating measure. I do not think any country in the world taxes ESOPs at income tax rate?

There are countries in the world, which tax ESOPs. And all that I have said is, we will tax ESOPs.

There is a feeling that you, the ministry of finance and the Reserve Bank of India, are working at cross-purposes as far as they understand of how hard you must slam the breaks.
The dharma of the Reserve Bank of India is price stability, monetary stability; the dharma of a government is to promote growth. As prime Minister said yesterday, there is always a trade off between growth and inflation.

So when the RBI and the government consult each other. We consult them, they consult us. Each one''s presents quite legitimately its side of the case. Until that your story is correct.

The rest of your story is pure fiction that government and RBI are at loggerheads about dealing with the situation, we consult each other, we come to an understanding and then the RBI announces monetary policy changes and we check the fiscal measures.

Are we correct in assuming that the ministry of finance is in agreement with the policy, which has brought interest rates? When you took over, the interest that the government was paying was nearly 4.9 per cent or 5 per cent. It was in that region, maybe 5.2 per cent and corporates were paying 8 per cent, 9 per cent. Today the government is picking up money at well over 8 per cent and the corporates today have to borrow at about 13 per cent, 14 per cent. That is the reality.
That is not correct, the corporates do not say that. I do not know about your company but corporates do not say that. The point is, it is true that when this government took over, the top corporates were able to borrow at sub-PLR, and today they are perhaps borrowing at PLR.

The reason is interest rates have indeed moved up but please remember in 2001, home loan rates were 14 per cent. We are not going back. This is not going back or going forward, these are interest rates, which are determined by the Reserve Bank of India by deciding the policy rates reflecting the requirement of the economy. If today inflation is 6.5 per cent, it requires a response.

But inflation was 4.5 per cent when interest rates were 8-9 per cent. PLR is 12 per cent -12.5 per cent.
The rate has moved up, CRR has been increased four times.

So is the ministry of finance in consonance with such a conservative policy?
Now you are questioning the RBI policy. I am in entire agreement with the RBI policy, every time they have made a policy rate change, they have consulted the government and I have conveyed our support after discussion. After discussion we have come to an understanding, I have always supported RBI''s monetary management.

You could not have supported a policy, hikes the CRR when 24 hours before that you are telling the banks don''t raise home loans rates?
You have got your sequence wrong. I have told the banks RBI has increased a risk weight on four assets, but not housing. It was increased on four assets not including housing and the RBI statement underlined the fact housing was not included.

So I told the banks because the meeting had been scheduled earlier, the RBI had increased the risk weight for four assets and only housing is not included, so please do not tweak the rates for housing. What is wrong with that?

Why do we perceive that you believe it is the assessment of ministry of finance, that in the RBI we have a situation where it is an over dependence on monetary policy when the problem is actually in the supply side?
RBI has only got monetary policy.

But its over depending on that instrument?
I do not agree, RBI as a duty to be ahead of the curve, RBI has to anticipate the inflationary situation and take measures. RBI in fact has adjusted the repo rate four times and CRR four times in order to contain inflation. Despite that inflation has moved up to 6.5 per cent, the reason is supply side, which RBI has no control over.

13 per cent or 14 per cent interest rates could hurt economic growth?
If they persist for a long period, they could hurt economic growth. That is why every effort is being made to moderate inflation in the medium-term, so that these high interest rates do not persist.

We are 4 per cent away from that era of 18 per cent interest rate and 3 per cent GDP growth; we are not very far away.
You are exaggerating. In 2000-2001, not in the distant past, when some of your friends were in government here, some of my friends were in government here, for 48 out of 52 weeks, inflation was over 6 per cent. In 22 of those weeks, it was over 7 per cent. In 12 of those weeks it was over 8 per cent.

But see what the economic growth rate then was as well?
Economic growth rate that time was 4.5 per cent. Therefore, they had low growth and high inflation and I wonder what question you put to them at that time.

That is in the past. but I am saying you could be seriously headed towards that situation again because you have got high interest rates, you have got high inflation only high growth and if that comes down the equation is the same?
Why do you assume that it will come down? I believe there is a structural shift in the growth cycle. It is not a cyclical shift, so does Raghuram Rajan (IMF economist), so does Steven Roche, who met me.

We believe there has been a structural shift, thanks to the engines of industry and services firing in all cylinders. We have a situation of high inflation today, not as high as it was in 2000-01, still much lower than 2000-01. We are therefore taking steps, fiscal monetary and supply side to moderate that inflation. If we succeed in moderating the inflation, interest rates will decline.

That was my question, how hard are you going to slam the breaks?
I can only answer in the language of prime minister. We need to moderate inflation without hurting growth. It is a fine balancing act but I am sure we can manage it.

You are saying the RBI is doing that fine balancing act?
RBI is consulting the government before taking any steps and it will be untruthful to me to say RBI does not consult the government. RBI is consulting the government fully and comprehensively.

You are comfortable with the policy stance that RBI has adopted?
The final policy stance adopted by RBI has the full support of the government; let me make that very clear to our viewers.

You will see a moderation in interest rates - that is the expectation and assessment of the finance minister.

Once inflation moderates, interest rates too will moderate.

Down to what level?
That depends on how quickly and to what level inflation moderates.

You must be having some assessment?
If inflation goes back to 4 per cent - 5 per cent, interest rates also will go back to where they were.

To about 8 per cent - 9 per cent, prime lending rates?
It should go back to at least between p per cent and 10 per cent.