labels: finance - general, economy - general, markets - general
P-Notes to stay for now: Chidambaramnews
23 September 2006

The International Monetary Fund''s decision to give some countries higher quotas is questionable; there is no direct connection between participatory notes and fuller capital account convertibility; and too many special economic zones could hurt the government''s revenues.

Finance minister P Chidambaram addresses all such important global and domestic economic issues. He bares his heart and mind in this exclusive interview with CNBC''s Maura Fogarty on the sidelines of the IMF and World Bank conference in Singapore.

CNBC shares with domain-b its exclusive interview with Chidambaram:

India at least this time around isn''t seeing any large increase in its IMF quota. What happened to this reform of the IMF voting issue? No, we have made our positions quite clear. We are not opposed to increasing the quota of any underrepresented country. Therefore, we have no quarrel with China, Korea, Mexico, Turkey getting small increases. But we think that the exercise was purposeless.

The reforms should have taken place first, the new formula should have been constructed and on the basis of the new formula, whichever underrepresented country deserved an increase should have been given an increase.

This is tokenism and doesn''t really assure that the second stage will go through. Anyway we have expressed our view. We have said all right the vote is behind us but the argument is still valid and therefore we will work with the management.

The countries have supported the resolution but we will hold them to their promise that they will complete the reform process in two years and have a formula, which reflects the current economic rate and current economic realities of countries in the 21st century and not in the early 20th century.

How confident are you that this new formula will be achieved? To be candid at this moment I am not very confident. But I have been assured by the management of IMF; I have been assured by Secretary of Treasury and Chancellor Gordon Brown that they will push through the reform in two years.

I have promised to cooperate, I am not going to sulk and stay away. I am going to involve myself even more with the discussion and in the construction of a new formula. So let''s see what happens.

What''s a stake for India? Plenty. In MER terms we are ranked ten or eleven in the world. Our GDP in PPP terms is ranked number four and yet we do not get an increase in quota. How is that acceptable?

You have been saying that you see growth this year around 8 per cent. With oil prices coming down, are you revising your forecast anywhere or are you more optimistic? No, at the moment I would like to stick to 8 per cent although IMF''s economic councillor placed it at 8.3 per cent. That has in fact raised expectations in India. We will have to do better to meet that standard. At the moment I would stick to my forecast of 8 per cent.

How sensitive is the Indian economy then to some of these global inflationary pressure that we have been seeing in other regional economies? Only to the extent that interest rates harden, if interest rates in the rest of the world harden then there could be a reverse capital flow or there could be a slow down in capital flows into India.

Secondly, it will also have a sympathetic effect on interest rates in India, India''s interest rates also will harden and that means investments may get slowed down. So we are not very happy about interest rates hardening, although we recognize that the rise in interest rates is inevitable if one has to dampen inflationary expectations.

Is there a room for interest rates to move higher in India given the inflationary pressures? I hope not. Inflation now is 4.78. It is expected to hover around 4.5 for another few months but there is ample liquidity in the system. In the reverse repo, the Reserve Bank of India, which is the central bank absorbs as much as Rs40,000-Rs50,000 crore that is about Rs400,000 million in terms of excess liquidity. But there is ample liquidity in the market and therefore I would be happy if interest rates don''t harden.

Do you think that given we have seen how oil prices have fallen in the last several weeks, there could be room for the Central Bank of India to either pause or possibly even cut rates? Not in the Indian context because unless we have passed through fully the oil price increase, the reduction in oil prices does not help us. It only means that the subsidy burden comes down.

We didn''t pass through the full oil price to our consumers, therefore $4-5 drop in oil prices doest not really help us to a great extent. It only reduces the burden of the subsidy marginally.

how much pressure is the oil subsidy putting on the fiscal situation in India given that you issue oil bonds to help make up the revenue shortfall that these oil companies have faced? Oil bonds are cashless transfers although the debt is postponed. It''s passed on to the next government or the next generation. The bulk of the subsidies borne by the national oil companies and the upstream oil producing company like ONGC is borne by the exchequer.

So to the extent that money is not available for investment, I have to borrow for investment. But there is no other way. We cannot in a country like India, where there is a large number of poor people simply pass through the oil price increase completely, although orthodox economist will say you should. But it''s practically not possible.

Some economists have expressed concern about the current government''s ability to meet some of the fiscal and revenue deficit targets that have been put in place are you concerned at all? They are wrong, we have got an FRBM (The Fiscal Responsibility and Budget Management) Act in place and until now we are meeting the FRBM targets and in the current year I am committed to reduce the fiscal deficit by 0.3 per cent and the revenue deficit by 0.5 per cent and we will stick to that target, we will achieve that target this year.

If we can move onto a few more reform-oriented issues. One of the big issues revolve around is the insurance sector and the possibility of raising foreign ownership limits in the insurance sector to around 49 per cent, is this going to happen? We have promised to introduce a comprehensive law in insurance to amend our insurance laws. One of the clauses on that bill will be to raise the cap from 26 per cent to 49 per cent. That is, of course, a contentious issue.

We will do our best to mobilize parliamentary support for that clause. What parliament will do I cannot say, but this is a comprehensive law to amend the insurance laws.

How confident are you that Parliament will pass that? How could I say? We have a majority in parliament and if all our supporters vote for us, we should pass the bill.

What is the finance ministry stand on whether ''participatory notes'' be banned and sort of done away with completely? We had a committee under Dr Ashok Lahiri, which recommended that PNs can be continued subject to stringent regulation. The Government accepted that report. There was a minority view in that report, so that is a position that prevails today.

Then we had the committee on fuller capital account convertibility and that committee recommended that PN should be abolished but there is a minority view there too. So we have said that while we examine the new committee''s report, the present status quo will continue namely that PNs will continue to be allowed in India. That''s the position as of today.

How does that affect the fuller account convertibility in India? Would it slow down the process eventually? In my view, this was the issue peripheral to the mandate of the convertibility committee. I don''t think whether allowing PNs or banning PNs has any direct connection with convertibility. I think while reporting on convertibility they have just taken the opportunity to slip in a chapter on PNs but I think it is peripheral to the main mandate.

Another hot topic is the issue of special economic zones, one of the biggest initiatives India has ever launched. There are some concerns about the revenue shortfall you are going to face by setting this up, how are you balancing revenue shortfall versus potential for investment in setting this up? We don''t yet know, we have just approved 150 special economic zones. I think another 112 or so are in the final stages and another 150 are waiting in the wings. Only four have become operational, three of them are in the IT sector, which already enjoys tax benefits.

So we will have to wait and see how many of these zones for which in principle approval has been granted will obtain final approval and how many of them will be operationalised.

There are issues of land, environment and other issues which they have to negotiate but one has to wait and see. Of course, as finance minister I am naturally concerned about any potential loss of revenue and therefore I have sounded a note of caution about proliferation of SEZs.

We are not against SEZs, I am a party to the government decision, which adopted the bill and the bill was passed by parliament but I am concerned about the proliferation of SEZs and therefore we have agreed to review the SEZ policy after certain number of SEZs of become operational.

I would like to ask you about the issue of divestment that was supposed to be a large way of funding a lot of social programmes in India. With divestment pretty much at a standstill right now, where do you expect to find the money? The premise is not right. We were not going to use disinvestments funds for directly funding social sector projects.

We are going to put that money in a corpus fund and only the return from that fund was to be deployed for social sector. So it''s not that money would have been directly available and assuming a return of about 8-9 per cent, it''s only an 8-9 per cent return from the fund that would have been available.

That''s a very small amount compared to the size of the Budget. But I do not think that has affected the allocations to the social sector but I would like to use that extra money for social sector. That, of course, has been put on hold now, pending a review. But I am told that the review will take place in next few weeks.

It is one of the issues though that foreign investor talk about when they talk about India needing to open up its sectors a lot more and their concerns that the India has sort of stalled some of these economic reforms, what do you say? Not correct, what sectors are they talking about? Barring five or six sectors all the sectors are open to foreign direct investment. Mining, petroleum, road construction, sea ports, air ports, telecom, power all of them are open to foreign direct investment.

There are only four or five sectors- atomic energy, railway, in a limited way; there are caps in insurance and banking. But I think that we are evolving a model where domestic private sector, foreign private sector and the public sector can compete with each other.

I don''t think we are not open to the FDI, if someone can tell me which sector is close to FDI then perhaps I can respond better and tell him when that will be opened but there are hardly four or five sectors, which are closed to foreign direct investment.

The issue of the banking sector- foreign banks still face a cap, an ownership cap there and do not have the same market access there as they would have say for example in Singapore? Why is Singapore always the right model for banking? Our banking system is one of the strongest in the world. We have a legacy of a strong public sector banking system and most people in India even today repose great faith in public sector banks. So we have said that public sector banks will continue.

Foreign banks are allowed to come to India in one of three ways - either branches or wholly on subsidiary or acquiring stakes in private sector banks. Now they are welcome to open branches, we allow branches to them; many of them have opened a large number of branches.

We do better than our obligation under WTO or they can come through WOS route. The third route says if you want to acquire stake in a bank, one can acquire up to 5 per cent. If one wishes to acquire more than 5 per cent, one will have to get regulatory approval but that''s the law in every country.

If one wants to acquire a stake beyond the threshold, one will have to acquire regulatory approval. So they can apply for regulatory approval and if are they found suitable, regulatory approval will be granted. I do not think anyone has actually applied to acquire more than 5 per cent in a private sector bank. I know of no such pending application.

I want to ask you about the issue of the WTO and multilateral trade talks that has been rallying cry for the IMF at this years meeting, what role do the finance ministers in the IMF play in trying to get the negotiators back to table again and to get the Doha round moving? I don''t think that finance ministers at an IMF or World Bank meeting play any decisive role as far as the Doha round is concerned. Back home in their own cabinet meetings when the commerce minister brings a proposal, the finance minister as a member of the cabinet perhaps influences that decision to some extent by taking part in the discussion.

But from India''s point of view, we have said this repeatedly and I say this again unless the European Union and the United States resolve between themselves how to address the issue of removing trade distorting agricultural subsidies, we do not see how Doha round can progress.

As and when the issue of trade distorting agricultural subsidies is addressed in a satisfactory manner, surely they can expect the countries like India to make a much more attractive offer in services and in non-agricultural market access.

If they do so, India will indeed be willing to make concession in services? Not concessions, make a better offer. These are not concessions. These are offers and acceptances. We are willing to make a better offer but surely the developed countries in the world cannot subsidise their agriculture by several hundred percents and yet expect us to offer market access.

I was talking to the minister from Switzerland, who said agriculture is a tricky issue for her. I said its tricky for me too, what is the percentage of your population engaged in agriculture and she said 2 per cent. I said what is the proportion of GDP contribute to the agriculture, she said 1 per cent.

I said if 2 per cent and 1 per cent can make it very difficult for you, imagine in my country nearly 60 per cent of the population is directly engaged in agriculture. That''s not only their livelihood, that''s the only the way of life they know and they contribute about 17 per cent to18 per cent to GDP. How much more difficult it is for us? I think one have to keep a sense of proportion when discussing these issues.

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P-Notes to stay for now: Chidambaram