labels: economy - general, interviews
We must learn to manage large cap account flows: FMnews
16 June 2007

Finance minister, P Chidambaram discussed a variety of issues ranging from the legislatures regarding CEOs'' salaries, capital account flows, issues related to agriculture, textiles, leather and insurance and banking sectors, in an exclusive interview with CNBC-TV18.

A CNBC-TV18 exclusive to domain-b:

align="left"> P ChidambaramWith respect to your book, what exudes in every word is your conviction about liberalisation, about reforms, your sincerity about the idea of market and reforms. If this is the real, Mr Chidambaram then you maybe a slightly unhappy man with your government. There are after all several places where the government has not really respected market or reforms or liberalisation.
I am not unhappy. When I took on this job, I knew that I was taking on a job in a coalition government and within days, we were given a common minimum programme.

>Somewhat unhappy; I have to work within the limits set for me; I have to play within the field. But I am confident that even if we implement the CMP as it is, much reform would have been done in India and then we can go forward from that.

>Some of the principles that you believe so sincerely in this book are thwarted by the government. For instance, the way in which cement prices were handled clearly against market forces or for that matter reservation in private sector or the thing about CEO salaries, all these are against the market principles that you believe?
You have got two - three things, which don''t fall in the same category. Take cement prices. It''s the very writers and articulators of market principles who also invented the word cartel, who also invented the word monopoly pricing, who also invented the word predatory pricing.

Therefore, there is nothing in my principles, which would warrant that I should not urge industry not to act like cartels and not to exercise predatory pricing. Take, for example, CEO salaries. When has the government suggested, and I am absolutely clear in my mind that the prime minister did not suggest that we should legislate on CEO salaries.

>All that he pointed out was there must be a reason and justification for CEO salaries and I think the refrain will be taken by others - shareholders meeting, stake holders meeting will ask why do CEOs deserve so much as salaries and that is very good.

>And we also know that we are living in a time when employment or getting quality employees is a problem?
We are not talking about middle management salaries. We entirely agree that professional people, skilled people, must be retained in this country. They must be paid near global salaries. We are talking about huge compensations to CEOs. We don''t intend to legislate. We are simply appealing to shareholders to ask the question, ''why does the CEO deserve so much?''

>In general would you say that since this book was largely written when you were not in our power, is it easy to be a liberal in the opposition and more difficult when you are in power?
No. Not necessarily. I sharply cut direct taxes when I was in power and in the years that I was not in power, I did not advocate a further cut in direct taxes.

>It''s when I am in power now that I have said there is scope for further deduction if compliance improves. So that proves the point that you can be a liberaliser even when in power.

>Let me come to a specific point about forex flows. There is a point where you are almost chiding Mr Jalan, asking him to be a little bold about forex flows and use of forex flows. Do you still advocate that forex reserves should be used?
Yes. And we are doing it.

>You wouldn''t think that it would increase money supply?
Not if it is spent outside the country and that''s what we are doing. We allow companies to take out capital, three times of net worth or so.

>We have liberalised imports, which means the money will be spent outside the country and we will even set up in the next two-three months the SPV that I promised, outside the country that will borrow from the Reserve Bank of India through the government of India and will co-finance ECBs for capital expenditure outside India.

>As long as the Forex is spent outside the country, it is not inflationary.

>You have really no discomfort at all with the kind of effects of liberalisation or capital account convertibility that you advocate in the book?
I have; but I think they are manageable. All the developed economies of the world are either fully convertible or nearly fully convertible; they manage their economies. So we aspire to be a developed country.

>We must learn to manage fully convertible or nearly fully convertible capital account.

>There was desperation in the tone of some of the speeches of reserve bankers and deputy governors on forex flows. In fact, one delivered just yesterday says how long can we manage to simply build up our reserves and sterilise them with MSS, which is the cost of the fiscal or the CRR, which is the cost of the banks. There is a feeling that this system can''t go on. Do you share that kind of desperation on the situation?
This question goes beyond the book but I will make an allowance to answer this one question.

>The point is that I don''t envy the job of the central bankers. But we must learn to manage large capital account flows and the only way to manage large inflows is to evolve a set of policies that will encourage large outflows too. If inflows and outflows are equally large, then it is manageable.

>Precisely at a time when these capital account convertibility measures are announced where you ask your citizens to invest abroad… to have capital savings abroad, precisely at that time, the money never goes out because India happens to be the best destination for those savings?
Not right. I know your views on the subject. But I think if we aspire to be a developed economy, we must learn to manage a nearly full capital account convertible economy. That is why the prime minister used the expression fuller capital account convertibility.

>You have said at one point on forex that too much of a good thing is never enough. Are you convinced that at this point of time, forex flows should not have any controls whatsoever? After all, a lot has flowed into real estate and has created its own asset price inflations. Are you sure that you are happy with the way forex flows are flowing in and there is no need to control them?
I am quite clear. We should not impose quantitative controls; that would be a retrograde step. You can''t say 16 years after liberalisation you will put quantitative controls on capital flows.

>Yes, you can make things a little more difficult. You can throw some sand in the wheels; but I think we must learn to manage the flows, not go back to the days of quantitative controls.

>Another statement of yours on record says at one point in time, that the finance minister is a playmaker and he really goads his team to go into reforms. But lately, your Budgets are more like an accountants budget, you don''t put too much of you policy or your vision into it?
That is not quite right; I sat down one day in Parliament and made a long list of Budget announcements in the four budgets and it ran into two pages. A number of initiatives are announced in the Budget after consulting the Prime Minister and with his consent. That is the way to trigger action.

I can give you number of examples of initiatives taken through the Budget. But the Budget is essentially a statement of account; that is what the Constitution says. So how can you neglect your basic duty of presenting a statement of account, income, and expenditure? But part A of the Budget speech is number of initiatives.

>One of the statements that you make in your book is that our forgotten fields… you accuse the government of the day of literally forgetting the agricultural sector and you enumerated a number of points; most important among them being higher prices for agricultural products. Is that something this government can really deliver because it probably leads to other problems of inflation?
Between 1999 and 2004, the minimum support price for wheat was increased by only about Rs50 - an average of Rs10 per quintal per year… in three years.

>We (the UPA) have increased it by Rs160 or so. So we have given more prices to the farmers. But we have not be yet able to convince our consumers; something, which I write about in the book, that consumers in India must be prepared to pay Rs1 per kilo or per litre to the farmer if farming must remain a remunerative activity.

>Nobody thinks twice about buying a bottle of mineral water for Rs10 or Rs12, but if price of wheat goes up by Rs1 or price of sugar goes up by Rs1, the consuming class complaints and because we are caught between rock and a hard place, we cannot do more for our farmers.

>Let''s also remember that the aggregate measure of support or AMS to farmers in India is still negative, which means the farming community, the producing community is subsidising the consuming class. We need to pay our farmers more. But before we do that, we must convince our consuming class that it is in our self-interest to keep farming a viable and remunerative activity in India. We have not succeeded in that yet.

>In the next two years you think that some such headway will be made?
We are trying to tell our people that otherwise, we will be dependent on imports and I have argued passionately; in the Planning Commission, the NDC (national development council), a country as large as India simply cannot be dependent on imports. We must be self-sufficient or at least nearly self-sufficient in food grains, oil seeds and pulses. There is no other way for a large country.

>You point out a puzzling arithmetic which is probably bedeviling the economy that agriculture employes, about 70 per cent of the population but it contributes only 25 per cent of the GDP. That was in 2002-2003 when you were writing; the ratio has only gotten worse. Would not that be an indication that your government also has not done its part?
It''s inevitable; the share of agriculture in the GDP will decline because agriculture cannot grow at 9 or 10 per cent. At best, it can grow at 4 per cent a year average. So as a proportion, it will decline, that is simply basic school level arithmetic.

>What must follow is that we should employ fewer people?
What must therefore follow is, we must create more job opportunities outside agriculture.

>So what we are trying to do is, since we cannot create that many jobs in services or manufacturing immediately, we are trying to create more non-farm or off-farm activity like poultry, piggery, dairy and other activities like fishery, which will supplement on- farm activity.

>But in the long run, the answer is to wean a large proportion of the agricultural work force or at least their children to the services sector and to the manufacturing sector. The best employer will be the services sector like in any other country in the world.

>In that light, you made a statement saying ask Narayan Murthy to promote the Taj… that was the advice you gave. How did you come with such out-of-the-box idea?
I would. If I had the power to do it, I would. I would tell him, this is the statement you made and now I am giving you the chance to promote the Taj and bring so many tourists to the Taj.

>But you must give him authority for that. We must give him authority over a land area. Say, within a 20 km radius of the Taj, you must give him authority to acquire or purchase land, to put up the hotels and the resorts to attract the honeymooning couples or those who are spending their wedding anniversary. Please remember, that is in the context of enticing people to spend their wedding anniversary.

If you give a challenging task like that, I am sure Narayan Murthy or someone like him should be able to accept the challenge and deliver. Mr Shreedharan is delivering; so why should anyone not deliver the Taj to us.

>My point is, this is the out-of-the-box idea. But we don''t see so many such out-of-the -box ideas or any such ideas implemented even in your tenure. You think you will be able to do that in the next two years?
What is the out-of-the-box idea? Something, which is unconventional. There are numbers of unconventional things that have been done. Except that, since so much has been written about or talked about it, people don''t notice it.

>Now when this government came into office, there was not a hope on earth by anyone that the FRBM (fiscal responsibility Budget management) Act would be implemented. We notified that within weeks after coming into office. Not only that, we are sticking to the law.

>We will bring the fiscal deficit down to below 3 per cent and we will wipe out the revenue deficit. Now you can call that an out-of-the-box idea or you can call that a very conventional idea.

>The point is that it has been implemented is being implemented. I can give you any number of other things. All this has not happened by accident - 7.5 per cent, 9 per cent, 9.4 per cent. Notwithstanding what some scribes will say, this is not an accident.

>The next big issue for the Indian economy is the infrastructure. We speak to a lot of experts on CNBC-TV18 and one of the statements they make, is that there is no problem with the Indian private sector; got a huge number of micro stories, not 10 companies, not 20 companies; 200 companies, which will qualify for global standards of corporate governance, accounting standards, the works.

>That is why FII gets attracted. But FDI depends on infrastructure and depends on the consistency of government policy delivery. And you have repeatedly chided prior governments for not being able to be consistent on their FDI policy. Would you say that your government has delivered on that issue?
We have not gone back on any FDI policy statement that we have made. In fact, the effort is to take it forward. Last year, we got $16 billion of FDI. Is that an accident? Only a few years ago, we were talking about crossing $10 billion.

>But when we actually got $16 billion, nobody even blinked, not even raising the eyebrow. The fact is $16 billion flowed in last year and what my colleague tells me is, that this year also we will get the same amount of FDI.

>I think he said $30 billion.

>What is wrong with our infrastructure is, not that we are not adding to infrastructure, not that we are not adding to capacity, but what we add still falls short of what we need and the pace at which we add, still falls short of the pace at which we need to add.
Suppose we had to build 20km of national highway a day and we average say 11km, then there is a shortage of 9km a day.

>Suppose we need to build a power plant in 24 months and we take 36 months to do that. For the 12 months, that power is not available. We are adding to infrastructure capacity. But I concede the point, we are not adding as much as we should nor are we adding at the pace at which we should.

>Any particular power because you have devoted a whole article to shortfall in power and shortsighted policies followed by state governments. Would you not say that that charge can be applied to the UPA government?
Yes it can. In terms of delivering on the power sector, 8th plan, 9th plan figures, which are given, show that we did not even reach 50 per cent of the planned target. Likewise in the 10th plan as against a target of about 41,000 mega watts we added only 21,200 megawatts just a little over 50 per cent.

>The charge will apply to the present government, three years of this government and two years of the previous government, so we share the blame. That''s a classic example of our inability to deliver what we have promised on the power sector. China adds 100,000 MW every year and our goal for the entire 11th Plan is only 78,000 MW and, therefore, we need to learn from other countries.

>Do you think that in the remaining two years some progress can be made on that your views on FDI in insurance, or FDI in telecom or thoughts that you hold dear to your heart?
FDI In telecom has gone through. I am confident we convinced the allies that the reason why we are asking for an increase in the FDI cap is not because of any ideological predisposition, simply that these companies require more capital and now if they tell me another way to raise this capital, then I will be quite happy to listen to those ideas.

The point is that capital brings the technology, the product, brings the new systems, which are required in insurance. We must remember that India is one of the most under-insured countries in the world.

>Overwhelming number of Indians do not know of any insurance product - life, health, home, fire, theft, riot, calamity, motor vehicle; no insurance at all. We are the most under-insured country in the world and this requires massive capital.

>And the only way to bring in capital is Indian capital and foreign capital, in more or less equal measure. It will lift the burden on the Indian entrepreneur, it will impose the burden on foreign entrepreneur; but control will still be in Indian hands because Indians will still control 51 per cent.

>You are convincing the convinced.

>No, I am trying to convince my viewer today and I hope that I will be able to convince our allies too.

>Couple of other things which you hold dear to your heart - for instance banking consolidation and the income tax reform bill which one thought would be underway; can you set some goals, do you think these two goals you will see some progress made on these?
The income tax code will be introduced before the end of the current calendar year. In fact I have already spent nearly 15 hours on drafting the code and they are asking me to spare another 7-8 hours.

>But the code will be introduced before the end of the calendar year then of course it has to go through the legislative process - committee, Parliament, law ministry, etc.

>Regarding banking consolidation we are not forcing anyone to consolidate. I am only pointing out that the world over; consolidation is taking place including in China. What does that mean? It means Indian banks, which are relatively small-sized today will become even more small-sized relatively and that means they will be cut out of action.

>They will not be able to fund major mergers, acquisitions, takeovers, restructuring. They will be cut out of action. The only way therefore, is to consolidate first among banks in India and then look for opportunities to acquire banks abroad. But we are not going to force anyone to do that. I am still confident that managements and unions of Bank A and Bank B will voluntarily come forward some day and say, we wish to consolidate.

>The manner in which the forex flows have come in and the manner in which the rupee has probably hurt a lot of commoditised exporters, do you think there will be some kind of a rethink on the part of the government on helping certain communities that have been deeply hurt?
Yes, textiles, leathers. They have met me and I said, we would find ways and means in which we can lend them a helping hand. But in the medium- to long-run, they would have to become more efficient more competitive; price alone is not the factor by which you acquire and secure export markets.

You do that by scales, by delivery, by quality, by design, by brand equity and there are other hosts of factors, which have to play. In fact, what they told me was not that they cannot adjust to the sharp rupee appreciation it just it happens too sharply and too quickly.

>If this appreciation, say between January and May, happens say, over 18 months, they could have adjusted. I think there is force in what they say and we said we will look into this.

>But this entire collapsing of the rupee surge in three - four months was primarily because the flows at that time were so severe or so huge and they don''t show any signs of flagging at all. So do you think that you will have a rethink on hedge funds? Will you start scaling or spacing out the kind of liberalisation that your are thinking of?
Your idea of liberalisation is very different. Liberalisation does not mean gong back to quantitative controls. Liberalisation means managing a changed situation. The yen has moved from 130 to 98 per dollar, today the euro is 1.3 to a dollar. Germany is still a large exporter — the largest exporter in the world.

>I am not saying that we have all the advantages of Japanese and German exporters, we do not have. My sympathies are with Indian exporters. But the point is while we can lend a helping hand for the short term; in the long term, Indian industry including Indian exporters must prepare themselves for competing in the export market, not only on price but on other factors.

>The rupee will appreciate; the rupee will depreciate. In 2005, many of our rivals'' currencies appreciated. They didn''t lose their market shares. Relative to 2005, our currency has appreciated but if you go back to 2001 there is hardly any relative change between our currency and rival exporter''s currency. Lets not get into details — I recognise the fact that the sharp appreciation may have caused some discomfiture to our exporters and we said we would look into it.






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We must learn to manage large cap account flows: FM