Full Interview: Union Finance Minister Nirmala Sitharaman On GST, Taxation, Privatisation, Infrastructure Push And Reforms

Finance Minister Nirmala Sitharaman, whose stewardship of this most important ministry has been impacted negatively by Covid not once but twice in the last 18 months, is not the type to make excuses just because the going is tough. After launching a plethora of reforms – from tax cuts in 2019 to bank mergers to the telecom rescue package, and the withdrawal of the retrospective tax, to name just a few - she is limbering for the next big challenge.

It’s about helping the economy rediscover its animal spirits, for which boosting government capital expenditure is key. “We are on a spending offensive,” she says.

Her plate of challenges is already overflowing with massive privatisation (Air India, LIC) and asset monetisation targets to oversee and deliver, some of which have to happen by the time of the next budget that’s due on 1 February, barely four months away.

It was against this backdrop that Sitharaman gave an extensive interview to R Jagannathan and Tushar Gupta of Swarajya.

Excerpts from the over hour-long-interview:

Swarajya: What are you challenges in the next budget?

Sitharaman: It is too early to say, but let’s leave aside the second part of the question (about the budget challenges). I can tell you what are the challenges now. It is to make sure that the BE (budget estimate) figures on capex (capital expenditure) are met because we gave a 34 percent hike (over last year). We have a challenge on that because the budget came in February, and by April we had the Covid second wave. Many government departments had a big role to play (in spending that capex). Although I was monitoring spends every month, and will be monitoring every month even now – the PM asked us in cabinet to make sure that the targets are achieved – but ground realities in April and May were different. As a result, what should have happened in the first quarter did not happen.

In the second quarter, everybody was asked to sit up and check whether what was missed in the first quarter could be made up in the second. I am not sure about that. As the second quarter ends (in September), it means half the year is over.

But now, we are pushing as hard as we can. I am hopeful that in the third quarter (October-December 2021) we will see a good run. We hope we will be able to make up for what we lost in the first two quarters. So, that’s my first challenge: to see that the capex shown in the BE can be undertaken.

The second challenge is less of a challenge because vaccination is going on fast, and with that confidence, businesses are more relaxed and recruitments are catching up. There is a change in the pay pact (structure) from what it was before. There are more higher-end jobs and not so much for lower-end ones compared to 2019. The narrative on employment has changed, and we have to see how it will play out. But recruitments have started.

In rural areas, demand for MGNREGA is not as heavy as it was before. Does that mean people are sitting there but not doing things? No. People are moving back (to cities, where the jobs are), but some of the industries I have been talking to say they are not all going back to their old employers. They are now bargaining to seek better pay packets with new skills and moving to different employers who need those skills. Their old employers are still not worried because they think they are getting new and younger people who are partly skilled and are willing to invest in them as they are revamping their business models. A lot of them (businesses) are now without hesitation going for robotics and different kinds of artificial intelligence (AI), which is helping them.

A whole lot of churn (in the jobs and skills market) has now gone to the ground level. The churn is happening so rapidly that it is a challenge for us to document it and understand the profiles of workers and the skillsets, and where the flow is going and where it is not.

All these are (essential) inputs for what we can do in the budget. Unless these churns are captured with the skill profiles, and we can understand how businesses are resetting their models, the next budget cannot be meaningful. So, I will definitely spend time on (understanding) these trends. I am meeting not just big businesses, but also small ones.

Swarajya: Are small and medium businesses able to make this transition?

In one of my recent visits to Tamil Nadu, I had an interaction with Ficci and CII (south zone), and some micro and nano businesses also came to meet me. They said quite a few things, and one of the things they said was how they were tied to one big mother industry. They are trying to see how they can readjust if that big customer is under threat.

I saw a recent newspaper report which said one of the big auto companies was closing down operations, and its suppliers were asking for ways in which they came be compensated or helped (for loss of business), though I am not sure compensated is the right word here. Maybe, many other groups of (ancillaries) that are dependent on one large customer are now going to rapidly readjust.

All this is happening fast, but simultaneously many more industries and their supplier ecosystems are moving in from elsewhere and coming to India. Their demand is also for local suppliers. How much and how fast these industries, not only in the south but all over India, can link up with the new companies which are coming into India (is worth observing).

Swarajya: Is the China plus one global resetting of supply chains, and the government of India’s own production-linked incentive (PLI) scheme to attract manufacturing to India helping?

Actually, it is happening. In fact, there are many sectors where PLI is not offered but even they are being impacted by investments from abroad.

Swarajya: Your direct tax revenues are buoyant. Your advance tax collections in the first and second quarters are keeping pace with budget numbers, something that is not usually noticed in the first half of the fiscal year. But there seems to be a reluctance to spend.

If I am hesitant to spend, why would I monitor spending on capex? We are almost on an offensive, saying go, go spend. Capital expenditure is literally the priority, but there have been two main – justifiable - constraints. One is the constraint of Covid itself, which made a lot of people hesitant. And now, of course, that hesitancy is coming down due to vaccination and the receding of the second wave.

But the second constraint is the absorption capacity in some areas – on roads it is not a problem and capex is moving. But you will recall that we have put an emphasis on building health infrastructure in the budget. Health infrastructure involves both the Centre and states as the hospitals are to be located in states. We have also said that this (new healthcare infrastructure) can go down to the block level, which is even further down. If money has to be pushed to the level of blocks, a lot of simultaneous activity has to happen at the local panchayat level, the municipal level, and the state level. Every state is keen and we are also trying to identify some areas through our aspirational districts programme.

From states like Bihar, we have some active engagement happening. If I can bring in a comparison, if in Tamil Nadu there are two districts that are aspirational, and Andhra also two districts, Bihar has 12-13 aspirational districts. We have spoken to the MPs from those districts - irrespective of party affiliations – and asked them to identify Tier-2 or Tier-3 towns where hospital capacities have to be ramped up. We are helping in two ways: if it is in the private sector, we are giving viability gap funding; if it is the public sector, we are ready to invest and ramp up capacities in ICUs and beds.

This takes time. But because I have interest in the kind of work I do I have been engaging with states, asking them to tell me which are those districts that want private or public hospitals. I will push banks for viability gap funding, and I will give the resources for government hospitals.

Swarajya: Is coordination with the health ministry happening on this?

Absolutely. I requested the health ministry to not mind this because I want things happening faster. I did this in Tripura, and in UP the CM is already doing it. He himself is coming up with a lot of requests, I am dealing with Bihar too in that way. I will be visiting Assam soon. So, yes, we are pushing on capex, not just with big ministries like heavy industry, defence, railways and home, but also engaging with states to make sure that that aspect of the budget estimate also gets pushed. Absorption is an issue not because they can’t do it, but because it has to percolate down (to the block level).

Swarajya: Will the ramp-up in health spending sustain after this year, after Covid?

I would think so, even leaving the vaccination (spending) aside, because we have provided for health infrastructure. Many of them may not be in a position to complete all the programmes they have started this year, and so this emphasis on health will continue.

Swarajya: Your last two budgets were overtaken by two Covid waves. Can you insulate the next budget from a possible third wave?

I think the emphasis on infrastructure, whether it is oxygen, ICUs, or preparing for paediatric needs if they arise, will help. As an MP (from Karnataka), I had requested that all my residual MPLADS (Member of Parliament Local Area Development Scheme) funds be spent on one of the big government hospitals in Bengaluru in Jayanagar. I have also requested two or three companies to give their CSR (corporate social responsibility) funds and banks to help ramp up the children’s ward there. Many MPs have taken up that kind of initiative to strengthen healthcare infrastructure. But it's not just MPs. There is money to ramp up infrastructure, and if - god forbid – there is a third wave, we will be in a better position than before.

Also, during the second wave, many experts felt that the best way to keep the economy on the rails was to localise any (negative) effects of Covid. This method has worked during the second wave – an option not open to us in the first wave (when we had practically no infrastructure to deal with the pandemic).

Part 2: Privatisation and asset monetisation

Swarajya: Manmohan Singh famously said that he does not lose any sleep over what happens in the stock markets. As someone who has a large disinvestment agenda, isn’t it necessary to speed things up when the market’s appetite for equity is good? Privatisation seems to be going at a snail’s pace…

I don’t think it is going at a snail’s pace. Privatisation and disinvestment are major, major decisions. After the decision is taken, the process itself involves a lot of due diligence. I am not pointing a finger at any earlier exercise but you know both at the bureaucracy level and with banks, there is fear. People (bankers) with this in mind were slow on credit flows. Now bankers have been given reasonable support so that credit flows. But in the bureaucracy, there is the consciousness that they should be ticking every box clearly. And which is good sense. This government has never violated any norm or called the banks to give money to my chacha or bhatija. Similarly, we have not decided on privatisation or disinvestment with any other ulterior motive. The only motives are 'sell because we cannot run (a company), or sell because it (the public sector company) is not in a position to sustain'.

So, it is a policy-driven approach with no element of discretion.

The bureaucracy understands this, but they want to be sure that from their side every box is properly ticked. Which is not something we want to discourage. But I am monitoring it, so that it is not forever (about) box-ticking. It (the privatisation agenda) is moving.

I don’t want to name the companies on the block, or promise that this will happen now and this will happen in November. But we are clear that we will do a clear, fair, and transparent job.

Memories of last two years, when it could not happen, will linger, and perceptions of those who are looking at India’s disinvestment programme and saying it is taking forever, may be there. But I can tell you it is actually moving forward. Otherwise, why would you have financial bids coming for Air India…why would you have the LIC IPO, for which we have appointed 10 major advisors from the financial and legal sector, all working together?

Swarajya: Will the LIC IPO happen this fiscal?

I hope. But Air India should happen, since financial bids are already done. We have done the whole process with diligence in mind and transparently.

Swarajya: What about privatisation of the others, BPCL, Concor, Shipping Corporation?

They will all go on, but I will not name them or give a timeframe. But everything is on course.

Swarajya: You have announced Rs 6 lakh crore of asset monetisation, of which Rs 80,000-85,000 crore is supposed to happen this fiscal…

Again, today’s government is not muddling through. It states the policy and also gives the framework in which it is going to happen. Professionals are engaged so that it happens as per a timeline. Each ministry will have to sit with Niti Aayog for the specifics (of their asset monetisation plans) which are unique to them. There cannot be one way of monetising assets for all.

But it is one thing for us to clearly give a framework and announce a plan. After that, you should understand that it has to go through a process. Now, just because disinvestments did not happen (as per announcements) in the past, to carry the same memory everywhere may not be fair. You have to give it space, but it won’t take forever. We have done so much homework pre-announcement that, given due time, it will happen.

Swarajya: Will Rs 80,000-85,000 crore monetisation happen this year?

That was the assessment of Niti Aayog, but each ministry will have to assess for each asset in the segment to which they belong. They will have to reshuffle their priorities and then move ahead.

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Swarajya: What happens after monetisation? Who gets the money?

Each ministry will have its own infrastructure ramp-up plans. If it is a public sector enterprise whose accounts are separate from the consolidated fund of India (CFI), the money goes to them. But in other cases, the money will come to the CFI.

Swarajya: VSNL was privatised nearly 18 years ago, but the land parcels are still to be monetised.

You need an insight on how this operates. Assume it is DIPAM (Department of Investment Promotion and Asset Management) which is handling it. The land may be in one part of the country, one piece in Tumkur, one in Salem, a third piece in Balasore and a fourth in Guwahati. DIPAM is a small department and it will have to deploy a set of people to go to each place, assess land value there, check on valuation of neighbouring lands, the rates fixed by the local government, etc. Then they have to figure out how all these four or five land assets are to be sold in one go. Maybe they will come to a conclusion that it cannot happen in one go.

The process is complex if pieces have to be sold separately. The value, once fixed, should be justifiable for the CAG can ask us how did you fix the price as Rs 235 per sq metre instead of Rs 237? Ultimately, it is public money. You want to be fair and transparent.

Swarajya: The bad bank idea has finally taken off. How fast will the bad loans be settled?

That is why it is being done in two tranches. The first lot is to sell and resolve Rs 90,000 crore worth of bad loans. Banks have already identified the assets for which they have provisioned over the last several years and will get 15 per cent in cash upfront. The remaining 85 per cent will come after the asset value is realised. It will move fast, for banks’ interest lies in it.

The formulation is in the fee structure which these companies will have to pay. The sooner you clear it (i.e., sell the asset), the lesser the fee. The longer you keep it, the more fees you keep paying. It has been thought through very well by the bankers themselves. The government’s and Reserve Bank’s inputs were taken. It should work for the banks are happy to get rid of these assets while being sure that they get money for those assets.

Swarajya: What has been the response internally to bank mergers?

I will credit bank managements (for the smooth process of mergers). It was announced just before corona, when there were demands on banks from the government side. We wanted them to reach out to bank business correspondents, credit money into their accounts, and keep many branches open so that people had access to their savings. Even without the vaccine, they (bankers) were exposing themselves to risks but they serviced people. But even as this was happening, the mergers were not left by the wayside. I have not heard any substantial complaints from customers, though some customers must have faced problems. The mergers were largely managed well.

Swarajya: Your bill to privatise general insurance has passed parliament, but the law to privatise banks is still stuck. When will this happen?

Insurance is part of our strategic sectors. We want to maintain a certain minimum presence for general insurance, life insurance and underwriting. If in those three areas there is an excess (beynod strategic needs), they can be carved out and privatised.

Swarajya: Will some general insurers be merged?

We have neither given the idea up, nor are pursuing it actively.

Swarajya: What is the timeline for getting the bank privatisation bill moving?

Look at it the other way. How much work was done by the ministry by convincing the cabinet and getting various bills that are important to the common man to parliament. Like the DICGC (Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021). Customers have to be given back their money within 90 days of a bank (getting into trouble). That happens in November. Even on this (pro-depositor) legislation, the opposition didn’t engage.

We also brought in amendments to company law, including limited liability partnerships (LLPs).

Every start-up says treat us more favourably; every partnership says treat us more favourably because partnerships are very flexible, companies are very regulated. The LLP law will benefit every start-up. We did extensive consultations before we came up with the bill but even on that the opposition did not cooperate. At the end of the day, the citizen is waiting and looking to the government and saying, give me relief.

Part 3: GST regime and the reforms that are being worked on related to that.

Swarajya: What is the status on Goods and Services Tax (GST) reform? Especially on rate structures and compensation to states?

States have very clearly shown an interest in discussing the rationalisation of rates. GST is heading for a good stabilisation period. In the last two or three meetings of the GST Council, rate rationalisation was consciously not taken up, particularly the correction of inverted rate structures. Many states said we agree, but this may not be the appropriate time for this. Nobody questioned why there should be a correction. They understand that inversion costs a lot to the exchequer, where you are refunding more than collecting. So, the principle is agreed, and on some items, like mobile phones, they decided to go ahead. They have agreed to look at footwear and textiles. If there are any inputs coming from affected parties or sectors, we will look at them…So on the question of correction, the GST council is one, there are no differences. It is only a question of timing the correction.

On rate slabs, we have not come to any view. Should there be only one slab, should slabs be reduced to two, no discussion has happened on that because we want to first get the corrections done.

Then there is the question of compensation to states (who have been promised 14 percent annual increases in revenues till June 2022). This is being paid with borrowed money, which, by law, has to be paid for from the cess. The Council extended the cess period to 2026. The cess collected from 2022 to 2026 will go to pay back borrowed money and servicing the interest.

Swarajya: GST revenues seem be steadying well above Rs 1 lakh crore now…

We have plugged loopholes where false input tax credits were claimed and the system was being gamed. Some were collecting refunds and disappearing. We have extensively used big data and AI and found trails going to the last point. Every day you will find in newspaper stories saying that Rs 320 crore has been found, Rs 260 crore found, and even Rs 800 crore. There are some one-room operations with no activity, who were just collecting refunds and disappearing. We are benefitting by closing the loopholes.

Swarajya: Will matching invoices be the ultimate way to plug loopholes?

That is a matter on which a lot of discussion has happened. Let us see how the Council sees it.

Swarajya: Will compensation to states beyond June 2022 be discussed?

The existing law is what we have explained, all of them (i.e., states) are aware…But with revenues going up, many of the states, particularly the north-eastern ones, are getting the 14 percent growth. Now, with monthly revenues going up, we are compensating as per the formula.

Swarajya: Will the Cairn and other retrospective tax cases be settled this year? Have discussions happened with the companies?

Yes, it (should happen). They (the companies involved in litigation) do consult to understand how the law is framed and how it will be implemented. We hardwired quite a few things into the law itself so that parliament should know every aspect of it. We made it a part of the law itself without putting it all in subordinate legislation. Yes, there will be subordinate legislation, but largely it is all in the act itself. Yes, people are showing interest (in settling the cases) and discussing with our officials. The Department of Revenue has a cell dealing with it.

Swarajya: Can you speak about the account aggregators reform, which will make small customers access credit by releasing their private data?

On the one hand, the data privacy bill is happening. But much before that, and without waiting for it, the department of financial services and the Reserve Bank came up with this idea of account aggregators. Every customer can now go to the system and say, I am quite willing to let this much of my data be used, so that without compromising on my privacy I will be able to economically benefit from the data I give. Credit will be given based on a higher rating…

Swarajya: How important has the PM’s support been for your ministry?

Absolutely. He is always available for discussion, always available for consultation, always available for me to go and voice my concern. He has been very active in keeping in touch with all stakeholders, both during the second wave and post the second wave. We are able to exchange thoughts with the PMO and ministries and come to decisions. This is not just about Covid, but also long-festering issues like the retrospective tax and the telecom reforms. These are very bold decisions made with the commitment that the Indian economy should not just be perceived to be better but also function better. That cannot happen without the political backing of the PM.

Part 4: Relentless reforms at micro level.

Swarajya: One has seen the Modi government launch reforms on a continuous basis, probably the first time any Indian government is doing so without necessarily having a big crisis precipitating it…

Yes, as you say, there has been relentless reform. Some are very small, but critical to the system; some are very big and so obvious. The small corrections we have done are many. Look at the way we have understood the difficulties that non-bank financial companies (NBFCs) are going through. To give them an infusion of cash, since 2019 we have taken steps to redress their grievances. First, we addressed their immediate problems, as they were sitting with (a lot of) papers that were worthless. We also pushed joint lending with banks in the first credit outreach. In October 2019, we asked the banks to go to the districts. Of the 750 districts, nearly 680 were covered.

The banks didn’t go alone. In every district, every bank was expected to bring in some NBFCs from that area during the credit outreach. What did this mean? It meant banks were directly offering credit to some, and where they did not have direct access, but the NBFCs did, the money went through NBFCs. However stressed the NBFCs were, they were continuing to do business and keeping themselves afloat. That happened in 2019, and in 2020 it was about keeping them alive. This year, from October, we are going again for a credit outreach. Again, the NBFCs will work along with banks for it.

Last June, we added MFIs (microfinance institutions) who lend to the last customer, where the maximum amount may be upto Rs 1.5 lakh. So, with banks, NBFCs and MFIs, the congestion in the passage of money has reduced. The banking system as a whole has been lubricated.

Swarajya: There has also been a lot of lending of small loans through various schemes…

Yes. We had been to Thoothukudi (formerly Tuticorin) for the 100^th anniversary of the Tamilnadu Mercantile Bank, a well-managed bank. At a different venue there were stalls put up by the customers of banks who were benefited by Mudra, Stand-Up India and SVANidhi loans. (Stand-up India is about each bank branch lending to SC/STs or women entrepreneurs, SVANidhi is about lending to street vendors and Mudra is expanded as Micro Units Development and Refinance Agency).

There were self-help groups (SHGs), FPOs (farmer producer organisations), and some beneficiaries of Nabard lending. One small group, which had only nine members, showed us what they produced and how they are marketing it. The groups we met were selling local organic food material, bamboo-based items, textiles, and items woven by local women. I asked them (the nine-member group) what they were earning, and they said Rs 20,000 per month (each).

Swarajya: These were beneficiaries of Mudra loans?

Not just Mudra, Stand-Up too. When Stand-Up was launched, it was meant for small places with one bank, women and SCs. Even though most Stand-Up loans are meant for people living in the far corners, it is also there in places with strong eco-systems like Gurgaon, Bengaluru, Hyderabad, and places like that.

There have been other small reforms (under the Modi government), like the use of drones to demarcate private land boundaries in rural areas and giving certificates saying you are the owner of this piece of land which is now marked and cannot be encroached. For the person who has owned this land from his grandfather’s time or even earlier, this piece of paper means he can go to a bank and get money based on his land value, which is already recorded.

Swarajya: Commercial banks are still hesitant in giving small loans of Rs 20,000 or Rs 50,000…

I don’t think that hesitation is there in bankers’ minds any more. In 2014, when Jan Dhan was started, every one said most accounts had zero balances. So, what is the use? In the first year we said we will service that account and you can’t charge them for services…But now there are more than Rs 1.45 lakh crore in Jan Dhan accounts. It’s zero-balance no longer. And several accounts, after being observed for five or six months, have been issued RuPay cards, and withdrawals and deposits are regularly happening.

So, the cash flows in these accounts are clearly established, even with small amounts of Rs 10 and Rs 20. These small contributions would not have come to bank accounts without the formalisation done through Jan Dhan. This, along with digitisation of transactions, allows farmers to sell and get money credited without coming to bazaars. They can accept QR code-based payments.

Swarajya: So, you are saying credit is flowing to many segments, including the MSME sector.

Niranjan Rajadhyaksha (an economist with IDFC Institute) wrote about the problems with developing countries. There is income disparity and there is the vicious cycle of poverty. I am poor, I need credit, but I don’t have any security to offer, and so I will remain poor. Being poor means continuing to remain poor. So how are you going to break that vicious cycle? That is what most developing economies have had to grapple with and many don’t succeed. Am I saying we have broken this cycle? No, but look at the way we are approaching the problem.

We, as a party, and the PM as PM and earlier as CM, never believed in entitlement logic. We don’t say, he is poor and he is entitled to this. He is poor, we agree, and entitlement may help, but if I empower him, will he not come out of poverty? Entitlement is a tempting route to help the poor. Empowerment is a more trying route, but a sure-shot one to help you come out of poverty.

Take the example of all the empowering measures taken by us, and which were ridiculed at first. Jan Dhan was one, after that RuPay, after that Mudra, and after that many other schemes like DBT (direct benefits transfer), Ayushman Bharat, Atal Pension Scheme, etc. The poor can help themselves by investing, sometimes as little as Re 1 a day.

Then there are many schemes to lend to FPOs. This scheme has been extended to help fishermen. We are gradually weaning them away from the feeling that I don’t have security, and so I can’t get credit. The opposition mocked us, saying you want everybody to start a pakora shop, but that’s not the point.

Everybody gets some liquidity help. In Thoothukudi, the palm trees were there, but there was no incentive to make sugar from them, since nobody was buying and nobody was lending them money. But this is changing. Local weavers are getting their own weaving material and people are willing to buy them. In Tripura, bamboo-based products (are getting a boost). The economy is now sizzling with small economic activity (in some places). That is what is going to give you a virtuous cycle of demand spurring itself and therefore (boost) manufacturing.

Swarajya: Thank you for giving us the time. Wish you good luck for the next budget.

This was the final part in a series of Swarajya conversations centred on the principles and policies guiding Aatmanirbhar Bharat, and was powered by Vedanta. For other parts in the series, follow the link here.