Few finance ministers expect to be thrown at the deep end of the pool with the lights dimming and a storm about to blow the nearby structures down. This didn’t happen even in 1991, when everyone and his aunt knew the economy was in a mess, but not to worry, Dr IMF had all the right remedies and pills ready for the government to administer. The good doc was just waiting for the patient to show up and open his mouth.
But Nirmala Sitharaman didn’t get to North Block as Narendra Modi’s surprise choice as Finance Minister last year with readymade palliatives available to her. Even as her first budget was delivered in July, the very next month brought bad news about a slowing economy.
Things only worsened as the quarters progressed, and her second budget became redundant barely a month after it was presented as the Covid-19 lockdowns and steep economic collapse followed. No fiscal number made sense any more.
Sitharaman, arguably, has had one of the steepest learning curves in North Block, and her ministry’s responses to the unfolding crises have been quick and aggressive.
In September 2019, she made good — at one go — a promise made by her predecessor Arun Jaitley in 2015 to reduce corporate taxes to 25 per cent. This was followed by a big bang merger of 10 public sector banks into four. Every other week, her ministry announced reforms and economic support plans, including one to revive the realty sector by providing last-mile funding for unfinished housing projects.
But this frenetic activity was soon to be eclipsed as the Covid crisis struck the economy, scuttling a second, and better formulated budget barely a month after it was presented. Even as the Covid threat escalated, the Finance Ministry has been faced with increasing demands for defence procurement as China has begun threatening our borders in eastern Ladakh and elsewhere.
Sitharaman, who has taken much flak for presiding over an economy that has allegedly been decimated by poor economic policy-making, was not one to whine about the tough task ahead of her.
By the end of March 2020, as the country went into a large national lockdown, followed by equally serious local lockdowns and deceleration of economic activity, the Narendra Modi government sprang into action to announce further rounds of monetary and fiscal measures to support the needy — both poor people and weak companies. It was feisty Sitharaman who administered the dosages.
One would have thought that all this pressure to deliver results from an ailing economy would have left Sitharaman tired and frustrated, but that isn’t the case.
Her critics clearly underestimated her resilience purely because the predecessors who held her portfolio — Arun Jaitley, P Chidambaram and Pranab Mukherjee — had strong political reputations preceding them and were, therefore, judged more carefully. She could well prove them wrong and establish her own reputation, for she remains unfazed by the burden of high expectations and the limited resources at her command.
One criticism that continues to hold good is that the Modi government has chosen to implement long-term reforms during a crisis instead of putting more money in the hands of the poor so that demand can be quickly revived. But Sitharaman, even while assuring us that the government will act on every front at the right time, rejects the idea that the economic malaise can be reduced to just a demand problem or a supply problem due to the interlinkages between supply side stimuluses and demand. Her critics, for the record, had nothing more than shop-soiled remedies like more government spending to end the crisis.
Between the Reserve Bank of India under the highly capable Shaktikanta Das, and the Finance Ministry under Sitharaman, the government has not only rolled out a Rs 20 lakh crore fiscal-cum-monetary package (and counting), but also set the Yamuna on fire with some very aggressive moves in farm and labour sector reforms.
Recovery is likely to be slow, but the Modi government’s decision to convert the Covid threat into a reform opportunity is likely to deliver in spades after the economy starts recovering. This is partly because Sitharaman has put in long hours executing the Prime Minister’s Atmanirbhar Bharat agenda along with other ministries and ministers.
Destiny did not confer any special favours on Sitharaman when she settled into her challenging job — which continues to remain challenging. But she does not carry the burdens of office to her home, and when we asked her whether she gets a good night’s sleep she dismissed it as destiny’s problem, not hers alone.
In an extensive interview to R Jagannathan of Swarajya magazine, the Finance Minister answered all our questions and her critics even while delivering some political punches to the Congress party, which is now busy spearheading opposition to farm sector reforms.
Edited excerpts from the interview
You inherited a slowing economy and Covid pushed that into a slump. But the government has been more focused on long-term reforms rather than shorter-term demand boost… Is there a belief that some of these reforms could, in fact, help address the crisis in the short run? Or is it all about the long term…?
We do not look at it like that. What has to be done for the short-term, we are doing, whether it is considered adequate or not. Secondly, every opportunity you get to undertake reforms, especially when they come up during testing times, is a challenge that must be met head-on. You do not let the opportunity go. That’s the driving force of the Prime Minister. Whatever be the need, whether it is relief to address the distress of the poorest of the poor (or about small companies), it must be done. He ensured that we did that within 48 hours (of the lockdown).
With respect to Atmanirbhar Bharat, where several reforms appear to be only for the medium or long term, there are elements packed into it that are immediate in nature. So, categorising reforms into watertight binaries, with no scope for overlap, is not the way we look at the phenomenon of transformation.
What ultimately is Atmanirbharta? Is it import substitution, or a limited period protection to Indian industry, or an attempt to build global scales in specific product lines by incentivising investment and temporary protection?
It is closer to the third category you just described. The Indian economy, in the last decade or so, has become (import-oriented) such that whatever can be easily obtained from outside we obtain; what can be cheap outside we obtain; and whatever (import) is inevitable, because we don’t have the technology, we obtain.
This (attitude) has gradually made us dependent on one source (ie, China). It has eroded the foundational industries that we had, like production of APIs (active pharmaceutical ingredients) for the manufacture of bulk drugs.
Atmanirbharta means that which we can produce we should produce and not depend on imports. That where we (already) had the ability to produce, we should ramp up capacity. And that which we produced (in the past), and where we lost due to predatory pricing or whatever, should be brought back. It does not mean stopping imports of items which we just simply don’t have the capacity to produce.
The Prime Minister announced a Rs 20 lakh crore package some months ago. Most of it is about credit and monetary easing. But how have we proceeded with the non-credit part of the policies?
The non-credit part of the package is what we call production-linked incentives, where we are attracting industries that are moving out of one country. We are also bringing in an ecosystem (for Make in India), and (doing) structural reforms and major factor-based simplifications… we are moving fast on all of them equally.
There is a feeling that most of the package is about easing lending norms, not putting money in people’s pockets. How will demand improve? When can we expect a more direct demand stimulus package?
Is it so watertight a compartment between ‘supply side’ and ‘demand side’? It is very well to say that this is supply side and that is demand side, but the way in which we tailored the schemes was aimed at helping industry, both small and big, to start up once the lockdown is lifted. Whether it is to pay wages or electricity bills or to buy raw materials, or for a trader to replenish his stock, once money is spent on these things does it not mean money is going for demand creation?
While I appreciate the fact that more can be done, I do not think that the government has confined itself to help only one side of the story. We expect the flow from one to the other. I can clearly see that happening. For example, through Nabard and regional rural banks, more rural credit is being pushed. A sum of Rs 90,000 crore has been pumped into the system and is making a difference to the rural economy. Hence a clear-cut division of supply and demand side (stimulus) is not necessarily valid.
There is a feeling, especially among well-wishers of this government, that the Modi government is too fiscally conservative at a time of Covid crisis. Your comments?
I would like to say, no, not at all, in a humble and unemotional way, but I will say, Absolutely not! We have been doing that (opening the fiscal tap), and we will keep doing that.
What is the Finance Ministry’s assessment on when we will return to a positive growth path, whatever the rate? Will it happen in the next quarter (October-December 2020) or January-March 2021, or only in fiscal 2021-22?
We have not come to any conclusive internal assessment on this matter. I, for one, would not hasten to give a final answer on this aspect because Covid is still on, and we do not yet have a vaccine in place. Recovery is being seen in patches as you have containment zones in every state. Unless all this clears up, I cannot even make an intelligent guess.
Assuming we see a new demand stimulus, what is the guarantee that people will spend and not save the money they get?
No. We have not literally used that as an argument to hold back spending.
In view of the high spending needs for defence and health this year, will this impact the larger proposed investment in infrastructure, which is the best form of demand stimulus? There was a plan to spend Rs 100 lakh crore over five years in your first budget. What is the new roadmap after Covid? Has there been a setback on this front? Has the larger investment goal been pushed back (by the Covid slowdown)?
I don’t think so. The projects identified had a funding component from the Central budget, and also funding from sources like sovereign wealth funds and also many other investors, whom the National Infrastructure Investment Fund (NIIF) is independently approaching.
The investment priorities are all understood and the state governments where these projects are located are also taken as a party to this infra pipeline and its implementation. On the contrary, we have been in discussions with the relevant departments to ramp up their infrastructure spending.
The review of capex from various ministries is being done with mandates to complete targets (that were to have been met) in the first quarter, and to frontload those in the second quarter. All that has been done earlier, and we will continue in this tenor in the future as well.
Your government has been the most committed to consistent and regular reforms. The latest are the farm sector and labour reforms. There is a pushback against that. What is the implementation plan so that both farmers and labour benefit when there is also strong opposition pushback against it?
The (opposition to) farm reforms is total grandstanding by the Congress party. If anything, they are misleading the people, as they had promised the disbandment of APMCs in their Lok Sabha manifesto. Either they come out openly and confess that they had given a false promise in their 2019 manifesto, wherein they clearly say they will disband the APMCs and free inter-state trade and also (facilitate) the export of agricultural produce. Now, even without disbanding the APMCs, haven’t we liberated the farmer to choose where he wants to sell or trade?
So, when you put it in the manifesto, it is all very well, but when we do it, you ask the states to bypass the central law. The Congress should either come out and confess that the promise in the manifesto was false, and admit that they are provoking the people by what is constitutionally in the central list and not in the state list. If, through a parliamentary process, we have done something, what is the respect for institutions that the Congress president is showing when she asks the states to bypass the central law?
The states argue that agriculture is in the state list…
We have only legislated that bit which allows inter-state trade. Where have we transgressed into state domain? If anything, I will rub this point a bit further, APMCs are determined by state laws. The Congress, in its 2019 Lok Sabha manifesto, clearly promised to disband them. Did the Congress then not know that APMC disbanding is encroaching on the states’ domain? How did you put this in the Lok Sabha manifesto? It was not about a state election. The Congress is clearly tying itself up in knots. It (the opposition) is clearly political and hypocritical, and unfortunately, they are clearly misleading the Indian farmer.
There is no doubt about the political hypocrisy, but now that the farmer is free to trade his produce, and there is a regime to enable contract farming, does the Centre now have to help create those structures — the producers’ organisations and infrastructure — which will enable such free trade to happen on fair terms to farmers?
Yes, haven’t I, both in the July 2019 and February 2020 budgets, clearly mentioned farmer producer organisations (FPOs)? We have offered to provide viability gap funding to FPOs at panchayat levels so they can set up their own cold storage facilities for particular crops in particular areas. We want the farmers to do it themselves, so that it is owned, run and completely managed by the farming community itself. That is why we invited local self-help groups to join hands in the initiative.
Now that labour reforms such as fixed-term contracts have been instituted, and we have also passed a more flexible labour code, do you foresee any political opposition to this? Will firms be free to pursue flexibility in hiring practices?
If (only) we had a mature opposition… With the Labour Minister having engaged with all stakeholders — labour groups, political parties or state governments or parliamentarians — maturity in political parties means they have to concede that consultations were done and due process followed by taking to Parliament.
All these recommendations have been suggested by earlier standing committees too. But if parties don’t approach it in this way, and resort to grandstanding and hypocritically distancing themselves from a reformatory step that keeps the welfare of labour in mind, then you never know how they will react. Ideally, we expect them to understand the importance and meaning of such reforms.
Any prospects of land reforms similar to the labour and agricultural reforms that have been announced? A mild attempt was made in 2014, but due to the lack of a Rajya Sabha majority it was shelved. Will that now happen?
Haven’t we also engaged with states to take up such measures, giving them model acts, and asking them to get going with it? So, I am sure the states are applying their minds to the issue.
Given the hostility on our borders, clearly, we need to move trade away from one big neighbour and also bring down the trade deficit significantly. Are we doing anything to reduce over-dependency on a single nation for a lot of our critical imports?
Yes, there is a lot of work going on in identifying, through the ministries, the goods and services (that concern them). Work is underway in each ministry to identify other sources of supply so that no excessive dependence is there on one source.
In a year or two, we shall move out gradually (from China dependence), or at least reduce the dependence gradually. Work is going on in various ministries on how this excessive dependence can be brought down.
Our growth problem relates to the missing middle sector which is globally competitive — like Germany’s Mittelstand. What kind of policy will the government adopt to ensure that small companies become mid-sized, and mid-sized ones become large? Your comment?
A lot of thinking has to be done by both sides, government and by industry themselves. Given the way industry is organised in India, small and medium units do have some benefits because they are small and medium. They have a doubt that if they grow to the middle layer, the benefits that accrue to them in being small will go away. They are asking, will we be worse off?
While growth will bring in new strengths, the suspicion that they will immediately be dropped off from list of beneficiaries worries them. This is a major reason why such progression does not happen. But that is an area where we have to continue to work seriously.
Our financial system — especially digital infrastructure — is one of the best in the world, but our public sector banking system is stodgy. Covid came just when things were on the mend. Does this mean the government has to budget for more capital investment in PSU banks this year and also next year?
Capitalising public sector banks (PSBs), at least in the near future, will continue to be a challenge. There will be a demand for it. To an extent, the government will be for PSBs as we are morally duty-bound. But I am also happy to note that several PSBs are now approaching the markets to raise funds. I think PSBs are really attempting to be run professionally. Hence, they do not seem averse to approaching the market now. Care is now being taken by them to present themselves professionally if they want to realise their worth.
Government has a new policy of having a maximum of four PSU players in any sector. What happens to banks that are outside the merger list? Will they too be ultimately merged or sold off?
Firstly, I want the current set of mergers to get processes completed. Unfortunately, they have been challenged on account of the Covid situation. And during Covid, we have been expecting them to perform far in excess of their brief in terms of exposing themselves to the situation, by taking the government’s schemes to the people. So, I would want the banks to first complete their mergers before we think of the other banks.
Since revenues will be a problem, what is a realistic target for disinvestment this year? Will Air India be sold, or BPCL, or Concor and Shipping Corp? All of them?
It is difficult for me to say anything on this matter right now. While we would like to get on with the disinvestment process as approved by the cabinet, we are also conscious of the fact that the world is not yet back to normalcy. Covid is still on, travel is still restricted, bidders may still have a problem reaching out, so I have to keep my fingers crossed on it.
Will the government monetise some of its deficit if the going gets tough on growth in the coming months?
At this stage, I still have six months to go (in this financial year). I have not yet had any discussions with the RBI on monetising the deficit.
In your first budget, you mentioned sovereign dollar borrowings. We have, of course, more than half a trillion dollars in forex reserves. But is the plan off the table now?
Well, it was mentioned in the Budget, and we have a big reserve of foreign exchange. I don’t think I have done anything more as yet.
So you are not in a hurry to raise sovereign dollar funds?
Well, I am doing other things now…
Your government has talked of cooperative federalism, but some states are planning to fight your compensation proposals in the GST Council. How will that get resolved?
Technically, I would have to wait for 5 October to answer that question, when the council meets. I have had about 20 states writing to me about wanting to choose option one (ie, either borrowing Rs 97,000 crore, the estimated compensation amount, from a special RBI window, or market borrowing of the full Rs 2.35 lakh crore shortfall due to the Covid slowdown). I will go to the council with those facts and also discuss with each state. Then we will take the call. After all, the council is very good institution representing the federal nature of things in India.
Your government cut corporate taxes last year. But a direct taxes code eludes us. Any thoughts on presenting one along with the next budget?
Haven’t I started showing what the Direct Taxes Code (DTC) should be like by giving options where exemptions are removed, tax rates reduced, and tax slabs reasonably placed? A DTC has, in effect, seen in the February Budget, where the taxpayer has been given the option of following the old or new systems.
Also by bringing in a taxpayers’ charter, and making it a part of the Finance Bill, I have recognised that the rights of the taxpayer have to be honoured much beyond the DTC; also, by making the tax authorities accountable, by reducing the wide discretionary powers of the officials, by introducing the faceless assessment feature, both at the assessment and appeal stages, by making the field structure not geographical but faceless, haven’t I gone beyond the tax code?
In reality, these three major reforms show that we have not just actualised the vision of the DTC, but even transcended its brief.
While your party does enjoy a majority in the lower house, some allies have left you. The opposition says this means the BJP is unable to run a cooperative ship. The policies are that of one party, not a consensus in the polity. How do you react to this claim? And to Sonia Gandhi’s assertion that states ruled by her party will not adopt the agricultural reforms spearheaded by the Centre.
The Congress president saying their states will bypass the central law clearly betrays the way in which the party undermines institutions. I am not surprised at all. Congress being in the opposition has never been constructive. In the opposition they have always been, directly or indirectly, party to destabilising the economy and destabilising the elected government. They have not got that out of their DNA. It’s in their DNA.
Let’s take the recent past, and I am not going even as far as the Emergency, where the Indian Constitution and the Indian Parliament were wholly violated by them as they feared being in the opposition. In the recent past, in two specific instances, Parliament played its due role. Through an elected government, bills were passed (when) they were seated in Parliament, they asked all questions and got replies. But after their defeat in Parliament they went outside and provoked violent protests. During the anti-CAA protest, the Congress president went on record calling for an aar-paar ki ladai.
And now, she is on record again, saying Congress-ruled states should bypass the legislation which has come from Parliament. And this despite the fact that we are only implementing what their 2019 Lok Sabha manifesto promised the people.
If they made a false promise in a manifesto then, and are now provoking the people to violence, the Congress is singularly responsible for undermining parliamentary democracy and maligning the Constitution of India.
So, if you had to give one line of advice to Rahul or Sonia Gandhi, what would it be?
At the moment isn’t Shrimati Sonia Gandhi the president of the party? I wonder who advises her.
Given the challenges you are handling, do you get any sleep at night these days?
I strongly believe it’s not about me. It is destined somewhere. Ramana Maharshi once advised one of his listeners (about not carrying burdens you are not expected to carry). He said a train was going, but one man who boarded the train still kept his luggage on his head... So, as long as you are clear that it is not (about) you (carrying all the load), why should you worry?
This interview will also be published in the October issue of Swarajya magazine.
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