A Talk With India's Finance Minister
Finance Minister P. Chidam-baram surprised India and the world on Feb. 28 with a new budget that boldly opens the economy to more investment. The budget slashes top income and corporate tax rates, boosts the allowed level of investment by foreign companies, cuts tariffs on imports, and promises fiscal discipline from the government. But the 51-year-old Harvard MBA still faces a challenge to reach his goal of 8% annual growth. At his offices in New Delhi, Chidambaram spoke to BUSINESS WEEK Special Correspondent Manjeet Kripalani about his plans.
Q: How did you pull off this budget?
A: Pull off? The budget is not a rabbit. [Last year] showed good control over expenditures and revenues; therefore, it was possible to make bolder moves. For three years running, the country's economy has been growing at an average rate of 7%. If at this point in time India cannot be bold, I'm afraid we have only ourselves to blame.
Q: How do you think you'll implement the budget?
A: I am fully alive to the fact that if we don't deliver, all the high praise will turn to harsh criticism. The central government has to deliver on: containing money supply and inflation, ensuring there are no supply-side constraints and that essential commodities are available, keeping a tight leash on expenditure, and delivering on telecom [privatization] and [ending] petroleum [subsidies]. And finally, ensuring that social services' expenditures are spent wisely. I intend to travel the country to urge the states to cooperate.
Q: What if you fail?
A: If you fear flying, you should not get into an aircraft. I do not fear the future. I don't fear anything.
Q: Why didn't you go whole hog and attack other problems, like insurance?
A: I have made a modest but an important beginning. If I can show that what I have done is good for the people, then it will be easier to open up more sectors of insurance to competition.
Q: Why does India's growth lag behind China's?
A: If you compare the first five years after China opened up and the first five years of India's liberalization, I think India compares very well. But I will readily concede that such a comparison is not valid. What we must compare is India today and China today. China is way ahead of India because Chinese reform is driven by the Communist party, and there is complete consensus within the Communist party. Indian reform is driven by consensus among many parties. It is the quality of the consensus that will determine the pace of the reform.
Q: Do you think the big Indian companies are afraid of reform, or do they welcome it?
A: It varies. Some companies which are in traditional industries and are family owned are more wary of reforms. Other companies which are in globally competitive industries, and are owned or managed by professionals, are more upbeat about reforms.
Q: How serious is corruption?
A: It was quite big, and there is a potential that unless we put in place suitable mechanisms, corruption could explode in ways that are quite unexpected. That's why we are keen to enact [anti-corruption legislation] soon. For foreign investors, it will mean that the government is committed to greater transparency and accountability. So if the foreign investor knows that ministers will be accountable to the law, they will feel reassured.
Q: How secure are shareholder rights in India?
A: The problem is not in the law. The problem is in the shareholder's awareness of his rights and the shareholder's capacity to assert them. Litigation in India is costly. But in the new law that we are proposing, we will have provisions that lean even more in favor of shareholders and place an even higher responsibility upon the board of directors.
Q: How is the investment climate for U.S. companies now?
A: We've had many interesting meetings with Bill Gates [of Microsoft], Jack Welch of General Electric, Jack Smith of General Motors, and many others. These companies are now willing to commit themselves to making larger investments in India. I am confident we will continue to be an attractive destination for U.S. investments.
Q: What's next?
A: Hard work. It is always on the agenda, except that from time to time people seem to forget that it's hard work that brings results.