India's Finance Minister:

A candid talk with Yashwant Sinha about reducing India's deficit, attracting foreign investment, lowering tariffs, and nurturing IT growth

Despite the recent corruption and bribery scandal that has nearly brought down the Indian government and still threatens the country's decade-long economic reform program, Yashwant Sinha, India's Finance Minister, is feeling confident. "The reforms are irreversible," he says. Sinha has been running the country's finances for the last three years, but the results have been mixed. India is nowhere near achieving its dream of 9% growth, which would reduce poverty and might attract more foreign investment.

Instead, a slowdown of growth from 7% last year to under 6% this year, a series of scandals, spats with multinationals such as Enron Corp., and natural disasters like the recent earthquake in Gujarat all have set back progress -- and sent investors fleeing. While China drew $40 billion in foreign direct investment last year, India attracts a dismal $2.4 billion annually.

Sinha thinks he can still change all that. His annual budget for the nation, delivered on Feb. 28, would reduce personal and corporate income taxes. Sinha also has mandated that government cut its own bloated expenses, including its staffing, and reduce India's notoriously high interest rates to 9.5%. He's aiming for more: lowering import tariffs over and above India's World Trade Organization obligations and charging farmers for electricity for the first time, even if it's only a fraction of a penny per unit. And Sinha thinks India can compete with China in export growth. Sitting behind a large desk in his spacious and imposing office in New Delhi, Sinha spoke to BusinessWeek Assistant Managing Editor Robert Dowling and India Bureau Chief Manjeet Kripalani recently about his plans. Here are edited excerpts from their conversation:

Q: In light of the current turmoil in New Delhi, how do you rate the prospects of reform in a widely praised budget? Will there be greater resistance now?


The budget has evoked a positive response from various sections of society. The process of economic reforms is ongoing and irreversible. The country has adapted well to the process of restructuring, as is evident from the strength of the economic fundamentals. We are confident of implementing the budgetary objectives and going ahead with the newly initiated reforms.

Q: Your budget is more reform-minded than previous ones, with the intent to attract more foreign investment. What's behind this?


We have been talking about the second phase of reforms in India. We started in 1991....We've been trying to get a lot of legislation passed, mainly in the area of foreign-currency regulation. We have introduced the private sector into insurance. We have also broken new ground in the telecom sector and in the energy sector, where we have defined policies more clearly. In the sectors of roads, ports, civil aviation, we have moved more towards privatization.

But I suppose the reason everyone is happy with this budget is because, for the first time, I have clearly set forth the agenda for the second generation of reforms, which everyone considered so difficult but nobody talked about.

Additionally, for the large masses of our people, I have talked about human development -- not merely human resource development, but also social security measures and a number of schemes in the insurance sector that will provide security.

And there's the issue of fiscal consolidation. I personally feel that the introduction of the Fiscal Responsibility & Management Bill in the winter session of Parliament was a landmark step by me. Because for the first time, the government of India has gone to Parliament with a piece of legislation which will impose a great deal of restriction on ourselves and bring the fiscal deficit down in five years. It has not become law yet, but we are trying to stick to it, because we feel we are bound by what we introduce in Parliament. So this is the broad picture.

Q: When you say consolidation, what does that mean? Fewer employees?


It means that we will downsize government. We have appointed an Expenditure Reforms Commission, which is looking at the size of government in terms of functions. We will transfer redundant staff to the surplus pool. Then we'll ensure that they can acquire new skills, so if we need them elsewhere in government, we can take them back instead of hiring new people.

Second, we will offer attractive voluntary-retirement schemes so that [staff] can leave if they want. It has been our experience with public-sector banks, owned by the government. Their schemes have been hugely successful. Over 110,000 employees have asked for voluntary retirement.

Basically, the emphasis is not to cut the productive expenditure, but to cut unproductive expenditure, what we call revenue expenditure. So the five-year plan of consolidation talks about 50 basis points of reduction every year, so that from around a 5% budget deficit, we come to around 2%, and then completely eliminate the revenue deficit.

Q: For foreign investors, what's the highlight for the budget plan?


No one wants to go to an economy that's slowing down. We have not merely reformed our taxation laws -- but we'll hold to the reforms over the medium term. Any changes will be for the better and not for the worse. This is a very clear assurance that I want to hold out. We will bring down import tariffs from the peak of 35% now. We will reduce it by 5% every year, so in three years, we'll bring it down to a peak of 20%. This has nothing to do with our WTO obligations. If we [only] had to stick to WTO duty obligations, then our tariff rates would be much, much more. The whole emphasis is to make India more competitive. Because in a sheltered economy, we built up a high-cost economy.

Q: Are you also factoring in the changes going on in China?


China has certainly been an issue. Overall, China-India trade is growing at a fast pace. Their exports to India are growing, but our exports are growing faster. But in certain areas, their exports to India are cheaper. That's creating some problems, and voices have been raised for more protection. We have not fallen for it, but the fact that China is today able to produce cheap, quality goods and sell them in the international markets is certainly an example that India could also follow.

Q: A great deal has been made of India's tech strengths, but it is still a very small portion of the economy. Is there a way to bring high tech more fully into the larger economy to increase competitiveness?


Yes, we have already drawn up plans to raise our tech exports from $6 billion now to $50 billion by 2007. We are also taking proactive steps to ensure that our skilled-manpower supply doesn't dry up. Indians are now in demand the world over, and more and more people are going abroad in this area of technology. So we have made systematic plans to upgrade our institutions to get more qualified people. Thirdly, we are encouraging use of IT in India, so there is a large domestic base to support the IT industry here.

Q: Internally, are you concerned that too many of your people are leaving, causing a brain drain?


No, we are not so much concerned about a brain drain. The issue we have been raising is that there should be a level playing field, a fair deal for the developing countries. It should not merely be cherry picking, where you pick up our best and brightest. We should sit down together and talk about how, along with technology and capital, skilled manpower can move across national boundaries more freely. Which means that governments will have to look at their immigration and visa regimes in order to encourage this. The system which is in place now is still very restrictive. The U.S. has H1-B [visas], Germany says it'll only issue 20,000 visas, each [country] tailoring to suit its own requirements. We feel there is a need to encourage this flow across national boundaries.

People are coming back and forth, one leg here and one leg there. It is the responsibility of all of us, the better developed countries and the developing countries, to ensure that we get the assistance to build capacity. We have already built capacity in India, so we are asking for equal opportunity. No favors. Just give us a level playing field. And we should be able to perform.

Q: To go back to foreign investment, some studies say you should be seeing much more foreign investment in India than you do. You get so much less than China. What has to happen?


We suffer from an image problem. Because India has been a restrictive economy, foreign investment was not welcome, so we erected all sorts of barriers to foreign investment. Things started changing in 1991, though gradually. Despite 10 years of progress, this news has not traveled as strongly as it should have to the foreign investor. In our own terms, there has been an increase, from $300 million to $3 billion in foreign direct investment. But if you compare that to emerging markets like China and Brazil, it's a dismal picture. What we need to do is go out and tell the India story more and more.

Very few people will know that India, along with China, was one of the fastest growing economies in the world in the decade of the '90s. And we have reached a stage where our 6% growth is considered to be tragedy, a catastrophe, in India. So people's aspirations and demands are rising. Therefore we are all required to perform more than in the past.

I think we should have 8% sustainable noninflationary growth in the next few years and then move to a higher rate of 9%. The goal that we have set for ourselves is 9% over the next 10 years. We hope we will go on building on that.

Q: How much lasting damage has the recent political scandal caused to India's economic growth?


The Indian economy has remarkable resilience. It has displayed time and again its ability to rise above exogenous disturbances and stay tuned to the growth process. The Orissa cyclone, the rise in international oil prices, the Kargil war, and the Gujarat earthquake have been major exogenous disturbances experienced in the recent past. However, the economy has successfully bounced back on all occasions, underlying its ability to ward off crises and surge ahead on the growth path.

Edited by Douglas Harbrecht

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