JAIRAM RAMESH: So, this is the second - to use your language - mota point. Now, thirdly, let us take filling up revenue. On this I want to ask Suman and all. The third big thing is that insofar as the issue that Prabhu has raised in terms of the tax demarcation between the Centre and the States, it is true that the States have not made their effort to raise revenue; but when you look at overall macro figures, the fact as Indira has brought out, the tax-GDP ratio as far as the States are concerned, has been pretty much constant; but the steep fall has come from the tax-GDP ratio of the Centre and, therefore, between the Centre and the States, while the States must do more to recover user charges and clean up the tax administration, there is need - the Centre cannot just get back and say - 'it is your responsibility, you clean up your thing'.

INDIRA RAJARAMAN: I have a point which will answer your question. It is really the States have to do much more on the non-tax revenue side. The Centre is to do on tax side and they have to do on the non-tax side. All of it is there.

BIBEK DEBROY: There is one thing I want to mention. You have not mentioned and I want to make it clear whether it is just my feeling or the sense of the table - no mention has been made the way to do this - increasing tax rates.

JAIRAM RAMESH: I think everybody has agreed. It is tax administration; it is computerization; it is the use of I.T. in tax etc.

MS. INDIRA RAJARAMAN: But no reduction in rates - we keep the 10-20-30 rates.

A DELEGATE: All exemptions should go. That is the consensus.

JAIRAM RAMESH: Even for small savings - everything should go.

Let me just get on to a second issue and I want to start with Suman on this. Successive Finance Ministers promised the moon in Budgets on things which they do not have direct control over. So, let us focus on things that are directly within the control and privy to the Finance Minister namely the financial sector. He does not have to depend on the Labour Minister; he does not have to depend on the Civil Aviation Minister; he does not have to depend on anybody. It is entirely the domain of the Finance Minister. Suman, let me start with you. As far as the financial sector is concerned, is there something that you expect this Budget to come up with?

SUMAN BERY: I think one important move has already been this announcement of 49% FDI in the private banks. Let us get back a little bit what is the nature of the challenges. I think the challenge is in the financial institutions, the challenge is in the public sector banks, and then there are challenges in the capital markets as well. Now, with respect to the financial institutions, I guess we have seen one sort of route chalked out by ICICI which is the kind of the universal bank sort of model. The question of whether that still is realizable - I think we can see. But it seems as though, at least IFCI is now looking for strategic partners. So, I think, one has to give credit to Government that a set of regulatory kind of changes that were needed to facilitate this have been allowed to take place.

Now, it has been slow, maybe painfully slow; but over ten years, because my first involvement with this was in the early Nineties; we have now got to the situation where VRSs have started to happen; so the kind of over-manning in the public sector banks has come down. Competition through the private banks has started to provide a kind of a credible threat. For me, the big stumbling block now is the statement by the Finance Minister that even when you go down to 33% of public ownership, the public sector nature of the banks would be maintained. Now, I do not know why he has said that - whether he does not think that he can pass the relevant legislation through. It would seem to me that on an experimental basis, that ought to be waived and the attempt to attract strategic investors in one or two mid-sized reasonably well-managed public sector banks is something - I do not think is beyond the pale. So, that is certainly something I would like to see - will it happen, I doubt it.

JAIRAM RAMESH: OK. Can I ask you on this private banks? You mentioned 49% FDI. Is your interpretation of this, 49% FDI and 49% FII - in practice today you can have 98% foreign ownership of a private bank. Am I right?

SUMAN BERY: That is my understanding. Right.

JAIRAM RAMESH: But that is a major step forward.

SUMAN: That is what I am saying.

SURJIT BHALLA: Then why bog down at 49%?

JAIRAM RAMESH: No, that is a separate issue. It is stuck up on the numbers. The fact is that you can have now virtually, entirely foreign owned private banks in India.

SUMAN BERY: Yes. Now, it has to be said that there has been some disappointment at the performance of foreign banks in India. I mean there has been assent, they have been creaming the rents rather than being aggressive in terms of competition. But still, I personally do not know, maybe others in the room would know, whether they had been forced to do this because of some commitment under the GATT or whether this is completely unilateral for them. But whatever, I think that you are finally getting to a situation where there is going to be a genuine, competitive threat as a challenge to the public sector banks.

ARVIND VIRMANI: Just a factual clarification on this - unless the FII limit is explicitly included the general policy is FDI is the FDI limit. For example, the only one major exemption given deliberately was insurance when it was said that this 26% FDI limit will include FII. Otherwise you can presume that it is not. That is a general thing.

JAIRAM RAMESH: I just want to make one clarification on what Suman has said on the banks and the public sector nature. It is generally forgotten in this country that banks are not under the Companies Act. It is generally forgotten. They are under a special legislation of Parliament. So, you can have one per cent of Government ownership and still have a public sector because it is not governed under the normal rules. So, one of the suggestions has been that convert the banks, make them into companies - bring them under the Companies Act and then all normal regimes of the Companies Act will then begin to apply. You can bring in strategic partners, you can have 26% which you are having in other public sector companies.

Let us talk of financial sector very quickly. Do you make some major initiatives in this Budget in the financial sector?

BIBEK DEBROY: I want to make the obvious point first that monetary policy does not become truly independent as long as you have these kinds of deficits. I think one of the things he could try and do as the signal, because operationally I do not think it matters at all, is to scrap their sell-off. It is completely dysfunctional; banks have got much more money in Government paper; but as a signal, I think you could probably scrap the SLR.

JAIRAM RAMESH: Now, SLR means that for every hundred rupees today that I deposit in a bank, twenty five rupees is preempted by the Government for meeting its own expenditure requirements.

BIBEK DEBROY: yes, and the actual figure is pretty close to 40%.

JAIRAM RAMESH: So, 40% of every hundred rupees that a depositor puts in a bank …..

ARVIND VIRMANI: Again a factual clarification - the law as it stands, the SLR cannot go below 25%. As far as I know there is already a proposal which has not, so far, been cleared to reduce that.

JAIRAM RAMESH: Just as a matter of interest to the reader, that for every hundred rupees that the reader of INDIA TODAY has deposited in his or her bank account, twenty five rupees is preempted under the statutory liquidity ratio, mandatorily by the Government for meeting its own requirement.

BIBEK DEBROY: And you add the directed credit programmes and all kinds of things and out of every hundred rupees, about seventy five rupees go away.

A DELEGATE: Jairam, you can put a different spin on it; you can say that one reason why people are putting money hand over fist into the banks is because it is in safe assets like the Government rather than risky assets like bankrupt companies.

A DELEGATE: and with a very high rate of interest.

BIBEK DEBROY: That is the reason I said it is a signal rather than operationally being very meaningful. You see, in the financial sector, again I think there is a credibility issue because of the scams, of perceptions about the scams etc. I do not know whether the Government is ready - Arvind would know better; but the UTI Act is there. I think scrapping the UTI Act and replacing it with a new legislation is overdue. I am not very sure whether the Government is ready to do it in this Budget or not. Clubbed to that is the implementation of the Deepak Parekh Committee recommendations. Those are the kinds of signals which in a way are not part of it.

JAIRAM RAMESH: Do you see any financial package for UTI in this budget? A bail-out package?

A DELEGATE: No, I do not think so, because I do not think it is yet clear how much that bail out is going to amount to; how much will be generated out of UTI's own resources of selling of assets and how much will be needed as a direct bail out from the Government.

JAIRAM RAMESH: Do you see any bail out packages for banks, for weak banks - Allahabad Bank, Dena Bank etc.?

A DELEGATE: Not within the Budget. I do not see that happening within the Budget.

JAIRAM RAMESH: Let me ask Subhasish - one of the big concerns for ordinary citizens is the interest rates on small savings are going to come down. Do you see this in the Budget? They have already been cut - a southward movement in interest rates.

SUBHASISH GANGOPADHYAY: Well, again I do not want to try and predict what the Budget is going to do right side. I do not see it in that way. Do I think it should come down - no, I do not think so; that is not a problem. I think the major problem is ….

JAIRAM RAMESH: You do not think it should come down. If it comes down it is fine.

SUBHASISH GANGOPADHYAY: I do not think .. we are talking about …

JAIRAM RAMESH: The official theology of the Reserve Bank of India is that these interest rates are actually creating an upward pressure on interest rates in the economy in general and, therefore, they should come down. This is an important issue. So, you think that interest rates should not come down.

SUBHASISH GANGOPADHYAY: In the Budget - we are talking about the budget. Yes, it is not a budgetary thing.

JAIRAM RAMESH: It is, absolutely. Suman, do you think that there is a case for reducing these interest rates?

SUMAN BERY: Yes, I do. I was part of a Committee that suggested that at least it maybe….

JAIRAM RAMESH: But wouldn't ordinary citizens, pensioners, senior citizens, middle class families - would they not be badly affected by this?

SUMAN BERY: I mean if they are to be around, the inflation has come down.

JAIRAM RAMESH: But this is headline rate of inflation. The real rate of inflation, the underline rate of inflation is still 5 to 6 per cent.

SUMAN BERY: Yes, you are right that basically what matters for them is more the CPIs and the WPIs.

JAIRAM RAMESH: Is there a concern or is there an exaggerated concern that people are worried that interest rates are falling, they are seeing that savings being eroded etc.?

SUMAN BERY: Is it an exaggerated concern? No it is obviously not for people who have got the money in these assets.

JAIRAM RAMESH: But you feel that there is still any macro economic case for reducing these rates?

SUMAN BERY: I believe so, yes.

INDIRA RAJARAMAN: Jairam, the issue is not one of whether the rate should go up or down. As I said, it is not the direction of movement which is at issue here. What is important is the structural prescription of how these rates should be set and the point that has to be made by the Finance Minister in the next Budget is that the time has ceased when the Finance Minister simply announces in every Budget what small saving deposit rates are going to be; but moves instead to a benchmark system. The Committee of which Suman and perhaps some others were members, has suggested this. This is a long overdue reform. I think small saving deposit rates should be changed.

JAIRAM RAMESH: What is the benchmark?

INDIRA RAJARAMAN: Well, let the members of the Committee say it.

JAIRAM RAMESH: Give me a number. What is the relevance that the Finance Minister accepts the recommendation of the Suman's Committee? What does it mean for the ordinary investor in small savings instrument?

INDIRA RAJARAMAN: What it means is that they can no longer rely on an administered rate, a fixed rate; but that they have to be willing to move up and down with the market. That is what the Finance Minister has to bring home. It is not the immediate number that it comes to; but more importantly their willingness to move up and down with rates because that is what financial sector reform means.

Very quickly on is there going to be a bail out - No, we have not had any recapitalisation of weak banks in the system since 1999-2000. In the last two years the Government has refrained from further recapitalisation of the banks.

JAIRAM RAMESH: There are two banks - Dena Bank and Indian Bank. It is in today's papers.

INDIRA RAJARAMAN: for two years we have not had any recapitalisation and I would like to see that kept up. But coming back to small savings rates, it is exceedingly important that this vocal middle class that you talked about who are worried about declining deposit rates and small savings should be educated on what reform is all about - reform is going with the markets. That is what we have committed ourselves to and we have to stay with that; we have to be willing to move up and down. I think that is very very important. That is an important message to get through.

SUBHASHIS GAPNGOPADHYAY: I think the important thing about the financial sector which we do not keep in mind again is if we are talking about the Finance Ministry in the Budget saying all these things, one thing is that we are not allowing the markets to develop in financial markets. We are trying to orchestrate the way markets should develop. That is something that the Finance Minister can really think about. We talk about VRSs and all that. If you look at the way the bank management is chosen, the top management of the bank, they have no clue to what is going on; they have never had a clue to what is going on; they have been put up there. Look at all the regulatory commissions that are being made up for the financial sector. The people who are being put in charge were the people who have no concept of how markets work; they have no understanding of what are the modern financial instruments that are going to do the rounds and they are trying to orchestrate the way the market should move. Now, these, I think, for the financial sector are much more important than us trying to think and giving recommendations as to how the market should develop or should be made to develop. That is the worst possible way to get into it. It is exactly like planning. And that is what we are trying to do - like the rate of interest.

Yes, giving a formula how it will be fixed year by year, is a brilliant idea. But that is not really what we are going to do. We want it to reduce today; then it will be less today; tomorrow inflation will go up by more than 8% and then it will wait for five years before it is pushed up again. I think we should get a way - if we want changes, if we are really serious, we should get away and correct what the mistakes we have made.

JAIRAM RAMESH: One is that the middle class investor should have - interest rates should go up and go down depending on the market; there must be a benchmark.

INDIRA RAJARAMAN: They have to go with the market and that is what reform is all about.

ARVIND VIRMANI: One technical point - I disagree slightly with Suman in that he is saying that strategic sale of kind of well-functioning banks would be a good thing. I have always held that the best place to start is one of the weak banks. Why because then it can be demonstrated much more clearly that the gains to both the bank customers as well to everybody else. I have always held that the first place to start on strategic sale as far as banks are concerned is the weak banks - maybe just one or whatever, that is a separate issue.

The second one is the point which Ms. INDIRA RAJARAMAN did not mention. But, INDIRA RAJARAMAN and I were on a Committee before the Reddy Committee where we also looked at small scale; we did not look at one category which is the GPF and EPF. Now, it is not that I disagree with the fact that these rates have to be responsive. My problem is this that having studied the monetary system very closely it turns out that very few people focus on real rates. It is not just small savings. It is the banks, it is the monetary authorities, it is the whole bunch of people and that is what the structural reform which is required in some ways is much broader than just the thing. Here I always disagree with Surjit's emphasis that it is only this, if you just do this everything else will work; it will not. I can guarantee it because there are specific ways. The whole monetary policy does not pay enough attention to real rates. It just goes on nominal rates.

A DELEGATE: I have a question here. It is about linking the interest rate of the market. But nobody is raising the question of high cost of keeping this banking administration. So much of money is spent on debts etc. there is a high cost of banking in India. The consumer has to pay this. I think there is some mismatch between the interest rate and this.

SURJIT BHALLA: There are two things. One is the high cost of bank is spread, it is hardly measured because banking in India is involved only half per cent than anywhere else. In other words it is not the case that we have a super relatedly higher cost of banking. But let me come to the true thinking. Suman has mentioned that issue. The Finance Minister has said that about 20% ownership should stay with the bank. Here we get into the political economy thing and I can see why Jairam is not keen to have a discussion on this because the Congress party is the major - we have opposition of these buys then, I think, it is very very sad because the only party today that is opposing disinvestments of public sector, that is below 50% is the Congress party. Correct me if I am wrong. And the CPM also. These two parties have gone on record again and again including I believe more than one State in case.

This has been put on record. I want to make two or three other points. I think as far as the financial sector is concerned, basically it is like the old policy. This problem is no more. I happen to think that we have progressed tremendously in the financial sector in the last 4-5 years. I am coming to that. Let us take one of the sectors whether it is the interest rate sector and there is the capital account convertibility sector and there is the stock market. The stock market sector basically and in today there was insider trading that besides insider trading we do not have a stock market problem.
I think that is another positive thing which will take its own course, that is the structure of the market has changed.

Coming now to interest rates I think there has already been a considerable bit of movement in terms of bringing about market determination interface rather than the other way round which is in practice. I think there is consensus on that. I think there are signs that we are already considering it.

JAIRAM RAMESH: Incidentally the guys who opposed the movement from babu rate to market rate would be the babus themselves.

A DELEGATE: Related to it the babus must also be marketed.

SURJIT BHALLA: Then we come to UTI. I think you have asked - should there be any specific things in the budgets etc. I doubt that UTI is also an ex-problem. They have removed the guaranteed returns which UTI was giving through US-64. That problem is out. That has now come before.

JAIRAM RAMESH: Are you the honorary adviser to the Finance Ministry?

SURJIT BHALLA: Then we come to the two things which would be of interest to the readers. One has already been discussed. The one area of financial sector where we have a mood is capital account convertibility. Jairam has mentioned in the opening remarks that 50 billion dollars reserves are there and the Government has been encouraging everybody to go and buy dollars. Basically there is full convertibility of capital account with everybody.

Then I come to one policy implication which, I think, if the Government wants it can have it - it is that basically the distortion cost by the capital gains cost. This should be of interest to your readers. It is absolutely nonsensical, the capital gains tax will get collected from it. You get this all these distortions where people take money out of Mauritius, bring it back in and so on and so forth.

My suggestion is that on capital gains tax there will be no distinction between short run and long run and it should be immediately reduced to 10%. It will increase compliance. Now I come to the banks.

JAIRAM RAMESH: Can you hold for one minute here? The Mauritius thing - you know it has been very much in Parliament; it has been a big political issue. Are we agreed that between something fundamental on the capital gains tax would make the entire Mauritius thing a non-issue? Is this kind of a big issue? Are we agreed that basically the capital gains regime has created this Mauritius route which has become a real thing?

SUBHASHIS: I will go a bit further than that. What the capital gains tax has done is not just the Mauritius issue. If you look at any emerging economy the way it develops is that a lot of money which was not in financial markets, assets which are not in financial markets are now created with the opening up of the economy. In India that is not happening. People are investing much more in non-financial assets, in real estate, opening up a shop, in keeping three apartments, not selling any and not renting any - precisely because of these capital gains taxes. You are going to bring in a lot of …..

JAIRAM RAMESH: The assets are coming into the market.

SURJIT BHALLA : And it will give a huge boost to the financial market rather than have this draconian capital gains tax which nobody pays.

INDIRA RAJARAMAN: It has everything to do with rent control legislation; it has nothing to do with the capital gains tax.

SUBHASHIS GANGOPADHYAY: I also want to add - if you remove rent control legislation and the stamp duty you will get much more asset turnover than with capital gains tax.

A DELEGATE: I just want to make this point just to substantiate - rent control for housing is exactly the same as 35% tax rate or 32% tax rate for stock market.

JAIRAM RAMESH: Since you are talking of stock market, let us draw this conclusion. Let us come to the end. Let us start the debate. Bibek, do you feel something will be done for the markets?

BIBEK DEBROY: The markets are so badly off right now that I do not think including the GDP. I do not think it can be at worse. The question is by how much are you likely to get. On the financial sector itself there were several promises made in this year's Budget and the financial sector. None of those have materialized. So, the issue that you get back to is - is there any point in creating more of a hype with more promises or is it a matter of implementing promises that have already been made. I would say that it is a matter of implementing the promises.

JAIRAM RAMESH: I want to get a sound byte from each of you. Do you that markets are going to revive with this budget or not?

INDIRA RAJARAMAN: That is very hard to say. It all depends on what the Finance Minister does. I do not think we are here in the business of predicting what he is going to do.

JAIRAM RAMESH: I am just asking you.

INDIRA RAJARAMAN: Instead of asking to predict, I think you should ask us to suggest and advice but not to predict.

JAIRAM RAMESH: What is your gut feeling?

INDIRA RAJARAMAN: I want to comment on a very important point made by Mr. Chawla which has not been addressed by any of us. He was talking about the bank intermediation margin and Surjit came in and said that it was just half a per cent higher than it is in the rest of the world. As a fact that is correct. But what you have to remember is the reason the intermediation margin is so high in Indian banks is because of the NPA load they carry and that in turn is because of the failed attempt by the Finance Minister - an excellent attempt, but a failed attempt to correct labour market legislation and bring in easier liquidation of companies. In this poor country we have assets tied up simply because of lack of liquidation facilities. So, the minute you implement what he promised in the last year's budget, if he were even to go on record, describing what was the major political objection that he faced in trying to bring that Bill into Parliament, that would already be a major contribution towards reducing the bank intermediation margin. We have to remember that their NPAs are a result of this environmental factor. That is one very important point I want to make.

I think we have to remind the Finance Minister of that promise, of that excellent promise and he has to tell us why it is that there was political economy objection to that. Secondly, on CAC, capital account convertibility, I disagree with Surjit; I do agree that we have 50 billion dollars of foreign exchange right now and that we are in a position to loosen up for residents. We already have full CAC for non-residents. It is just prevailing.

I think we have to do what Malaysia did which is to bring in capital account convertibility for residents on a possibly reversible basis.

JAIRAM RAMESH: Subhasish, do you expect the markets to rebound with this budget?

SUBHASISH: Yes and I expect a market revival simply because this is my gut feeling. My gut feeling is that the Government is aware that this year things are getting really bad to us. So, I do think they are going to give some signals. For example the privatization thing that happened - though I do not agree with the way it happened - but it was a very good signal. The agriculture, announcement on sugar and all that were there. So, that is what the Government is going to do and, therefore, the market will revive. The issue whether it will be sustained revival or long standing and whether it will open up and the possibilities in the next Budget are there; because you remember in one Budget we cannot do everything. On the other hand if you plan it well, then in subsequent budgets we can actually take it.

JAIRAM RAMESH: Suman, do you feel optimistic about the sustained market revival?

SUMAN: There is a question on it. On the Budget itself I would say probably, by an old adage, rumours sell on the news. I think we have had the run-up now and the Government has been doing and probably there will be some pull-back after that. My sense of this overall discussion is that actually there is much more, as it was satisfaction in complacency about than the average person in the street. So, we have been taking that climb which will be reflected in the markets sooner or later. Surjit is testimony to the fact that I am noting that in my pocket book. Yes, I do expect over an immediate term; but I believe that the record actually has been that markets often go down right after the budget. I would expect that to happen.

JAIRAM RAMESH: Surjit, do you feel that the markets are going to behave as they have in the past? Take a rise and then take a dip.

SURJIT: I think there is another dip in the market - is that if everybody feels that way it is not going to happen. I think they are believing that the market is already run up and that come budget day you want to sell. I will give you my spin on the market. I think this market is heavily, heavily under-valued. I think what Subhasish just said, and at least in my view, the policy announcement which was in 2-3 weeks ago will go down in history as equivalent to the 1991 devaluation of July; that is a major, mega mega signal about where reforms are headed. This is the privatization as well as the agriculture - movement of foodgrains. In sugar actually they did a waffle and postponed it for political reasons because of U.P. But I think the tenor there was very very positive. I must go on record that I am not as enthusiastic as others.

JAIRAM RAMESH: Let me give the serious point. My short question to you - do you expect the markets to be in the zone of sustained revival after the budget or not?

SURJIT: I would say that they will cross 4,000 in three months from now. My point is the last word. You can put it somewhere earlier. What I can say is at least 4,000. The markets are up because of what policies have happened in February. So, I have a conditional forecast. Yes, if these policy reforms are sustained in the budget then there would be a positive outcome of the kind. If they are not, then probably what Suman has said will be there.

JAIRAM RAMESH: If the policy reforms are sustained in the budget, … and subsequently reinforced in the budget and taken up for action.

SURJIT: It depends on your estimate of whether there is a signal of more to come or is it a one-off. I cannot forecast more than that.

INDIRA RAJARAMAN: I am reluctant to predict, as you know. Let me just say that some of the market rise now is because of FIIs coming in. If there is nothing adverse for the FIIs in the Budget, then I expect to see an immediate perk up actually because they are just waiting to see what is going to happen before they come in with decisions which have already been taken.

BIBEK DEBROY: Since you are winding up and you might do various things in the nature of a consensus I want to register my objection to capital account convertibility alone on the lines of Surjit and Suman. This capital account convertibility is not a one shot kind of thing. You can have progressive liberalizations for the corporate sector and not for individuals. One is that. Secondly, and this juxtapolates on something that INdira has said, except I want to phrase it differently. What the Finance Minister can do to restore credibility, is to have action taken reports. He has them on paper; he has promised them on paper. But if you look at the actual ATRs on the Budget, they are absolutely meaningless. So, like what you have said about the political economy of why could not we get a Public Debt Act, why could not we have the banking legislation; why did not the legislation on securities materialize. And many of these actions, by the way, do not require legislative support. They can be done regardless of the legislative support. So, to retain credibility, I think the ATR idea has to be made much more respectable.

SURJIT BHALLA: Let me formally object to this on the record which I have done prior to this. The media - you guys are primarily responsible for, I think, false dissemination. I think if one looks at the record and that is when I keep coming back - let us look at the numbers, let us look at the record and I want to discuss capital account convertibility numbers there - let me just address this particular one.

As I just stated, the amount of reforms that have happened in the last 2-3 years have been staggering.

JAIRAM RAMESH: Could we change the subject?

SURJIT BHALLA: No, seriously. You look at the financial sector, you look at the agricultural movement of foodgrains. You look at privatization which you have not even talked about which, I think, is the mega signal that has just emerged. If you asked me a month ago I would not have said this; but this is a mega signal. So, therefore, to say that - look, he promised and the point is he promised labour reforms or whatever, it does not matter. The Government as a whole should get the blame and the Government as a whole should get the credit. If we are talking about have reforms occurred, yes, have reforms been faster than before, yes; have reforms been too slow according to some of us, yes.

JAIRAM RAMESH: Let me close with another sound byte. What according to you is the single most important feel-good initiative that the Finance Minister can take in the Budget?

BIBEK DEBROY: I have already said this - scrap part-A.

JAIRAM RAMESH: Arvind, you say in It is in professional capacity.

ARVIND: Let Indira say first, may be I can add something at the end.

INDIRA RAJARAMAN: Have a massive programme of expenditure on rural infrastructure with a promise - massive means more than the present Rs. 2,500 crore provision for the rural infrastructure for the rural roads programme, altogether that Rs. 10,000 crore initiative for rural infrastructure. That is half a percentage point of GDP or slightly less and a promise that that half a per cent of GDP will be realized through better direct taxation of rich individuals in the system who are outside the net.

JAIRAM RAMESH: So, Rs. 10,000 crore rural infrastructure programme resources of which will be found by better tax administration.

INDIRA RAJARAMAN: It is half a percentage point of GDP.

SUBHASISH GANGOPADHYAY: This is something that the Finance Minister can do without consulting anybody out - the disinvestments proceeds from the calculation of next year's fiscal deficit.

JAIRAM RAMESH: And do what with it?

SUBHASISH: Whatever he does. I just want to see the mindset change about disinvestment. Because then they know what the signals are.

JAIRAM RAMESH: Surjit, according to you there is already a feel-good; how will you feel better?

SURJIT: I think basically tax reform on the direct taxes side - I will give very quickly - decrease of the corporate tax rate to the maximum of 30% and bring it on parity, should be the percentage which will always be the highest margin of tax rate for individuals; removal of exemptions, non-standard but that will not be a feel-good factor, coupled with a reduction in the taxes.

PRABHU CHAWLA: Jairam, what are your own suggestions?

JAIRAM RAMESH: No, I am only a moderator.

ARVIND VIRMANI: Well, given that speaking for myself, obviously one of the things I would say is the implementation of recommendations on custom reforms.

JAIRAM RAMESH: Can you explain what does that mean? You want reform in customs. It means single rate of import duty. Is that what you mean? What is the important one - a single rate?

A DELEGATE: You can say that.

A DELEGATE: But, Jairam, we need to talk about import duties a bit because we have not touched it at all.

I think one word actually on the Arvind Virmani imports' recommendations that is there a consensus on it? Let me make it very simple so that whether it is in his report or not; 20% uniform tax tariff rate for all commodities imported.

JAIRAM RAMESH: It is uniform tax rate. I think Rohit has wants some quick sound bytes.

INDIRA RAJARAMAN: Rohit just before you begin, since that will be the last thing that we will do, ….

PRABHU CHAWLA: So far you and Subhasish made a statement in the beginning that we are shifting to revenue rather than expenditure. It is interesting to note that the group of people are not talking; they have forgotten about downsizing the expenditure etc. All of you stopped talking about supply side economy.

A DELEGATE: Even after nine years of failure you still feel that supply side emphasis is there.

SUBHASIS GANGOPADHYAY: I get terrified in classification as to what is supply etc. I am a general equilibrium person. There is no supply without business.

INDIRA RAJARAMAN: I want to make one important point. Consensus is more important. The reason our fiscal process lacks coherence is because of the plan, non-plan distinction. As long as that stays with us we have to, at a minimum, ensure that the period of finance conditions is co-terminus with the thing. So, therefore, my immediate recommendation for the Finance Minister for the next Budget is the following : Make the Tenth Plan which is beginning on 1st April, 2002, make it a three-year plan and not a five-year plan so that it stops in 2005 and after that you can have co-terminus.

A DELEGATE: But why have a plan at all in the first place?

INDIRA RAJARAMAN: Well, if you want to stay with that distinction ….

ROHIT SARAN: Given the situation today in the economy and reasonable level of guessing about the budget is, I will just run through three-four questions. First is about prices- a rise after the budget; from the current level, or stay the same or fall further?

SUBHASHIS GAPNGOPADHYAY: I cannot answer.

ARVIND VIRMANI: It will make some difference.

A DELEGATE: It will be 1.5 to 2. Should I say that it will go up?

JAIRAM RAMESH: Rohit, in 1979 the then Chief Economic Adviser was asked after the presentation of the Budget - what he felt would be the impact on inflation. He went down and he immortalized himself by his answer - he said, only 0.5% decrease in the inflation rate. I think it was the Secretary, Economic Affairs who was asked this question. Actually it went up by 5%.

We have reached the Hindu rate of inflation.

ROHIT: On interest rates after the budget-what do you expect, by and large, in the next quarter, six months--- it will come down or go up or remain the same?

SUBHASHIS GANGOPADHYA: Why are you looking at me?

SURJIT BHALLA: Actually that is one thing I can say - we have to go down.

(no other responses)

ROHIT: The other thing is a little more general which is - well, we have talked about about promises without action and as was said there is no point in adding the baggage of promises that you will not deliver. But given that what is said last year, in this year's budget package, do you think promises will exceed actions or actions will be more than promises?

INDIRA RAJARAMAN: It will be more action and less promise.

BIBEK DEBROY: No, there will be a lot of promises on agriculture. In general there will be more promises.

ARVIND VRIMANI: MORE ACTIONS

(No other response)
ROHIT: Do you agree that budgets are---or good or for bad---getting less and less relevant and with this year's budget there will be one more step forward towards making them less relevant?

Arvind Virmani: Yes. As an instrument of policy, yes.

INDIRA RAJARAMAN: It should be less and less relevant; but this Budget No, because this budget is an important budget.

A DELEGATE: Let it be this way - this budget will be one of the most important budgets; secondly it will continue the trend towards budgets as a forum of policy making and will continue to become less relevant afterwards. How is that?

BIBEK DEBROY: Same thing - in the long run they ought to become more relevant. But it will not happen.

ROHIT: Lots of discussion has taken place on Sinha not being able to deliver on his promises. Why? - political opposition, lack of resources, lack of credibility?

JAIRAM RAMESH: Qualify political opposition from where?

ROHIT: From both - within the Government and outside.

JAIRAM RAMESH: You should say political opposition from within and outside.

A DELEGATE: Let us say political opposition from the system.

SURJIT BHALLA: I think it is bureaucratic resistance.

A DELEGATE: Credibility does not give me that feeling. I think it is lack of commitment. I think this is on Mr. Sinha.

A DELEGATE: I think it is complete lack of support from bureaucracy.

SUBHASHIS: Let me understand this - if lack of credibility from the system is part of political opposition then I will put political opposition.

ROHIT: Do you think, in general, the feel-good factor and, therefore, the economy will look better post-budget one quarter, two quarters down the line than it is today?

INDIRA RAJARAMAN: Yes.

ARVIND VIRMANI: Yes.

SUBHASHIS: I do not think people are any more driven by feel-good factor. They have had it for too long.

A DELEGATE: That is right. The economy only revives if the people feel good, not if the economy feels good.

ROHIT: One very last question - this is not directly germane to this debate but our readers really want this. I do not know how best it can be answered. I will just pose it and leave it to you. Do you see budget creating employment in the next one year-directly or indirectly?

A DELEGATE: It is not related to Budget.

A DELEGATE: This is something which continuously comes. It can create environment.

INDIRA RAJARAMAN: It has everything to do with the Budget. If they go ahead with a major public expenditure programme on rural infrastructure, yes.

SURJIT BHALLA: Let me answer. I think any public expenditure will be completely disastrous and never creates any jobs if there is this …….. According to me the biggest stumbling block for employment growth and for India not achieving 9% growth rate is not ….. those which are happening now, but it is the entire housing sector. That is the housing policy, whether it be the Rent control, whether it be the Delhi District Association, whether it be the municipal corporations which are …… expansion of a housing sector, which is a very key sector in every economy. ……

SUBHASHIS: That is what has happened in Gujarat.

A DELEGATE: The signal that the Government can give is basically to take on the 25 people in Connaught Place by not allowing it to remove Rent Control Act.

ARVIND VIRMANI: I said no, in one year it is too short.

PRABHU CHAWLA: Thank you all, very much.