10 the raffles conversation

THE BUSINESS TIMES WEEKEND SATURDAY/SUNDAY, FEBRUARY 2-3, 2013

THE BUSINESS TIMES WEEKEND SATURDAY/SUNDAY, FEBRUARY 2-3, 2013

the raffles conversation 11

ments on board and identify the amount of subsidies to each state. We then have to link the thousands of PDS shops to the system, so that when food is delivered, the subsidy is also delivered. It's complex, but not impossible. It will come at the end of the chain. Were starting by doing the more easily doable things, in order to prove that the system works. But big reforms aside, what about Indias red tape, which many investors find frustrating? What about fixing some of the simpler problems that would improve the business climate? In the World Banks 2013 Doing Business report which ranks countries on the ease of doing business, India is ranked 132nd out of 185 and scores particularly low on criteria such as enforcement of contracts, starting a business and paying taxes. Dont pay too much attention to these rankings, says Mr Chidambaram. Look at some of the countries ranked above 132: not a rupee of investment goes into those countries. So what is the point of saying those countries are good for business when no business is being done in them? Many of them are not even democracies. So I don't think these rankings are important. But yes, if you look at the larger countries and compare the ease of doing business, I agree there is a lot of scope for improvement. We need to improve and we are improving. We have quickened the approval process for investments by the Foreign Investment Board, we have moved many investments to the automatic route, where no approval is required, we have set up a cabinet committee which will oversee large projects where investments are over US$200 million and we will set timelines to nudge ministries and departments to adhere to them. Its a work in progress, but I concede that we can do better. shoes, arms, ammunition, its work in progress. Delhi is a particularly difficult city to govern, he adds, because a large number of people come to live in Delhi every day. There are many unauthorised mushroom colonies which have sprung up. They are difficult to police. But we will tackle the problems thrown up by recent incidents. The gang rape in December was a particularly horrific incident which shook the

Indian Finance Minister Palaniappan Chidambaram talks to Vikram Khanna about how and why things are looking up for the Indian economy

Indias tough reformer

had long eluded his predecessor: he partially rolled back diesel subsidies, opened up to foreign investment in aviation and multi-brand retail, took steps to speed up infrastructure projects and adopted a conciliatory approach in a US$2.6 billion tax dispute with the British phone company, Vodafone which had also raised concerns among other foreign investors. Investor sentiment towards India soon improved. The Indian stock market has risen about 25 per cent from its 2012 lows last May, and the rupee has recovered. During a visit to Singapore last month, which followed a trip to Hong Kong, Mr. Chidambaram met with business leaders as well as representatives from Temasek and GIC, making the case as he does with practised flair, for investing in India. In our conversation, he exudes confidence. Asked whether the fall-off in Indias economic growth from 8-9 per cent from 2004-2010 to 5-6 per cent currently is likely to persist, his answer is an unequivocal no. The growth dip is purely temporary, he declares. Growth has fallen in all countries of the world, including China. In terms of comparative rates of growth we are still among the top five. Only Indonesia and China among the large countries are growing at more than 5.7 per cent. Once we get our act together once we shrink our fiscal deficit and restart the cycle of investment we will get back to high growth. The weakness in the US and EU economies is no big issue, he adds. Indias economy is largely driven by domestic demand and domestic consumption. Imports and exports are important, but still play only a subordinate role. So, well get back to our potential rate of growth of 8 per cent within two years.

N 66 years of post-independence Indian politics, where cabinet positions are much-coveted, only one individual has had the distinction of holding the prized Finance portfolio on three separate occasions. He is Palaniappan Chidambaram, a 67-year-old Harvard-educated lawyer who is seen as the co-architect of Indias economic reforms, together with Prime Minister Manmohan Singh. Indias veteran business leaders and commentators still wistfully remember Mr Chidambarams dream budget, of March 1997 which slashed income tax rates and import duties, launched a tax amnesty scheme to mop up undeclared income, liberalised foreign investment norms and sent Indias stock markets flying. His second innings as Finance Minister came during 2004-2008, when the Congress Party to which he belongs formed a coalition with the communists. He is now on his third stint, which began in August last year. Mr Chidambaram has a reputation not only as an economic liberaliser, but also as a tough, decisive and efficient administrator. With his sharp intellect, no-nonsense manner and undisguised reluctance to suffer fools, he commands respect more than affection. His detractors, including from his own party, sometimes accuse him of arrogance. But large sections of the Indian public appreciate him, most of all for a quality which commands a high premium in Indian politics: the ability to get things done. This also makes him something of a troubleshooter, the Mr Fix-it of Indias cabinet. After the Mumbai terror attacks of November 2008, he took over the vital Home Ministry which was then under fire from public opinion for its slothful response to the attacks as well as intelligence failures. He acted fast to revamp Indias police services and took a harder line against the so-called Maoist rebels that control large swathes of Indias rural territory, with some success. He reappeared as Finance Minister when the Indian economy was floundering, with growth slowing sharply, the rupee close to an all-time low and the countrys public finances bleeding red ink. He soon launched a series of measures that

PALANIAPPAN CHIDAMBARAM
Finance Minister of India (since August 2012) Born Sept 16, 1945, Kandanur, Tamil Nadu, India EDUCATION B.Sc, Presidency College, Chennai, LL.B, Madras Law College MBA, Harvard Business School, class of 1968 POLITICAL CAREER 1984 First elected to Lok Sabha (lower house of Indian parliament) from Sivaganga, Tamil Nadu Re-elected in general elections of 1989, 1991, 1996, 1998, 2004 and 2009 December 1985-89 Minister of State for Personnel, Public Grievances and Pensions, India June 1991-July 1992 and Feb 1995-April 1996 Minister of State for Commerce, India June 1996-April 1997 Finance Minister of India May 2004-November 2008 Finance Minister of India November 2008-July 2012 Home Minister of India

There is no room in a developing country for wasteful expenditure. We have to contain spending and try to get the best bang for the buck. And no, its not politically difficult. It just needs firmness in administration. If we target subsidies better, deliver them more efficiently only to the deserving, estimates show there could be savings ranging from 20 to 60 per cent in some cases.
conscience of the country, he says. But it has given us an opportunity to address gender-related issues. We hope we can use this opportunity to push through critical legislation that will give a better deal to women. The visible increase in public agitation has a positive side to it, he suggests, in that it partly reflects rising expectations. We have a young population, he points out. Even by 2020, the average age in India will be 29, compared to 45 in Japan. Our young population is restless, questioning, aspirational and more material. I welcome that. They should become more material, so that they demand jobs, incomes, housing, roads. In a sense its a wake up call to all political parties: wake up and recognise that a new generation has come of age. Almost 30 years after first being elected to Indias parliament, Mr Chidambaram himself has more than come of age as a politician. Now one of the seniormost members of the Indian cabinet, there is talk of him becoming the next Prime Minister. Is he ready to take it up? He has been asked this question many times and given the same somewhat cryptic answer, and he does so again: I know my limitations and I live and work according to my limitations, he says. My party has clearly chosen Shri Rahul Gandhi as the next leader of the party... The party will choose the prime minister at an appropriate time. Life is not just about being a minister, he adds. I have to conserve a few years of my life to do the things I want to do, which is travelling, reading and writing. And I hope you will read what I write.

Wake up call
Finally, but not least, there are questions about governance in India in general. This is reflected not only in the poor quality of many public services, but most visibly in huge public agitations in the country over official corruption and most recently, safety in cities, especially for women, after the gang rape in New Delhi in December 2012. In the area of public services, Mr Chidambaram points out that things are improving. The Delhi metro is an example of a dramatic improvement in public transport. Every city now wants a metro. There are 14 metros under construction in various cities all over India now. When the metros are in place, public transportation will improve. Or take the distribution of electricity. People have woken up to the fact that governments have failed in distributing electricity. Today in Kolkata, in Pune, electricity is distributed very efficiently and people are willing to pay for it. We are addressing the issues of public services, area by area. But he agrees that there are areas where India needs to do much better. One of them is policing. We have a very low policeman-to-population ratio. After I moved to the Home Ministry, I ensured the police services recruited 90,000 policemen and women every year for two years. But even then, our ratio is below the world average. We also have to train these policemen, equip them with uniforms,

ARTHUR LEE

Tough cuts
One of the biggest challenges facing any Indian Finance Minister is reining in the countrys fiscal deficit, which at 5.8 per cent of GDP in 2011/12 was among the biggest in Asia. The deficit has been stubbornly high partly because of hard-to-cut subsidies on the so-called 3 Fs food, fuel and fertilisers. Last year, the credit rating agencies Standard and Poors and Fitch lowered Indias sovereign credit rating outlook to just one notch above investment grade

and threatened to downgrade it further in the absence of corrective action. Mr Chidambaram has vowed to slash the fiscal deficit to 5.3 per cent of GDP in the current fiscal year (ending in March 2013) and then take it down further to 3 per cent of GDP within four years. There is no case at all to downgrade India, he told investors in Hongkong. We have done the arithmetic, he says in our conversation. Gross tax revenues have risen in the past and can rise again by 17-18 per cent a year. We will have non-tax revenues, through disinvestment (sales of shares in public sector units or PSUs) and sales of spectrum. There will also be revenues in the form of dividends from PSUs. We have cracked the whip we have told them that they have to perform, they have to earn profits and they have to invest their huge piles of surplus cash. Either they use it or they lose it we will take special dividends from them. So

there are various ways of boosting revenues. But the greater challenge is to contain expenditure but this is also an opportunity, he says. There is no room in a developing country for wasteful expenditure. We have to contain spending and try to get the best bang for the buck. And no, its not politically difficult. It just needs firmness in administration. If we target subsidies better, deliver them more efficiently only to the deserving, estimates show there could be savings ranging from 20 to 60 per cent in some cases. From 2013, India will be using technology to more efficiently transfer subsidies and other government payments. Under a so-called Direct Benefits Transfer scheme launched in January, payments will be made electronically and directly to recipients bank accounts. The scheme which will be unrolled gradually across the na-

tion throughout the year. It is something Mr Chidambaram is visibly enthusiastic about. Today we transfer defined benefits to identified beneficiaries scholarships, stipends, old age pensions, some other payments to auxiliary workers in the health care system. All of these go through a maze. One doesnt even know where the money lies at any given time, and were not sure if it reaches the beneficiaries. So we get complaints from old women, from students I have not got my scholarship, I have not got my pension. All this will change. The system uses highly sophisticated technology, he points out. The benefit is transferred instantaneously to a bank account which has been seeded, or will be seeded, with a unique identity number. So a person can have only one bank account; he cant have a duplicate bank account, because theres a biometric identity there.

And the benefits will go directly to him it wont lie somewhere in the system for months or weeks. Nobody can steal it, there is no leakage, no corruption. And no one can have a dual identity or dual benefit. There are huge efficiency gains. The most important thing is the delivery of the benefit to the beneficiary on time and directly to the account. of the beneficiary. At the end of last year, 600 million Indians had unique identity numbers. Over the next two years, the government hopes to have the entire population covered. For now, the system is not being used to transfer the biggest subsidies, such as those on food and fertiliser, though eventually this will happen too. Food and fertiliser subsidies are more complex, Mr Chidambaram explains. For example, there are different kinds of fertilisers, involving different types of subsidy. Food is distributed to the poor by state governments through the PDS (public distribution system). We have to get state govern-

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