RBI Should March in Step with Govt: FM

EXCLUSIVE Q&A P CHIDAMBARAM FINANCE MINISTER

Tasked with turning around growth & the credibility of the government, P Chidambaram says he just happens to be at the right place at the right time. In his first exclusive interview after taking over as FM, he says the govt must always tell the truth

    Finance Minister P Chidambaram wants the Reserve Bank to "walk in the same direction" as the government by cutting interest rates in response to sweeping reforms to rules governing foreign investment and politically-difficult cuts in fuel subsidies. 
"In our view, the government and monetary authority must point in the same direction and walk in the same direction. As we take steps on the fiscal side, RBI should take steps on the monetary side," Chidambaram, 67, said in his first exclusive interview since returning to the finance ministry. 
RBI held interest rates stable at 8% in its mid-quarter review of monetarypolicy on September 17, even as the government announced a dramatic series of reforms on September 13-14. The MP from Sivaganga, Tamil Nadu, is front and centre of the drive by the Sonia Gandhi-led Congress party to recapture the initiative and return to power in the general elections due in 2014. The core of the strategy, many analysts say, is to revive economic growth, so as to generate resources for welfare schemes such as NREGA and the proposed Food Security Bill. Key to this approach is reviving investor confidence, which the Manmohan Singhled administration has attempted to do by pushing through economic reforms such as allowing foreign supermarkets to enter India. 
The Harvard-educated lawyer, who returned to the finance ministry on July 31, succeeding Pranab Mukherjee, said his top priority was to stabilise the exchange rate by making India an attractive destination for non-debt dollar inflows such as remittances and foreign direct investment in order to tackle the stubbornly high current account deficit and control inflation. 
"We want to do all that needs to be done to bring about stability in the exchange rate. Volatility in the exchange rate impacts trade, impacts investment decisions and makes RBI's job of controlling inflation more difficult. That's why I put that on the top. If there are more capital inflows, preferably non-debt creating inflows like remittances and FDI, that will help stabilise the exchange rate. In fact, the rupee will strengthen," Chidambaram told this paper on Saturday in an interview at his North Block office. 
The rupee, which dipped to an alltime low of 57.13 to a dollar in June this year, has since started strengthening due to higher inflows into the stock market. It has risen 5% since July 31, closing at 52.86 on Friday. 
A rise in the rupee against the dollar will bring down the oil subsidy bill and help tame inflation. The Sensex has risen almost 9% since July 31, closing at 18,763 on Friday. 'Strict Vigil on Expenditure Priority' 
A strict vigil on expenditure was another core priority, and this would be accompanied by a crackdown on tax evaders to raise revenues, Chidambaram said. "Running a tighter ship itself will yield results. We need to convey to the people that complying with tax laws is better than non-compliance." Despite the recent cut in fuel subsidies, the finance minister, who joined the Rajiv Gandhi government in 1985, said subsidies cannot be wished away in a country where many people are poor, signalling that further bigbang reforms such as freeing up diesel and urea prices may have to wait. The UPA government has faced ferocious opposition to its reforms, with the principal Opposition party, BJP, threatening to rescind the move to allow foreign supermarkets into India. 
"We would have to take some hard decisions, but consistent with the socio-economic objectives of the government. In a country where a significant number of people are poor, there will always be a certain level of subsidies. The key to managing those subsidies is to target them better and ensure they are transferred directly to beneficiaries," Chidambaram said. 
The Trinamool Congress, a key ally, snapped ties with the UPA after the reforms — undertaken partly to ward off the threat of a possible ratings downgrade by agencies such Standard and Poor's — were announced. "I don't think we face a credit rating downgrade. But we take it seriously that some people have talked about a possible downgrade. We will engage with the rating agencies and convince them that we are taking necessary steps," said the minister. 
Both the Prime Minister's Economic Advisory Council and RBI have warned the government on the need to rein in the so-called twin deficits — on the fiscal and current account — to avoid the risk of a credit downgrade. 
As minister of state for home, Operation Black Thunder — to flush out militants from the Golden Temple in 1988 — was one of Chidambaram's first big-ticket political assignments. In his second stint at the home ministry between 2008 and 2012, he attempted to crack down on Naxalites, with what experts term as mixed results. The minister said growth will return to 8% if investment goes back to 37-38% of GDP. He claimed that the widespread perception that he was undoing many of the acts of his predecessor Pranab Mukherjee, now the President of India, was wrong. A controversial retrospective change in income-tax laws in this year's budget, which allows the government to impose a capital gains tax on Vodafone's acquisition of the Indian telecom assets of Hutchison Whampoa, has attracted international opprobrium. That decision is up for review along with proposed rules against tax avoidance and is widely thought to have dampened investor sentiment. 
Chidambaram made it clear that "a resolution of the Vodafone dispute would be prudent and beneficial. But how do we resolve it? Do we resolve it through a settlement or do we resolve it through arbitration or litigation is a matter that has to be considered. Let's wait for the Parthasarathi Shome Committee to give its advice". 
The Shome panel, set up in June to review the various aspects of tax policy, has suggested in its draft report that GAAR be postponed by three years. Its final report is expected on Monday. India's exportoriented IT sector is also poised to have a stable tax regime after a report by yet another panel suggested that the tax regime should move away from the aggressive enforcement of the Mukherjee years. 
On the goods and services tax, the finance minister said the bill to amend the Constitution, giving states the right to charge service tax and the Centre to impose tax up to the retail stage, can be passed if the Centre reached an agreement with the empowered committee of state finance ministers on GST. "We have got the AG's opinion that there is no effect on the legislative and executive autonomy that states enjoy under the Constitution," he said.