Devil's Advocate: Kamal Nath on lay offs

Does the Government appreciate the enormity of the challenge that India faces as a result of the international economic crisis? That's the key issue Karan Thapar raised with Minister for Commerce and Industry Kamal Nath on CNN-IBN show Devil’s Advocate.

Karan Thapar: Many people believe that the RBI (Reserve Bank of India) was slow in cutting the CRR, SLR and repo rates. People say all that should have been cut a week earlier. Would you agree?

Kamal Nath: Well, the whole thing started three weeks ago and within a span of 10 days the Government acted. You can't act in panic. You can't have a knee-jerk reaction. You have to consider all aspects of it and the Government has acted and the Reserve Bank has acted too.

Karan Thapar: Let me point this out. When he presented his credit policy the RBI Governor said he was as concerned about financial stability as he was about price stability. In fact in his statement he even spoke of the possibility of tightening liquidity if the need arose. But exactly a week earlier the Deputy Chairman of the Planning Commission had said inflation was no longer the primary threat. His exact words were "the back of inflation is actually broken". So wasn't the Government speaking in two words?

Kamal Nath: Not at all. We had inflation which went up to 13 per cent. It was coming down the curve, had stopped rising. The rise in price had stopped. The Government itself had contained liquidity about six months ago because of inflation. Now there has to be a calibrating. There has to be a calibrating between money in the market and inflation. That's what we were doing.

Karan Thapar: If there has to be a calibration do you think the Governor has cut the CRR and interest rate sufficiently because Assocham is calling for a 3 per cent cut in the interest rate. FICCI thinks the CRR rate should be at three, maximum 3.5 per cent, so has he done enough?

Kamal Nath: There is a balance, there is a liquidity issue. First the liquidity issue was targeted by us, by Government because of the inflation. We got a double barrel, then came the international pricing, then came the lack of consumer and investor confidence, then came pulling out of Foreign Institutional Investors (FIIs) of about $12 billion from our stock market. So, all these things came double barreled. There has to be a balance between how much you will put in the prime bank and that fat is the liquidity.

Karan Thapar: But, the point is that in making that balance, I concede that it is a difficult balance for anyone to achieve, has the Governor urged too much on the side of caution. The industry was hoping for a big bang set up policy but what the Government offered was a drip, drip, drip of smaller measure; as a result the need for a psychological push to cut through fear and panic seems to have been ignored.

Kamal Nath: The Prime Minister had a meeting with the industry two days ago.

Karan Thapar: But, that was just now?

Kamal Nath: It is just a three-four week old crisis, it is not that it is three-four month old crisis. You really require an action which is not panic. We don’t have the problems which are there in the Western world, we must remember that. With our banks not being under trouble there is an element of caution to be exercised. While exercising that caution I think the injection of the liquidity into the system has taken place.

Karan Thapar: Except for the fact that people feel that it should have taken place earlier, you are saying that that sort of criticism made by certain industrialists and many sections of press against the Governor, is unfair and even unfounded.

Kamal Nath: It is not unfair or unfounded, everybody has to have a view. Somebody who has got liquidity crisis wants it all, he is not concerned with any other dimension. But, the Government and Reserve Bank is concerned with all dimensions and all facets of the problem.

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Karan Thapar: The papers report that you felt that the Governor should have not gone faster, he should have cut deeper – are the papers correct in reflecting your reviews?

Kamal Nath: I did say that we should do this immediately and immediately happened in five days instead of three, now what difference does it make? It is not that it happened after five months or five weeks.

Karan Thapar: So, too much is being made of two-three days?

Kamal Nath: Too much is being made of it and now with the injection of the liquidity into the financial system there is a lot of ease, but there are new issues dragged into it.

Karan Thapar: Exactly, that is what I want to come to. Let us begin talking about the fear of lay-offs. The Prime Minister in fact in his meeting with the industry in the interest of the country has appealed to the industry to avoid lay-offs. But as you know the fear of lay-offs is not only present, in some sectors it is growing. Industries have already begun cutting bonuses, salaries and perquisites. Can lay-offs really be avoided?

Kamal Nath: I think lay-offs can be avoided. We must remember our economy is domestic demand driven. There is an element of export which adds to our Gross Domestic Product (GDP). We have exports of about $170-180 billion. Now what is happening in the US is that there is no liquidity, there is no consumer confidence, there is no buying, their economy is going down and the same is in Europe. This is going to affect our exports so Indian industry I believe has a resilience to overcome this.

Karan Thapar: The question is how much resilience does it have. Let us first take the issue of exports and then come to domestic demand driven issues thereafter. There are fears that exports growth might collapse this year which is 10 per cent compared to the 27 per cent the year before. Now, in the case of the small and medium enterprises which are the backbone of India’s export industries, there must be an enormous pressure to make lay-offs otherwise those companies will become unviable very quickly.

Kamal Nath: They being the smaller and the medium sector industries are being helped by the appreciation of the dollar and depreciation of rupee, so that is one benefit they have got. We are looking at other benefits, we can give them some sops.

Karan Thapar: Except for the recession in the West, any benefit in the terms of rupee or dollar?

Absolutely, the recession in the West is a demand. We’ll create a demand constriction.

Karan Thapar: Which is why Indian exports will suffer and therefore in export-related industries can you really be certain that you won’t see lay-offs?

Kamal Nath: I believe we won’t because I think the Indian market is growing.

Karan Thapar: Believe or hope?

Kamal Nath: I believe and I hope. Why? There are new markets where we will find space. There will be a marginal effect, I am not saying there won’t be a marginal effect.

Karan Thapar: So, there will be some lay-offs?

Kamal Nath: No, there won’t be lay-offs; there will be marginal effect on the exports.

Karan Thapar: Ok, let us then look at the domestic demand importance in the economy. The Business Standard reported just two days ago that out of the 1,379 companies that have so far reported their second quarter results, the net profits has dropped by as much as 35 per cent. This is the sharpest drop since 1998 when reporting quarterly results became mandatory. Surely, such companies will remain viable and have to start laying-off people otherwise the companies themselves will go to the vault.

Kamal Nath: Well, this is profit. We must recognise that last four years, the companies have made 50-60 per cent profits. In the West and in the other parts of the world they are struggling with five to 10 per cent profit so if there profits are coming to 30 per cent, Indian industry must live with this 30 per cent profits. They can’t have the same 50 per cent profit always.

Karan Thapar: So, you are saying to industry captains – don’t try boost your profits by cutting people at this moment, live with smaller profits but retain the people you have.

Kamal Nath: Absolutely, I am saying that and I am saying that if you have 30 per cent profits they are very good profits internationally and this is transitory. I don’t believe that this gloom, which is set up in the West, is permanent. It is transitory. Let us face it, let us address it and move on.

Karan Thapar: So, you saying for greater good of India and its unity, accept lower profit and don’t try to boost them by laying people off.

Kamal Nath: For greater good of industry and greater good of company itself because this is transitory as I say.

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Karan Thapar: But, what happens if the captain of the industry turns around and says to you that it doesn’t make economic sense. My business is to boost profits, I am not in the business of social engineering?

Kamal Nath: I think it makes a lot of economic sense when you have a 30 per cent profit and internationally you compare it with any profits, the profits made by the Indian companies is the highest in the world.

Karan Thapar: Traditionally, in India services which are transferred just over 50 per cent of GDP growth have always lifted performance of the Indian economy but this year when the financial services and construction are actually in the doldrums and host of other services such as – tourism, transport, travel, advertising, marketing, hotels, even media are in serious trouble – can services really lift the performance of the country? In fact, can services come in double digit?

Kamal Nath: Well, I think services will continue to have its role in our GDP and growth.

Karan Thapar: But, can they achieve the double-digit growth?

Kamal Nath: Yes, they will. They are achieving it and there has been no slowdown because the patterns are changing. Now, in the Western world, in the IT sector they need global comparativeness. For them it is because of their problems. It is more important for them to become comparative.

Karan Thapar: Because of their problems, Wipro, Infosys and Satyam, all of them could begun to suffer. They could find contracts be cancelled, they may be under pressure themselves and therefore companies would lay-off people.

Kamal Nath: I don’t think so. What could perhaps happen is, what they have said is the number of jobs they were creating. They will not create the same number of jobs.

Karan Thapar: Growth in the jobs may be checked?

Kamal Nath: Growth in the employment generation will be affected.

Karan Thapar: But, you are saying the actual levels of employment that exist will not be affected regardless whether we are talking about exports, manufacturing or service?

Kamal Nath: We must remember the curve we were on was very sharp, now it will not be that sharp. That is the only difference, it is not that we will start going down.

Karan Thapar: This crisis happens at this time and it coincides with the anti-Christian violence in Orissa and MNS threat in Maharashtra. It coincides with Singur, the uncertainty of elections and with continuing terror. Are you worried that all of this together could put investors off India?

Kamal Nath: I don’t think so. In September, our inflows of FDI have been 250 per cent more than September 2007.

Karan Thapar: But is this going to continue?

Kamal Nath: Well, there is a liquidity crisis abroad but I believe with the liquidity crisis there will need to be still investments made for the manufacturing and they will look India for that.

Karan Thapar: So, you are saying that the commitments in terms of FDIs already made will be honoured. They won’t be postponed and delayed?

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Kamal Nath: No, I don’t see that. It is reflected in the figures for September.

Karan Thapar: Can they be continued in October, November and December?

Kamal Nath: In the first six months, our FDI inflows have been 135 per cent more than the six months of the previous year.

Karan Thapar: What about the next six months? Will that rate of growth continue, will it fall or will it actually become negative?

Kamal Nath: No, it will not become negative. In September it was 230 per cent more.

Karan Thapar: But did the rate of growth diminish?

Kamal Nath: We won’t see this 200 per cent growth all the time, let us be clear but I believe that FDI target of 34-35 billion set for this year would be met.

Karan Thapar: Let me tell you why I have put this question so forcefully to you. Already two major British newspapers – The Telegraph and The Times - have started publishing articles which are questioning India’s rate of growth and they are even questioning fundamentals of the Indian economy. The Economist, a powerful magazine, did that a couple of weeks earlier. Is there a sense in which the sheen is coming off the India story?

Kamal Nath: It is not the India story, the sheen is off the Western world and that sheen which is off the Western world is causing a sentiment or a frenzy effect in India.

Karan Thapar: But you are saying they are not seeing us in different lights, through different spectacles.

Kamal Nath: No, in a relative situation we are so much better off.

Karan Thapar: Ok, how confident are you that you can still achieve 7 or 7.5 per cent growth or is that a slight over statement?

Kamal Nath: No, I don’t think it is an over statement at all. We are on track to achieve an excess of 7.5 this year.

Karan Thapar: Politicians usually say that when questioned. Do you really mean it or you are saying it because you need to boost morale and speaking the truth is too difficult?

Kamal Nath: No, it is recorded in figures.

Karan Thapar: So, you nailing your hopes to 7.5 per cent growth this year?

Kamal Nath: Absolutely.

Karan Thapar: Let us turn to the Government’s response in certain specific areas. The Prime Minister has said the Government intends to time the economy and many people agreed with him. But the truth is that if you look at the large Government projects that could actually pump the economy like – the national highways development, privatisation of airports, power projects – they are not just languishing they are behind schedule by months or years. In the absence of these projects, isn’t pump timing well intention rhetoric and nothing at all?

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Kamal Nath: No, not at all. This has come now, we have now decided to pump in so much more and that is going to happen. If we say everything is languishing that is not correct. Let us be clear, if we see what is happening in our highways, we build more highways than what have been ever made.

Karan Thapar: Tell me something, you said something very interesting – this has come now, the Government has decided to pump money into these projects. You have any idea of how much you intend to pump in?

Kamal Nath: We will definitely have to pump in close to a Rs 1,000 crore on an annual basis in definitive projects – in power sector Rs 1,000 crore, in roads Rs 1,000 crore. Totally, I think we need to pump in Rs 20,000-25,000 crore in the next six months to keep this machine moving.

Karan Thapar: Where is this money going to come from? Twenty thousand crore rupees in six months is a huge sum of money?

Kamal Nath: Well, it will be relocated in the existing Government’s revenue and we are very cautious about printing notes and financial management. Let us be very clear on that.

Karan Thapar: In other words, you not going to print new money, you are going to do it within the budget. So, what are you going to cut to give yourself Rs 25,000 crore?

Kamal Nath: Better efficiency and that the Finance Minister will have to look at from he can trim, how to create it, how employment can be created and what will create more economic activity.

Karan Thapar: The problem with trying to fund this money is that historically the Indian Government has not been capable of producing greater efficiency. And it is not you, all Governments in India are inefficient. So from where will this efficiency come?

Kamal Nath: Well, there has been transformations in the last couple of years. Let’s remember we were new to public-private partnerships. There were many platforms we didn’t have and now we got these platforms, I think it has become easier.

Karan Thapar: You are absolutely confident that your fiscal deficit is not going to go through this roughish result?

Kamal Nath: Well, I don’t believe so.

Karan Thapar: Don’t believe so, doesn’t sound like confident.

Kamal Nath: I am absolutely confident. I am sure that the Finance Minister is going to ensure this.

Karan Thapar: So, you are already saying this to me and I am repeating it, it is such an important thing that there will be no printing of money, fiscal deficit won’t suffer, this Rs 25,000 crore will literally come from greater efficiency.

Kamal Nath: And reallocation.

Karan Thapar: That is something time alone will prove. Let us come to another suggestion made this time by NK Singh in The Times of India. He says that the Government should dig into India’s result and create a special fund of $30 billion which could be used for financial institutions as the first option of redemption. Many other people support this idea saying this would mitigate the capital out of the country, it would stabilise the stock market and the rupee and in due course as things improve it will also make tidy profit for the country. Do you think this is a wise suggestion?

Kamal Nath: It is one of the suggestions which has its pros and cons. I believe that we should try and not fight the capital which is gone, we must try and attract it back and I see it coming back. This is panic. The capital has gone back not because India’s fundamentals were bad. Not that they were making profits, it is a tribute that the most easily encashable stocks were from the Indian stock market.

Karan Thapar: But if you actually want to attract the capital back and attract fresh capital in larger measure then what steps are you taking? For instance, to make it easier for NRIs to bring in more money?

Kamal Nath: We are looking at various steps in that relation.

Karan Thapar: Such as?

Kamal Nath: We are looking at how it can be more attractive for them. This cannot be demanding.

Karan Thapar: Will you remove ceiling for instance?

Kamal Nath: We are looking at it, I can’t say what is happening. What I can say is that we are looking at greater capital inflows and greater dollar inflows.

Karan Thapar: Would you allow banks to offer higher rates of interest on NRI deposits? That is one way of doing it.

Kamal Nath: Well, this is something that is being looked at. I think we should leave it at that.

Karan Thapar: So, you have an open mind?

Kamal Nath: Yes, of course we have an open mind and yes, it is one of our options.

Karan Thapar: So, you have an open mind on steps to track the capital, you also have an open mind on NK Singh’s suggestion?

Kamal Nath: That suggestion is not a new suggestion. It has come many times on what we should do. Let’s be clear, we have been very cautious and very conservative with our reserves. We should continue to be cautious with our reserves.

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Karan Thapar: But for that 250 billion do you have the reserves to fund the 30 billion venture?

Kamal Nath: Yes, Karan that is one of the things which seems very vague but if you look at it in the context of GDP, our trade deficit at the moment, is not a very big amount.

Karan Thapar: What’s the level below which you don’t want your reserves to fall. They have already reached 258 billion, is that the level you’ll feel comfortable with?

Kamal Nath: I think 258 billion is also less, we should have not let it go below 300 billion because when we look at our trade deficit, our fiscal deficit and foreign fiscal deficit. We need to be cautious on these things.

Karan Thapar: So, you are already a little worried about the fiscal deficits and reserves?

Kamal Nath: We are cautious on our reserves.

Karan Thapar: My last question, we have been talking so far about economic handling, many people talk about psychological handling of the crisis. I want to quote to you briefly from The Business Standard, “The system needs something more than the Finance Minister declaring that the fundamentals are sound, investors must not panic, the banks must lend. The question is that is your Government capable of that something more?

Kamal Nath: Of course, we are doing it, have done it in last three weeks and we will continue to do it. The Prime Minister has set up a committee to address these issues immediately.

Karan Thapar: Many people feel that the Finance Minister is too cut and dry and too technical and sometimes even too cold in his response. Can you understand that part or you completely disagree with it?

Kamal Nath: Well, the Finance Minister’s job is a finance minister’s job and in that some may consider him too tight on many things. Well, that is their view but the finance minister’s job is to be tight.

Karan Thapar: It was a pleasure talking to you on Devil’s Advocate.