“Finance minister Manohan Singh says he will not quit “

He is the man that the Joint Parliamentary committee (JPC)-or, at least, some of its members-loves to hate. But finance minister Man Mohan Singh is not a man to be browbeaten by critics. Or, for that matter, forced out of officially forced by a somewhat misguided witch-hunt. Even as detractors were baying for his blood, the finance minister met SUNDAY for a wide-ranging interview. In the excerpts featured below, Manmohan Singh talks about the JPC, India’s banking system, our economic future and his decision to stay on as finance minister.

SUNDAY: The JPC draft report has not been very kind to you and a lot has been made of your remark about not loosing sleep…..
MANMOHAN SINGH: In the Parliament, in the cut and thrust of a debate, one says many things. But you must judge the speech that I have made whether in Rajya Sabha or Lok Sabha in its totality. Anybody who reads at speech, will be able to make out that I was worried about the state of financial markets. I also outlined in the speech the measurement we had taken and the steps we proposed to take. Therefore, this one short sentence cannot become a judgment on the functioning of the finance minister.

Q: Ram Niwas Mirdha has blamed foreign ranks as being the key players in the scam.
A: Foreign banks were involved, Indian banks were involved. The important thing is what we are going to do about it.
I have started more than once, that banks irrespective of their nationality should conform to Indian laws. So the guilty should be punished. But at the same time, it is necessary to recognize that for the integration of the Indian economy, if we want more foreign investments, we need the presence of the international banking community. We should not simply force foreign banks to close.

Q: A common feeling is that there was an inexplicable delay on the part of the finance ministry in unearthing the scam in time…….
A: What is the scam? It is the misuse of bank funds and their diversion to the stock market. Unless you discover that bank funds were being misused, how could I do anything? It was only when the stock market crisis worsened in January, February and March that we began to look us to where the money was coming from.
On the fact of it, the credit situation was very tight; all the instructions to the Reserve Bank were not allow bank money for speculative purposes. Despite the seemingly tight credit policy, when the stock market indices went on rising, we looked for sources. Where was the money coming from?

Q: How did it take to find out where the money was coming from?
A: Once the RBI (Reserve Bank of India) started its exercise to look into the possible sources, it was discovered by March end, that the money was being taken from the banking system. Once we knew that, we took effective action. By mid-April, in the case of State Bank of India (SBI), we found out what was happening. By 30 April, the Janakiraman Committee was appointed. By mid-May, we brought in the CBI. Within two-three days of the first Janakiraman Report, we had set up special courts and issued an ordinance. It was not a slow response.

But we had to know what was fanning the speculation and unless we knew, we could not take action. If you take a look at the functioning of Bombay Stock Exchange (BSE), there were several irregularities. People get a low rate of return on investments in bank funds. Like water finding its own level, ways and means were found to see that money was diverted to the stock market, essentially public sector portfolio management schemes.

They wanted a rate of return, which they did not get on normal bank deposits, so they used techniques like portfolio management schemes, diversion of funds to the stock market and making them available to brokers. These became instruments of generating a higher rate of return.

Q: Some JPC Opposition members feel that you tried to pass off the boom in stock market as an outcome of your liberalisation measures.
A: I have always said that a blooming stock market and a crashing economy makes no sense. In the Lok Sabha, the Rajya Sabha and else where I have repeatedly said that stock market prices all over the world can divert from fundamentals. I do not need a certificate from the stock market to indicate the success of our economic measures.
There are more objective indicators. They cannot point out where I have stated that the boom was vindication of our economic policies. But I do want a healthy stock market because we need to channel more and more resources.

Q: The most damaging allegation Harshad Mehta has made is that there was a quid pro quo arrangement-that in return for certain favours to the government, the finance ministry obliged him……
A: I have talked to Dalbir Singh (minister of state for finance) and he has denied the allegations. Kamal Pandey ( controller of capital issues) said that he did not pass on instructions to Paul Joseph (government nominee on the BSE). Paul Joseph told me that the particular item, which allegedly helped Mehta, was not on the agenda of the stock exchange. The minutes that I have seen does not contain that item. Why don’t you get hold of the minutes of the BSE meeting? That should provide conclusive evidence. That should tell us who is lying.

Q: P.K. Gupta, a former CBDT (Central Board of Direct Taxes) official, has alleged that you never ordered the raids on Mehta and even questioned him about why Mehta was raided.
A: I don’t think that it is proper for me to argue with a former official. I did not claim that the raids were ordered by me. Raids are not ordered by the finance minister. I did use the world “I intervened”, by which I meant the finance minister, have said this before the JPC, and in Parliament that the income tax department ordered the raids. A finance minister should not, and he did order any raids on any individual-neither Harshad Mehta nor anybody else. Gupta used this little word “I” in a manner……. (Shrugs). Let the country judge.

Q: Gupta has also alleged that no steps taken to recover or trace the money. On the other hand, obstacles were put in his way, the result that tracing, or attaching, on that matter, recovering the amount…
A: On that point, the record will show. Any way he was in charge of the investigations till then, he retired.

Q: Gupta has claimed that he unearthed a racket in the foreign exchange immunity said me and when he brought it to the finance secretary’s notice, the later soft peddled the issue
A: I don’t think I want to enter into controversy with Gupta nor do I want to go into details.

Q: Are you feeling upset over the persists demands for your resignation?
A: (Looking visibly upset) No, I am not feeling upset. This is a democracy. Why should I feel upset?

Q: Do you feel that enough is enough and that it would be better if you quit?
A: I have a duty to perform. The day I am convinced that I cannot perform my duty I will quit. But that day has not yet arrived.

Q: If you intend to stay on as finance ministry, what is the pace and form of financial sector reforms that you visualize?
A: The pace is set out in the paper, which we have prepared. We need a competitive, efficiency-oriented banking system and for that need to ensure that in the next two-three years banking system absorbs the internationally proved capital adequacy norms, norms etc. At the same time, there has to a reduced amount of forced lending whether the government or to other sectors of economy at this banking system can emerge reasonably profitable.

Q: How do you plan to carry out recapitalisation of banks?
A: Part of the money we have given from the budget, part will have to come from the capital market.

Q: Will it imply the closure of some banks?
A: I do not think that it is necessary at the moment. But it may require the merger of some banks.

Q: The memorandum of understanding that the government has circulated among bank chiefs have not received an enthusiastic response.
A: This will have to vary from bank to bank. The problems of all banks are not the same. We will discuss with various banks the kind of commitment that is required from the management before the government maker’s additional contribution to their capital. If the management does not improve then it is useless to put more capital into their banks. If after two years, the quality of loan portfolios remains as bad as it is, then we will be back to square on.

Q: The banks say that the recapitalisation plan that you have envisaged will impede their operational functional efficiency.
A: Why should it? Because the banks are not in the position to lend even now. And without recapitalisation, the banks’ capacity to lend will be seriously limited.

Q: In what shape is the Indian Economy today?
A: The macro-economic condition of the country has improved considerably in the last few months. Look at the balance of payments situation. We had foreign exchange reserves of no more than two weeks when we took over. Today, our reserves stand at $6.5 million, which is equivalent of three-and0half months’ reserves. At that time, the country had mortgaged its gold. We have been able to retrieve the gold and we have repaid the loans that we had taken.
In August1990-91, the country was in the midst of double-digit (17 percent) inflation. We have brought it down to no more than six percent, which is lower than the average rate of inflation in the last 30-35 years.
As far as fiscal deficit is concerned, we have reduced it from 8.5 per cent of the GDP in 1990-91 to 5.6 percent in 1992-93. Our target was to reduce it to five percent, but because of shortfall in revenue after Ayodhya, roughly equivalent to Rs5, 000 crore, and the inability to dispose of public sector assets, the actual deficit amounted to 5.6 percent.

Q: Do you see the situation improving further?
A: This year the target is to reduce the deficit to 4.6 percent of the GDP. If we achieve that, we would have matched the fiscal deficit of the levels of the mid-Seventies. Unlike most other countries, where adjustments have often involved a sharp fall in the output and rise in prices, in our country we had the smoothest possible adjustment.

Q: What are the bottlenecks that you anticipate?
A: the infrastructure in our country is the biggest problem. The fact that in the last three or four years, petroleum production has fallen from 35 million tones to no more than 28 million tones, while consumption is increasing day by day. This is the single-biggest factor that is contributing to imbalance in the exports of our country.
In fact, import of petroleum product accounts for $6.5 billion, which is greater than the deficit in the current account. One could say that India does not have a balance of payment problem but an oil problem. We have to reverse this trend in consumption, which is increasing at the rate of ten percent annually.

Q: What are the other obstacles in the path of economic recovery?
A: The other major problem is the management of power system. The functional inefficiency of the state electricity boards, the low plant utilization factor, the fact that state electricity boards are losing money, inadequate resource generation to finance further expansion… This problem could be a serious drag on the pace of the economy.
Thirdly, we need an up-to-date telecommunication system. If we have ambitions of being integrated in the world economy, we need a telecommunication system, which is the best.

Q: Do you think that a reduction in the consumption of petroleum products is really possible?
A: We have no option but to price petroleum products at their true opportunity cost. According to my calculations, at least Rs2,500 crore of black money is generated every year in the kerosene industry. We have kept the kerosene prices artificially low in the name of helping the poor. In fact, 17 percent of kerosene sold in the city is used for adulteration purposes. The public sector oil companies lose roughly Rs2,500 crores annually.
This country will have to sooner or later accept that viable development of the petroleum industry is not possible unless petroleum producers like the ONGC
(Oil and Natural Gas Commission) get a return, which reflects the opportunity cost. The price that we pay to ONGC now has not risen for the last ten years. How can ONGC generate resources for expansion, research, etc…? We have to evolve new pricing policies for scarce products.

Q: Will privatization of the power sector help?
A: The power sector in our company is grossly inefficient. We have an annual loss of Rs5, 000 crore in power sector. It is a disgrace. By subsiding it, we are denying access to power to millions. Millions of farmers will benefit if they get power. However, by subsiding existing consumers we are denying them electricity. We are not willing to charge economic rates. This whole thing does not make sense.
Two years ago, state power ministers agreed that each state would charge a minimum tariff 50 paise per unit. But not many states have implemented it. If we continue like this, there is hope. Also there are operational difficulties in many states, plant utilization is as low as 22 percent. Loss of power alone amounts to 22 percent. Very often these are not losses, they plain thefts. Operational efficiency is low, there is chronic over manning. If the public sector does not deliver, and if the private sector can, I see harm.

Q: Cutting subsidies, increasing rates, have political repercussions.
A: The country has to take difficult decision Development is not a free dinner party.

Q: But aren’t there inherent difficulties in laying off labour, for instance.
A: We need to move away from the system, no enterprise can redeploy labour that they can continue, that state government must give to permission for retrenching, etc. The state governments never do give permission. By trying to protect the existing labour force, we are trying pamper a system that is anti-labour, be come people are afraid of employing labour. Peoples in for capital-intensive technology using the labour.

Q: How many years do you give Indian integration with the world economy?
A: It is not a one-day process. I think we have to work to this goal through out this decade.
My vision of India is that of a self-respect country, which can generate adequate amount resources, finance its industries, which is afraid of inviting foreign industries, sending Indian firms out. This is an interdependent world we live in it. There will be pressures and only a strong India that can withstand pressure. The world does not respect the weak.

Ketan Narottam Tanna/ New Delhi