Submitted by 2point6billion.com Blog

India’s Finance Minister lays down his reasoning India will escape a US recession, plus comments of Indian Government Corruption.

The full interview with Chris Devonshire-Ellis, Senior Partner, Dezan Shira & Associates in Delhi

Meeting with India’s Finance Minister, Mr. P. Chidambaram, is always a lesson in elocution and delivery. One year ago, when we last met him in our annual series of meetings with Indian Ministers in Delhi, he was shy, somewhat reserved, yet bullish. India was doing well, with growth rates at a consistent level of between 7-9% looking sustainable, and the Prime Minister, Dr. Manmohan Singh, stating to us that as long as India could keep such growth rates, it could afford it’s massive redevelopment, infrastructure and rural expenditure needed to lift the country into a true democracy with all people able to share in it’s wealth. “As long as those rates are sustainable” both the PM and Mr. Chidambaram chorused, “India’s continued development is assumed”.

Just a year on, we are faced with a different set of issues that could impact upon the Indian, and quite possibly, other emerging market economies, especially that of China. The US sub-prime crisis has dried up liquidity and seen money vanish. The US dollar is approaching record lows. The price of gas has just exceeded USD100 a barrel, respected international financial institutions are going bankrupt, and the prices of commodities in foods and metals have doubled and tripled. A year on, it’s not just a matter of India bullishness. A large blot has appeared on the landscape.

Sitting down with Mr. Chidambaram we had just one question to ask in our hour long discussion: “Can India escape a potential US recession ?”

His points, overlaid with those of our research of China’s fundamentals in the manner Mr. Chidambaram was able to explain those of India’s, are highlighted below.

Chidambaram: “Firstly, I have to explain that we are not responsible for this situation. India did not have imprudent lending policies and a breakdown between financial innovation and regulations. India is not responsible for the price of crude oil hitting USD100 a barrel. India has not been involved in the reasons why construction metal prices have in some cases tripled in the past year, or for the doubling of agricultural commodities. We did not make this situation, the level one weakness is not in our economy. However, certain aspects of it we have to deal with. We have protection against a problem in the US economy as follows:

1) Strong Investment in Indian GDP. About 35-36% of India’s GDP is in investment. Both domestic and overseas resources are continuing to funnel funds into India. I have spoken to our banks and they assure me there has been no slowdown, nor do any fundamentals dictate there will be. In fact, a US recession may well drive funds out of the US and into countries such as ours where there is strong growth.

2) Our Domestic Tax Administration has become more efficient. In 2005, our GDP ratio of contributing tax was 9.2%. In 2007, it was 12.5%. By the end of this year, it is expected to be 13%. Now, a half percent increase in our tax collection may not seem like much, but for us it represents an additional USD25 billion. And it is improving as we seek efficiencies in our tax collection base.

3) Our growth remains constant. It has touched 9%. However, mindful of a possible downturn we have made some adjustments. The text books say that when you increase public expenditure, and cut income tax and customs duties, your economy will grow. So in our recent budget we have done just this. These measures will help spur the domestic economy as a counterbalance to any negativity.

4) Debt Forgiveness. We have forgiven a lot of debt, especially in our agricultural sector, and steel industries. In agriculture, as you know, India suffers from adverse weather conditions. Just last week hundreds of thousands of hectares of rice in Kerala (south-east India) were wiped out. How is that the fault of the farmer? We have to support them, and get them back into production. We have just announced debt forgiveness for over 13 million farming families, wiped out their money owed and supplied a fresh new three years of production credit. This will also help our economy; we have a strong demand for our agriculture and we need to help our farmers provide it.

5) Control versus Regulation. Actually, we are seeking to move away from a control based government to a regulatory based government. However this transition has still not fully occurred, and funnily enough it has helped us in this situation. He have been cautious, and we have been conservative, perhaps more so than we would have liked. But that cautiousness is standing us in good stead, while the US got carried away, we have been steadfast. The current situation is largely because the US regulators were not watching. We have not had that problem.

6) Banking Liabilities. We do not have any first order effects in India as a result of the US sub prime problem. I have one small bank in India with a minimal and manageable amount of liability to this exposure. That is it.

I do however have one concern, and that is over monetary management. The Reserve Bank of India’s interest rates are currently a bit high, and this may dampen some investments. However, although during the period 2008/9 I do see a downturn, and while I do believe that it will impact India, I think it will reduce growth to 8% from our current 9%, and the damage can be minimized. At the end of the day, if China looks like showing growth of 9% during that period, and we are at 8%, then we are the second largest growing economy in the world, and for us during the next 18 months that is not a bad place to be. I have no major concerns for India right now in the global economy”.

Devonshire-Ellis:
The US and India agreed to drop the quota system for textiles in 2005. However, since then, the amount that India has exported to the US has receded. What can be done to rectify the situation and stimulate production and export in India’s domestic textiles industry?

Chidambaram:
This is not a problem dating back to the 2005 lifting of quotas. It is caused by the appreciation of the Indian Rupee against the US dollar over the past 18 months, coupled with high interest rates here. We want the rupee to stabilize, and we have also announced a series of packages to incentivise exporters, including a USD2 billion aid relief package late last year. It is volumes that have been hit, we are aware of the problem and will continue to monitor it. Again, the management of the US economy is out of our hands.

Devonshire-Ellis:
Foreign investors have shied away from involvement in India’s energy sector, at a time when you really need this resource. Why ?

Chidambaram:
There are perceived structural problems with the way the industry is set up here. I do ask my counterparts in other countries to invest in our energy sector ! They have concerns over our industry having bundled up products and services in ways that would only leave foreign investors with small potatoes and large risks, and there remain problems with securing the payment of tariffs we need to resolve. But India’s power companies have deep pockets also. What may happen is that the Indian power company may lead the project, take it to some fruition, then sell off a more attractive portion of this to foreign investment. I think that will be the way ahead.

Devonshire-Ellis:
There are concerns about variations between US GAAP and Indian accounting practice. How is this going to be resolved ?

Chidambaram:
It is an area of concern. Some accounting standards that are applicable elsewhere are not applicable in India. Issues such as certain assets not being required to be included on a balance sheet for example. There has always been a gap between US / Indian accounting standards, however we are looking at narrowing this and we do want to see global compliance and standards for Indian companies competing in the international marketplace.

Devonshire-Ellis:
Government corruption is always mentioned as a major liability here and recently India came second in a global poll of the worlds most corrupt countries. What can be done about this?

Chidambaram:
Actually, to tell you my perspective, we have about 50% of politicians at National, State and local level who are crooks, thieves and murderers. We have people in power in certain sections of our government who belong in jail, and many who have been there. It is a major issue. The only way we can win is by having more on our side than they have on theirs. Otherwise India will descend back into near anarchy. That is the main problem this government has had to deal with since we were elected in 2005. We are just about keeping our head above water, but it is very very hard. We need far more young, educated people to come into politics in India. It may not be a glamorous career but it has it’s merits and a sense of satisfaction when things are done. Recruiting more young graduates into a life of politics is the way forward for us. I am optimistic, but it is tough that is for sure. We have to be more than them and we have to keep it that way to defeat the corrupt. It is the only way. We need to educate and recruit more young people in India to be our future generations of politicians in a modern world.