Appointed as India's Finance Minister less than a year ago, Yashwant Sinha has found himself in an increasingly tougher spot, as his country's economy continues to slide downward. In response, the career bureaucrat is acting in a bold manner that surprises many observers. Sinha recently spoke with Business Week Bombay correspondent Manjeet Kripalani in his New Delhi office. Here are excerpts of their conversation:

Q: You have been sounding the warning bells of a severe fiscal crisis since December? What danger do you see?
A: No nation can live on borrowed funds for any length of time, and especially if the borrrowed funds are used more for current consumption rather than for productive purposes. Unfortunately, over the last two decades, in this country we have been somewhat lax about the various kinds of imbalances in public finances. The center has been lax, the states have been lax, with the result that the overall national public finance deficit, including that of the states, is reaching 10% of GDP. Most of this deficit has been met through borrowings, as a Result of which the burden of interest payments has been rising steadily and is almost 60% of our revenue collection.

Q: What steps do you feel will right this?
A: Well, we have to look at both government expenditure and government revenues. Government expenditure -- most of it -- is of a fixed nature, and it is not possible to drastically reduce it in many areas. But in other areas, it is possible to make substantial savings. One is the very size of the government.

The second is subsidies. Some are useful and important and will have to be continued. But if we want a certain group to benefit, we could think of a mechanism where the subsidy can flow directly to these target groups rather than through various intermediaries.

The third is, we do need to look at the whole host of schemes of public welfare in our budget, and perhaps there is a need to streamline them and make them more effective and improve the delivery system so that waste is cut down to the minimum.

Q: But you do have these vested interests that will cause some upheaval for you to dislodge.
A: Yes, that's what I say. It has not been done all these years because it is difficult. But these are the solutions, however difficult they might be, otherwise we will just go on and on like this.

Another problem is revenue. As far as the income tax is concerned, the number paying is now around 15 million out of a total middle-class population of 200 million and a total population of 1 billion. This is a very, very small number of people. Many more people should be paying income tax than the present number would suggest, and we need to take steps for better compliance.

Q: You have probably the most difficult job of any Finance Minister, and given the pressures that you and your party face, how can you right the imbalances of the past?
A: We are facing, nationally and internationally, a difficult situation. If you look at world trade as a whole, the crisis has had an impact on our exports. And I have inherited an economy which was already slowing down. What is going to help us this year is the increase in agricultural production.

But I'm not happy with this growth rate. Quite frankly, we should be having a growth rate of anything between 7% to 8%, and a 5.5% growth rate is not a matter of satisfaction. Because of the given national and international situation, somehow investor confidence is not picking up. And that is something that has to pick up to lead to larger investment and demand.

Q: But you face so much resistance inside the BJP coalition [the ruling Bharatiya Janata Party].
A: It is true there has been some resistance to the reforms within the party and the ruling coalition, but it has been possible for us to convince the party and convince the ruling coalition about the need for these reforms. There are some others outside, in the political spectrum and outside, who are still not convinced of the need. They have to be convinced.

Q: What else are you aiming for?
A: You have to look at rural India, because the majority of the people live there, and you have to improve the quality of their life. So you have to traverse many centuries. On the one had you are looking at modern telecom, information technology. On the other hand, you are dealing with rural roads, better seeds, and better fertilizers. So because India lives in many centuries, the policy package has to necessarily traverse these centuries.

Q: At the beginning of your tenure, you were not perceived as a progressive reformer. You are now in the reformers' camp. What is the reason for this change?
A: My policies and views on most of the major issues concerning my government have been shaped by the BJP manifesto and National Agenda for Governance. I do not think I have moved away from them. Both of them are strongly committed to the process of reforms. If I were not being seen in the reformer's mould, it is possibly because people were trying to judge me before seeing me in action.

Q: Critics say you pander to the Indian industrialists' lobby.
A: It is my government's priority to make the Indian economy stronger and if that requires certain sectors of industry to be safeguarded against dumping, predatory pricing, and other unfair trade practices, I have no hesitation in taking firm steps to ensure this. My government, on the other hand, will not hesitate to reduce tariffs where required to make the Indian economy globally competitive.

Q: Does the world financial system need to be reformed, and if so, how?
A: I'm very worried at the way the world financial system is working, the way it is destroying and destabilizing national economies one after the other. I personally feel that this just cannot be allowed to go on. There must be greater understanding at the international level. There must be greater discipline in regard to capital flows, especially short-term capital flows. We just cannot allow some players internationally to play havoc with the whole system, which is exactly what is happening.

What we really need is an international mechanism which will make sure that both the national markets as well as the transnational corporations and agencies operate with a sense of responsibility. At the national level, you must set your own house in order. But we know for certain that the best of economies can fall prey to the machinations of some manipulators at the international level. It cannot be a free-for-all. Just as we have rule-based international trading systems, we must have rule-based international capital movements.



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