Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, believes getting the economy back to a sustainably high-growth path is the priority at the moment, more so than inflation getting out of control. He discusses this and allied issues with Karan Thapar on the CNBC TV18 channel, telecast on Friday night. Edited excerpts:
At the Economic Editor’s Forum, you said, “The financial reforms agenda must continue; any assumption that we should stop would be a very serious mistake.” But Finance Minister Pranab Mukherjee’s said, “Our intention is not enough, it has to converge with the views of other political parties. We shall have to persuade and try and come up with a consensus.” You were talking about the need to go ahead; he was talking about the problem of going ahead.
There’s no contradiction on financial sector reforms: Many of them need legislative action. It’s clear to me that we should continue with those reforms and those who think that because of the financial crisis we somehow shouldn’t are totally wrong. But if you need legislative action, it’s the finance minister who has to build a consensus needed in Parliament to get it through. The finance minister was saying it’s not enough for us to have an intention, we need the support of other people for these reforms. The Prime Minister himself said these are areas we have to work to build a consensus, while talking about direction.
A second area where clarification seems to be needed is on the fiscal stimulus and when it should be wound down. Again at the WEF, the PM said, “We will take appropriate action next year to wind this down”, but hours later the minister for commerce and industry said, “It is premature to think of going in for an exit strategy”.
The PM was talking of the stimulus as a whole, which means the fiscal deficit. Basically, it is next year that we must take a decision to reduce it and if so, by how much. I don’t think anyone thinks we should be increasing the fiscal deficit. What the commerce minister had in mind was a particular component of the stimulus directed to the exports sector..
So, certain elements of the stimulus could continue much longer than just the beginning of April 2010?
The logic of withdrawing the stimulus gradually is that you are going to reduce the fiscal deficit. How you reduce it is entirely up to you. For example, you could maintain every one of the so-called incentives given last year but cut some other expenditure.
The finance minister had announced at the time of the budget that he would like the fiscal deficit next year to come down from 6.8 per cent this year to 5.5 per cent next year. We haven’t decided what the components of this reduction would be and what everybody is saying is that we should think about that around the time of the (next) budget.
And there could be some things that happen even after the budget and not necessarily with the budget?
Yes, absolutely.
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In the first quarter of this year, the economy grew at 6.1 per cent and that was more than was being expected at that point of time. But you have exports shrinking for 13 months in a row, though the rate of decline is diminishing. Your expansion of credit growth has now slumped to single digits for the first time in 12 years. Indirect taxes are 22 over cent below last year, if you take the April-October period. And even though there are greenshoots of recovery in the West, they are reversible and people aren’t sure how strong they are. In those circumstances, is this the right time to be publicly talking about reducing the stimulus or is it the right time to think in advance?
It’s the right time to say exactly what you said. I think you want to avoid any impression that we are looking for a growth stimulated by steroids i.e. more and more fiscal expansion
Because we cannot afford it?
We cannot afford it. I think we have given a very clear message. We have said that we expect that this year you will have growth of 6.5 per cent; Q1 was 6.1 per cent. To reach that 6.5 per cent, roughly the last quarter should be around 7 per cent and growth should be poised to go above 7 per cent next year. If in the last quarter of this year, judging by what then is the data, you come to the conclusion that the economy is now poised to do 7.5 per cent then my view is that is the time to say, maybe this 6.8 per cent fiscal deficit needs to be brought down. How you bring it down – taxes, expenditures – is something to decide later.
The important thing you said is that this decision will be taken in the light of the last quarter of this year.
The problem is, in the last quarter you won’t have the data for the last quarter. You have to predict.
The big threat you have to contend with is inflation. Both the Reserve Bank of India governor and Dr. Rangarajan (chairman of the PM’s Economic Advisory Council) have separately said inflation could cross 6 per cent by March-April 2010. But on the other hand, credit expansion has slumped to single-digit and many companies are reportedly putting projects on hold. Is the government torn between these almost opposite problems?
That’s the nature of decision making on macro issues. When do you think that the inflationary pressure has reached a level where you need to take advance action? My view is that inflation is only heading up to where it should be heading. If you believe that your target is zero inflation, then you should be taking action. If you think 5 per cent inflation is okay, then all that inflation is doing is it is getting back to where it should be. Therefore, in my view, right now it would be completely wrong to give the signal that inflation is a big problem.
Having said that, let me say that inflation in certain food elements is a problem and needs to be tackled by a better public distribution system, speeding up on the supply side. Those are not the kind of problems that would be tackled effectively through monetary policy. But I do not think there is any case about worrying on monetary policy because you see a looming threat of inflation. You see a looming return to normalcy in my view but of course you must be watching out – is it getting too much out of control? There will be time enough to judge that, maybe in February.
At the Economic Editors conference, Sharad Pawar was quoted as saying that “rising food prices is a matter of concern” but you were quoted as saying food price inflation was highly hyped up, mainly because it affects middle class interest. Are you concerned about food price inflation?
Of course. The point I was making is that some part of the rise in food prices, I have in mind particularly wheat and rice prices, was actually the result of a conscious decision that we want to increase the profitability of agriculture and we need to raise the minimum support price. Food prices are going up globally, so there is no reason why Indian farmers shouldn’t be getting the benefit of what is a globally appropriate price of food. Where this argument doesn’t apply, perhaps, is vegetables. In the last couple of months there has been a huge increase in vegetable prices. That is the result of a temporary disruption and will come down automatically.
Dr Rangarajan said on October 22: “In the shorter term, managing inflationary risks, particularly the food price inflation, is the biggest challenge to be faced by our policy makers.” You don’t sound as if you take that particular line.
That’s true, I don’t. Dr Rangarajan is entitled to his view of what is the most important thing; no politician would ever want to say he is not concerned about food prices. But right now, if you ask me, for the ordinary man on the street, we need to be watchful that inflation doesn’t get out of control. But the present level of inflation doesn’t, in my view, warrant making it a top priority. What is important, is to get the economy back to a solid growth path. That is what is going to generate jobs, that is what is going to generate confidence. And as far as food prices are concerned, let’s be clear, if the surveys tell us that 49 per cent of farmers want to leave farming because it’s not profitable enough, one of the ways in which you make it profitable is to give the farmer a decent price of food. And remember the rest of the economy is the one that is booming along at 9 per cent, pay commissions, this, that and the other.
Second, we have consciously and it’s a good thing that we have done, we put into the rural economy a lot through the National Rural Employment Guarantee Programme – the budgeted amount for this year is Rs 39,000 crore (and) there was an overhang of about Rs 10,000 from last year. So, the actual injection of money is going to be something well in excess of Rs 40,000 crore. Sixty percent of that is wages, so more than Rs 24,000 crore of wages is going to the hands of ordinary people. They are going to spend that on food and that is going to lead to a rise of prices that benefits those producing food.
Your assumption when you say come the Rabi crop, food price inflation will begin to come down, that we are going to have a decent Rabi harvest. But your colleague in the planning commission, Abhijit Sen, said to this very program on August 12 that when the monsoon has been bad, “normally in such circumstances, Rabi also suffers a certain fallback”.
Nobody should be confident of the future and it’s always appropriate to caution when you don’t know for sure. The reason why I think this year will not be like 2002-03, when you had a monsoon failure, is that the pattern of distribution of rains this year saw a big revival in the latter part of the period. So, actually there is a lot more moisture on the ground and I think that will help the Rabi.
But, clearly, we are making an assumption, and if it turns out that the Rabi crop is bad, then it’s a different situation. I don’t see any reason to believe that will be so. Compared to 2002, we have done better management; there are more programmes on the ground which are designed to support the Rabi crop production. The second thing is that there is a lot of stock.
But what is your assumption about agricultural growth this year? Productivity began to decline even before the monsoons took its toll. Agri growth between April and June was 2.4, compared to January-March, which was 2.7. Dr. Rangarajan is already predicting that, for the year as a whole, agriculture will decline by 2 per cent and it is no secret that the Planning Commission has got a note where you think your worst case scenario could be a 6 percent decline.
We have drawn our options in our meeting of the Commission more than two months ago. The base case scenario that we had was a decline of around 2 per cent or so, which is what Rangarajan was saying is also his base case scenario. Obviously, when you do scenarios you have to have a worst case scenario. We don’t think that will happen but, yes, you will have this year, that is 2009-10, a decline in the agricultural production and I don’t think it will be more than 2 per cent.
What is your assumption for overall economic growth in the GDP by March 31, 2010? The PM, finance minister and RBI have all spoken of a figure somewhere between 6-6.5 per cent, but the World Bank, the IMF and Unctad have put it much lower, closer to 5.
Two months ago, I said 6.3. If anything, I would shade it up; we are a little more reassured that there is more oomph in the economy. Rural demand has not slackened as people fear, there is a beginning of an upturn in several sectors and the key assumption is going to be what happens to investment. If we can step up investment compared to what the position was in 2008-09, more importantly in the second half of this year to jack it up, compared to what it was in the first half of this year, then we should get an industrial revival.
So, you are confident that the impetus to investment that you want to give through infrastructure, through roads, etc, would happen and you will be able to shade up your assumption for GDP growth beyond 6.3 and go as close as 6.5?
Yes, I want to say that. By the way, even to get to 6.3, we have to do a lot of work to make sure that the investment comes in. But I think that agenda is valid and we need to do it.
When then, do you hope or expect to get back to the desired 9 per cent growth?
My view is that next year, 2010-2011, we should be aiming at around 7.5 and if we can get to 7.5 in 2010-11, raising it for the next year to, say, 8.5 is not impossible. And that does mean that in the second half of that year, we may put the economy back on a 9 per cent path and that would be an enormous achievement. We have done 9 per cent (earlier), but we did itin a period when the world economy was booming
So, this is a hope with your fingers crossed?
It is a hope with fingers of both hands crossed, but with some expectations that if we can put in our best efforts, it’s not impossible.