Deputy chairman of the Planning Commission Montek Singh Ahluwalia in this the second part of an interview, that the Indian economy can do well even in a slowing global context, if more reform is done and if the policy measures announced so far are implemented. He sees some slippage in the 11th Plan’s infrastructure targets, but believes that much more will be delivered than before. And he rejects criticism that the government responded too late, too slowly to the recession, as also criticism that not much reform has been done in the last four years. Excerpts from the concluding part of the interview:
Our average growth in the last five years was 8.8 per cent. How much of this was due to the excess global liquidity, and what is a sustainable rate?
We now know that some of the rise in world growth was an unstable rise. If we are integrating with the world, we will benefit when the world goes up and suffer when the world goes down. If the world is now going to see not just a cyclical downturn but also a somewhat lower sustainable growth rate, then our trend growth rate would go down. For every 1 per cent growth that you knock off for the industrialised countries, a lot of models say for India you should knock off half of 1 per cent (growth).
There is a second issue. India has huge unutilised supply-side potential, because we have not been able to do what is necessary to achieve efficiency. If the world is going to grow slower, then that impetus is not there (for us). So we have to get our act together with somewhat greater urgency. Without doubt, that half of 1 per cent can be made up.
For the next two years, on a steady state basis, we will be lucky to get 7.5 per cent and pick it up to 8 per cent. For 2008-09, we’re thinking of 7 per cent. Most people pitch it slightly less. Next year will be worse. For the moment, we have not made an assessment. But to assume 7 per cent next year, we have to do a lot.
The fiscal stimulus that we have unveiled cannot be a three-month policy. The fiscal stimulus will have to continue into 2009-10. But there also has to be urgency about doing some of the reform-oriented things we have talked about. These are politically sensitive; you don’t expect to see action on them in the next three months. But after the elections, I hope action will pick up.
On what kind of steps?
The simplest of all issues. Textiles remain a major source for us to access world markets. China is a dominant presence there, but China will be under pressure to do something about its exchange rate, which hopefully will mean more scope for us. An exporter tells me that in a world where people are conscious of labour standards, when they contract with exporters, the buyers contract agencies to observe whether you’re following your labour laws.
They don’t tell you what your labour laws should be, but they want the laws observed. Now if the labour laws limit the amount of overtime a worker can do…the producers want more, the trade unions want it, workers want to do more, they’re happy to do more, they get paid overtime…but you’re faced with a situation where, if a compliance agency were to find this is happening, the exporter will get blacklisted.
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Now, because the exporter wants a little more labour for three or four months, he is not going to hire more labour, so he does not expand. And you can’t do this by hiring casual labour because these are highly skilled people. Now you can increase the overtime allowance, you can constrain it so that over the year as a whole the overtime is the same…. This requires a change of labour law.
This is in everybody’s interest. It is the simplest, easiest kind of labour flexibility. In the kind of world we’re going to move in, it is going to be much more competitive. Bangladesh is beating us competitively, Vietnam is surging ahead, China will be desperate to compete, so we can’t hobble ourselves in this way.
To come back to the growth rate, some people talk of 4-6 per cent growth—this year and the next.
Those are unduly low numbers. The figure we already have for the first half is 7.7 per cent. We have an assessment for the full year of 7 per cent. That means 6.2 per cent in the second half. You have to remember that when there is a slowdown, you get an inventory pile-up and then a short-term corrective. That could continue for another month or so. I am hoping that after that it will pick up.
A lot depends on the fiscal action we’ve taken. If the initiatives for public sector investment and for PPP (public-private partnership) and IIFC (India Infrastructure Finance Company), to finance long-term investment, if these work then there is a good chance that a lot of the industrial slowdown that we have seen will begin to correct itself. But there is a time lag for this, and this fiscal year will be over soon. So I would not be surprised if this year ends at lower than 7 per cent, but not 4-6 per cent.
What about next year?
Next year is a different ballgame. The jury is out as far as the world economy is concerned. I would still argue that if the world recession does not go beyond the second quarter of 2009, then our aim would be to do better next year. The reason is that all the stuff we’re talking about in terms of fiscal stimulus and investment is going to show in terms of expenditure on the ground in the next year.
Then there is another factor, which is confidence. When there is a downturn, we know that everybody is not going to lose their jobs. But everybody behaves as if they may be next. People want to know when the market will hit the bottom, and that includes housing, where the experts say it could go down a little more. In automobiles, there’s been a downward adjustment in price. Once people see that we are not into a 4 per cent growth scenario and it may be 7 per cent, then confidence will return.
To look briefly into the rear-view mirror, did the government and RBI react too slowly to the changing situation in 2008? Were you into inflation-controlling mode for too long, and did you move into recession-controlling mode too late?
I would not blame ourselves. In July, there is no question that inflation was a very serious problem. Some of us thought that international prices have softened, but that was more like saying there is light at the end of the tunnel, not that inflation has disappeared.
The argument also is that it was mostly imported commodity price inflation, about which you could do nothing anyway.
This argument, that when you have imported inflation, you do nothing, is not valid. You can’t do nothing. Either you raise the exchange rate, or if imported prices cannot be lowered, then non-imported prices must fall. So either you do demand restriction or you forget about inflation. And I don’t think exchange rate appreciation would have been the right thing at all, though we did some of it.
By September, it was clear that inflation was softening and by early October we were relaxing policy. It could be that we could have done it two weeks earlier, but not before that.
One argument is that you responded too late. The second argument is that the government took only slow, hesitant steps.
I am much less sympathetic to that view, though many of my friends think that we could have given a big stimulus as a boost to confidence. Within about eight weeks of October 7, when policy responded, it was clear that as the waves were rising and beating about, the ship was being manoeuvred. No one should have any doubt that on both fiscal and monetary policy, we are doing exactly what needs to be done.
Some people who focus on monetary policy assume that expansion of credit is a solution to a real economy problem. It is not actually so.
You talk of boosting investment. But the system is unable to produce the infrastructure projects that can be financed, in roads, power, ports…project are not getting off the ground.
That was certainly true before July. I would say that in the year preceding July, finance was not the constraint. We were delivering many more projects, but not on the scale that was needed.
And one of the issues is that the ability to deliver these projects depends crucially on the PPP mode. It is totally false to say we could have got it done in the public sector, because we would not have got the money in the public sector. You can raise the money if you go down the PPP route. And it is true that the system took too long to deliver PPP projects.
Even now, it is not able to deliver enough projects.
That is not correct. The most important thing now is to operationalise and publicise what is going to be done through IIFC. There are at least 60 road projects that are being bid out. In power, three ultra-mega power projects have got bid out. If you look at the pace of capacity creation, it will be much better in the 11th Plan than in the 10th. Our assessment is that, against the target of 78,000 Mw of new capacity as a target, we are virtually certain to do 70,000 Mw.
If you take the first nine months of this year, and this is the second year of the Plan, we’re behind target.
We may be behind target but we’re still likely to see 11,000-12,000 Mw added this year. And we did 7000-8000 Mm last year.
That means you need to add 50,000 Mw in the next three years. The lead time for a power project is four years, so if work has not started yet, it is not going to happen in this Plan period.
That is a very good point. Based on the reviews that I have seen, 60,000 Mw is a virtual certainty. Another 10,000 Mw we could do with a little bit of effort, and for god’s sake, we should be doing more than a little bit of effort. If we do a big effort, we can get to 78,000 Mw.
You talked of $500 billion investment in infrastructure during this Plan. It does not look likely to happen.
Probably. But let me put it this way. When have we reached 100 per cent of a Plan target? The purpose of $500 billion was to define the scale of the effort. We have succeeded in putting infrastructure on the agenda.
We have identified key strategies, like PPP. We had a financing constraint, so we have action through IIFC. The states have responded where the Centre has been slow, as with private development of ports. They have gone ahead in Andhra Pradesh and Gujarat, and Maharashtra is now stepping in.
You said when announcing the recent package of measures that you will not announce any more such packages this year.
What we wanted to say was that we will not announce any more tax cuts. We have to implement what we have announced, and that is a big task. Exporters face procedural problems, we have to address them. But no more tax cuts.
So do you believe that enough has been done to deal with the situation?
For the current year, yes, whatever was feasible. Some people may think that if we had done something different, we could still do 9 per cent growth this year. That is not feasible. To achieve 7 per cent, which is what we’re talking about, we have put in place the instruments on the monetary and fiscal side. Monetary policy is of course a day-to-day, week-to-week affair, so I am not commenting on that.
So, as you see it, we’re coming through quite well, with 7 per cent growth in a difficult phase?
Yes, that is feasible but not guaranteed. Assuming there are no more huge global shocks, and we implement what we have talked about, 7 per cent growth is feasible for this year and the next.
It has been argued that the economy has benefited from the initial flush of reforms, and is now paying the price for not having done more reform in recent years.
PPP is reform of the last four years. Putting agriculture back on track was done in the last four years, the growth rate has been much better from 2004, though more needs to be done in agriculture.
In the social sector, because inclusiveness is important, we have hugely increased the scale of the commitment. In higher education, although key reform issues are still unsettled, it is quite clear that we’re charting a new course. And the social safety net is a big change, we’re into a downturn when we have the rural employment guarantee programme. We also have the national rural health mission. So it is not fair to say that reform only took place earlier.
Also read:jan 9: India can attract more money even today: Montek
jan 2: ‘Contraction will be over within two quarters’
jan 1: Do more than you think is needed: Bimal Jalan
dec 31: We are seeing irrational pessimism: Tendulkar