 "Nervousness about rupee volatility behind us: Montek Singh Ahluwalia")
The government, of late, has begun a slew of measures to revive investment. Planning Commission Deputy Chairman Montek Singh Ahluwalia says investors are aware the government is addressing various problems in the economy. He tells Indivjal Dhasmana & Sanjeeb Mukherjee a new investment mood is there and investors are looking forward to these steps. Edited excerpts:
Do you see the rupee stabilising at 63-64 to the dollar, now that it has shown some signs of moderation?
I don’t like making forecasts about the exchange rate. But, I do think the nervousness about large volatility is behind us. We are not targeting the rupee at a particular level, so you can’t rule out some movement. But I don’t think anyone thinks the rupee is now overvalued. Most studies based on changes in relative competitiveness had pegged the competitive value between 60 and 65 and it is now within that range. If our macro economic numbers remain stable, and inflation comes down, which is happening, investors can assume we have entered a period where there will be much less volatility in the currency.
Raghu is an internationally recognised expert in this area. Do individuals matter? Of course they do and I think the best signal he gave was on his very first day, when he transparently laid down what he thinks the agenda should be. That creates a climate that he is a doer, who knows his mind. I happen to agree with what he wants to do, so I’m delighted.
Whether the recovery of the rupee is due to Raghu or not is difficult to say. Markets react to multiple stimuli, some grounded in reality and others on pure expectations. I think the rupee had overshot and was well set to recover, and the government has also taken a number of steps on economic policy. All of this matters. However, the markets might also be responding to the fact that the government made what they perceive as an excellent appointment. I agree with the markets on this judgement; so, more power to his elbow.
Isn’t this whole volatility in the rupee value affecting investor confidence in the Indian economy?
There are many circumstances where there can be short-term volatility and investors know that. Confidence depends on whether investors think we know how to handle the task in the short term and also medium term. On the former, we are in a much better position. I saw newspaper items only a couple of weeks earlier which said the rupee will be 70 against a dollar; one fellow actually said it will be 80. I sincerely hope those people put money their bets, in which case they would have lost a lot. Sometimes, people make alarming forecasts just to spread panic and make money by betting that the government will actually handle the situation! So, we shouldn’t pay too much attention to sound bytes on 24x7 TV.
What about the impact on investors?
People who want to invest in India are always looking forward, not backward. Indian assets are cheaper in dollars than before, so that makes these more attractive. If policy moves in a manner which looks as if it will make the economy get back to a higher growth rate, investors will invest and, indeed, should invest. That won’t happen immediately; I’m also not saying that foreign investors will lead the charge of revived confidence. There are a lot of Indian investors whose projects have been stuck for a variety of reasons and we are taking steps to solve their problem. Once the message goes out from these people that projects are moving, I think the rest will fall in place.
Is such a message going out?
I think people know the government has taken a number of steps. Let me give some examples. In March, there was almost 78,000 Mw of power capacity which didn’t have fuel supply agreements (FSAs) because it was not decided how to give people some combination of scarce domestic coal plus some imported coal. That’s all being resolved now. I think FSAs have been signed for at least 68,000 Mw and the rest will be done shortly. Several regulatory and environmental impediments on road projects, etc, have been removed. Several NELP (oil/gas exploration) projects, held up because of security clearances, have been cleared. Several FDI (foreign direct investment) proposals that were held up have been cleared. Important tax issues have been resolved.
Has all this not come a bit late in the day?
I would have been much happier if we had done it a year earlier but in government, when you do something exceptional, there are normal restraints. Take the Cabinet Committee on Investment (CCI). The idea that we need a new problem solving mechanism was first proposed in the draft 12th plan. When the 12th plan was discussed in the cabinet, Mr Chidambaram suggested the mechanism should be in the form of a cabinet committee. The CCI got notified around January 2013. That’s when the exceptional process started. It takes a lot of time for many of these things to happen. But I think people are aware that decisions are now being taken. This should produce a new mood.
A Prime Minister's Economic Advisory Council (PMEAC) report says the current account deficit (CAD) cannot be financed from forex reserves and there will be a shortfall from net capital inflows to the tune of $8.6 billion. However, the finance ministry says net capital inflows can finance the CAD. What is your take?
The PMEAC has endorsed the finance minister’s projection that our CAD will go down from $88 bn last year to $70 bn. The latest news on that score bears this out. Exports are picking up, gold imports are down and we also expect moderation in other imports. The finance ministry had earlier said they hoped to be able to mobilise the resources needed to cover this gap and could even add to the reserves. The PMEAC are less optimistic. But I don’t think the markets are necessarily looking to see whether we add $3 bn to reserves or not. They are looking to see if the CAD is financeable and even the PMEAC thinks it is. After all, reserves are there to be used – they can always be built up when circumstances improve.
There is a demand for subsidies in the energy sector due to an increase in gas prices. Do you support that?
I have seen newspaper reports about it but I have not seen any specific proposal. I am not in favour of giving any additional energy subsidies. Gas prices should be raised as recommended by the Rangarajan formula and if this is done, it will raise the cost of gas-based power. Many people are already paying very high prices for power. For instance, if you are producing power based on diesel, then you are producing very expensive power. It should, therefore, be possible for gas-based power stations to pass on the additional cost to consumers. Remember that discoms buying expensive gas- based power will pool that power with cheaper power and the increase per unit in the cost of power as a whole will be modest.
Rational pricing of energy is a major challenge for the economy. Everyone agrees with rational pricing as a mantra but they always find reasons to make exceptions in their own case. The point is, can we afford energy subsidies? I would respectfully say we cant.
Should Reliance Industries give its surplus power from (the) KG-D6 (block) at the new gas price or the old one?
I understand this issue is going to the cabinet for a decision and I don’t think it is appropriate for me to comment. If there are commitments under the production sharing contract, they must obviously be honoured and if there is non-performance, it will have to be dealt with as provided under the contract. I have yet to see what exactly is being proposed by the ministry (of petroelum).
In this environment, when foreign investors are looking at the global level as to where to invest, tapering of quantitative easing will happen in the US. Do you think with the policies that India is taking in relation to the CAD or fiscal deficit, we will be able to convince even those with lesser money that India is the right country to put it in, since there is a threat of (ratings) downgrade as well?
These are difficult times and all countries will be under scrutiny to see how they manage the macro economic situation. On the threat of a downgrade, that depends largely on the perception of whether the fiscal situation is under control. The finance minister has repeatedly stated that the 4.8 per cent (of GDP) fiscal deficit target is a red line he will not cross. As long as we stay within the red line, I don’t think rating agencies will downgrade.
As for persuading investors to invest, everything depends on the perception of whether the economy is on track for a growth revival. The tapering by the US Fed will raise interest rates globally and that will raise our cost of borrowing but most of our investment should be financed domestically. The domestic long-term interest rate is much higher than the international interest rate and that is because our fiscal deficit has been high and inflation has been elevated. With both parameters showing improvement, we can expect an improvement in the financing position for domestic investors. Finally, the (rupee’s) depreciation that has occurred has also made Indian manufacturing much more competitive. That should encourage investors to set up manufacturing capacity in India.
On interest rates, what do you think RBI is expected to do next week on its monetary stance?
I don’t want to second-guess what Raghu will do. No point putting an expert in and then second-guessing what he will do. He has to take a call and we can comment later.
The Planning Commission talked about prescriptions to boost economic growth in the 12th Plan document. If the next elections throw up a fractured mandate, do you think the next government can still implement these and get high economic growth in the last two or three years (of the Plan)?
The issue is not the mandate. If you get a mandate which is fragmented, you get a coalition government. If the Government
can build a sufficient consensus around sensible policies, the economy will see progress.
You mean to say political instability will not lead to 5-5.5 per cent economic growth in the 12th Plan?
Many people think we have moved into a period when no single party will get a clean mandate. I am not an expert on voting behaviour and I would never want to second-guess the electorate but if the result is coalition governments, then special steps are needed to build a consensus around sensible policies. Otherwise, we cannot perform up to our full potential.
As we approach elections, will it become harder for the government to take harsh decisions as you are implying and not the people- friendly ones?
No government should take people-unfriendly decisions. It should always take decisions in the interests of the people but it’s often difficult to explain to the people why these decisions are in their interests. The problem is that sensible decisions, which will benefit the people, are politicised and are made to look anti-people.
A good example is the agitation launched in Delhi against electricity rates laid down by the regulator. The chief minister deserves credit for reforming the system and making it much more efficient than it was. Delhi has much fewer outages, unscheduled cuts, etc. Yet, the main opposition has said they will cut rates by 30 per cent (if elected to form the next government). Sheila Dikshit (the CM) has explained that there are other states where power rates are lower but these are places where there are large and unscheduled power cuts. It is difficult for people to understand that irresponsible promises of cutting rates can only mean that investment in the system will suffer, the discom wont be able to buy power, quality of supply will deteriorate, etc, but all that will take a few years. These so called people-friendly actions are actually highly unfriendly.
You have suggested a rise in diesel prices by Rs 5 a litre. Can a political party have the will to do so in an election year?
I have consistently said we cannot afford to subsidise petroleum products. We have to subsidise food but not petroleum products. I think people realise this and know that prices have to go up. The media has a major role to play in making people understand why this is necessary. Of course, the exact timing of the increase or, in this case, the pace of adjustment, has to be left to the government. But this is an area where policy has moved. We have said it will be done gradually and we are doing it. There is a strong case for doing it faster because the gap is very large.
Do you see the rupee stabilising at 63-64 to the dollar, now that it has shown some signs of moderation?
I don’t like making forecasts about the exchange rate. But, I do think the nervousness about large volatility is behind us. We are not targeting the rupee at a particular level, so you can’t rule out some movement. But I don’t think anyone thinks the rupee is now overvalued. Most studies based on changes in relative competitiveness had pegged the competitive value between 60 and 65 and it is now within that range. If our macro economic numbers remain stable, and inflation comes down, which is happening, investors can assume we have entered a period where there will be much less volatility in the currency.
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There is euphoria over Raghuram Rajan’s appointment as RBI governor and some rise in the value of the rupee against the dollar is being credited to him. Do you think an individual can change the institution or is it just euphoria that will blow over?
Raghu is an internationally recognised expert in this area. Do individuals matter? Of course they do and I think the best signal he gave was on his very first day, when he transparently laid down what he thinks the agenda should be. That creates a climate that he is a doer, who knows his mind. I happen to agree with what he wants to do, so I’m delighted.
Whether the recovery of the rupee is due to Raghu or not is difficult to say. Markets react to multiple stimuli, some grounded in reality and others on pure expectations. I think the rupee had overshot and was well set to recover, and the government has also taken a number of steps on economic policy. All of this matters. However, the markets might also be responding to the fact that the government made what they perceive as an excellent appointment. I agree with the markets on this judgement; so, more power to his elbow.
Isn’t this whole volatility in the rupee value affecting investor confidence in the Indian economy?
There are many circumstances where there can be short-term volatility and investors know that. Confidence depends on whether investors think we know how to handle the task in the short term and also medium term. On the former, we are in a much better position. I saw newspaper items only a couple of weeks earlier which said the rupee will be 70 against a dollar; one fellow actually said it will be 80. I sincerely hope those people put money their bets, in which case they would have lost a lot. Sometimes, people make alarming forecasts just to spread panic and make money by betting that the government will actually handle the situation! So, we shouldn’t pay too much attention to sound bytes on 24x7 TV.
What about the impact on investors?
People who want to invest in India are always looking forward, not backward. Indian assets are cheaper in dollars than before, so that makes these more attractive. If policy moves in a manner which looks as if it will make the economy get back to a higher growth rate, investors will invest and, indeed, should invest. That won’t happen immediately; I’m also not saying that foreign investors will lead the charge of revived confidence. There are a lot of Indian investors whose projects have been stuck for a variety of reasons and we are taking steps to solve their problem. Once the message goes out from these people that projects are moving, I think the rest will fall in place.
Is such a message going out?
I think people know the government has taken a number of steps. Let me give some examples. In March, there was almost 78,000 Mw of power capacity which didn’t have fuel supply agreements (FSAs) because it was not decided how to give people some combination of scarce domestic coal plus some imported coal. That’s all being resolved now. I think FSAs have been signed for at least 68,000 Mw and the rest will be done shortly. Several regulatory and environmental impediments on road projects, etc, have been removed. Several NELP (oil/gas exploration) projects, held up because of security clearances, have been cleared. Several FDI (foreign direct investment) proposals that were held up have been cleared. Important tax issues have been resolved.
Has all this not come a bit late in the day?
I would have been much happier if we had done it a year earlier but in government, when you do something exceptional, there are normal restraints. Take the Cabinet Committee on Investment (CCI). The idea that we need a new problem solving mechanism was first proposed in the draft 12th plan. When the 12th plan was discussed in the cabinet, Mr Chidambaram suggested the mechanism should be in the form of a cabinet committee. The CCI got notified around January 2013. That’s when the exceptional process started. It takes a lot of time for many of these things to happen. But I think people are aware that decisions are now being taken. This should produce a new mood.
A Prime Minister's Economic Advisory Council (PMEAC) report says the current account deficit (CAD) cannot be financed from forex reserves and there will be a shortfall from net capital inflows to the tune of $8.6 billion. However, the finance ministry says net capital inflows can finance the CAD. What is your take?
The PMEAC has endorsed the finance minister’s projection that our CAD will go down from $88 bn last year to $70 bn. The latest news on that score bears this out. Exports are picking up, gold imports are down and we also expect moderation in other imports. The finance ministry had earlier said they hoped to be able to mobilise the resources needed to cover this gap and could even add to the reserves. The PMEAC are less optimistic. But I don’t think the markets are necessarily looking to see whether we add $3 bn to reserves or not. They are looking to see if the CAD is financeable and even the PMEAC thinks it is. After all, reserves are there to be used – they can always be built up when circumstances improve.
There is a demand for subsidies in the energy sector due to an increase in gas prices. Do you support that?
I have seen newspaper reports about it but I have not seen any specific proposal. I am not in favour of giving any additional energy subsidies. Gas prices should be raised as recommended by the Rangarajan formula and if this is done, it will raise the cost of gas-based power. Many people are already paying very high prices for power. For instance, if you are producing power based on diesel, then you are producing very expensive power. It should, therefore, be possible for gas-based power stations to pass on the additional cost to consumers. Remember that discoms buying expensive gas- based power will pool that power with cheaper power and the increase per unit in the cost of power as a whole will be modest.
Rational pricing of energy is a major challenge for the economy. Everyone agrees with rational pricing as a mantra but they always find reasons to make exceptions in their own case. The point is, can we afford energy subsidies? I would respectfully say we cant.
Should Reliance Industries give its surplus power from (the) KG-D6 (block) at the new gas price or the old one?
I understand this issue is going to the cabinet for a decision and I don’t think it is appropriate for me to comment. If there are commitments under the production sharing contract, they must obviously be honoured and if there is non-performance, it will have to be dealt with as provided under the contract. I have yet to see what exactly is being proposed by the ministry (of petroelum).
In this environment, when foreign investors are looking at the global level as to where to invest, tapering of quantitative easing will happen in the US. Do you think with the policies that India is taking in relation to the CAD or fiscal deficit, we will be able to convince even those with lesser money that India is the right country to put it in, since there is a threat of (ratings) downgrade as well?
These are difficult times and all countries will be under scrutiny to see how they manage the macro economic situation. On the threat of a downgrade, that depends largely on the perception of whether the fiscal situation is under control. The finance minister has repeatedly stated that the 4.8 per cent (of GDP) fiscal deficit target is a red line he will not cross. As long as we stay within the red line, I don’t think rating agencies will downgrade.
As for persuading investors to invest, everything depends on the perception of whether the economy is on track for a growth revival. The tapering by the US Fed will raise interest rates globally and that will raise our cost of borrowing but most of our investment should be financed domestically. The domestic long-term interest rate is much higher than the international interest rate and that is because our fiscal deficit has been high and inflation has been elevated. With both parameters showing improvement, we can expect an improvement in the financing position for domestic investors. Finally, the (rupee’s) depreciation that has occurred has also made Indian manufacturing much more competitive. That should encourage investors to set up manufacturing capacity in India.
On interest rates, what do you think RBI is expected to do next week on its monetary stance?
I don’t want to second-guess what Raghu will do. No point putting an expert in and then second-guessing what he will do. He has to take a call and we can comment later.
The Planning Commission talked about prescriptions to boost economic growth in the 12th Plan document. If the next elections throw up a fractured mandate, do you think the next government can still implement these and get high economic growth in the last two or three years (of the Plan)?
The issue is not the mandate. If you get a mandate which is fragmented, you get a coalition government. If the Government
can build a sufficient consensus around sensible policies, the economy will see progress.
You mean to say political instability will not lead to 5-5.5 per cent economic growth in the 12th Plan?
Many people think we have moved into a period when no single party will get a clean mandate. I am not an expert on voting behaviour and I would never want to second-guess the electorate but if the result is coalition governments, then special steps are needed to build a consensus around sensible policies. Otherwise, we cannot perform up to our full potential.
As we approach elections, will it become harder for the government to take harsh decisions as you are implying and not the people- friendly ones?
No government should take people-unfriendly decisions. It should always take decisions in the interests of the people but it’s often difficult to explain to the people why these decisions are in their interests. The problem is that sensible decisions, which will benefit the people, are politicised and are made to look anti-people.
A good example is the agitation launched in Delhi against electricity rates laid down by the regulator. The chief minister deserves credit for reforming the system and making it much more efficient than it was. Delhi has much fewer outages, unscheduled cuts, etc. Yet, the main opposition has said they will cut rates by 30 per cent (if elected to form the next government). Sheila Dikshit (the CM) has explained that there are other states where power rates are lower but these are places where there are large and unscheduled power cuts. It is difficult for people to understand that irresponsible promises of cutting rates can only mean that investment in the system will suffer, the discom wont be able to buy power, quality of supply will deteriorate, etc, but all that will take a few years. These so called people-friendly actions are actually highly unfriendly.
You have suggested a rise in diesel prices by Rs 5 a litre. Can a political party have the will to do so in an election year?
I have consistently said we cannot afford to subsidise petroleum products. We have to subsidise food but not petroleum products. I think people realise this and know that prices have to go up. The media has a major role to play in making people understand why this is necessary. Of course, the exact timing of the increase or, in this case, the pace of adjustment, has to be left to the government. But this is an area where policy has moved. We have said it will be done gradually and we are doing it. There is a strong case for doing it faster because the gap is very large.