Montek Singh Ahluwalia, deputy chairman of the Union planning commission, faces a grilling on the economy’s state from Karan Thapar on CNN-IBN’s ‘Devil’s Advocate’ programme. Edited excerpts:
In September, industrial growth fell to just 1.9 per cent, its lowest in two years. Inflation is at 9.73 per cent, its 10th month above nine per cent. Last year, foreign direct investment (FDI) was 25 per cent below what it was the year before. A worrying situation?
Year 2011 is bad for the world economy. With the explosion of the euro zone crisis in the middle of the year, everybody’s growth rate has been disrupted, capital flows have got disrupted and economies are growing much slower than hoped.
Industrial growth in India in the first six months of this year has been just five per cent, compared to 8.2 per cent last year. That suggests this is an established downward trend.
For the current year, it certainly establishes a slowdown. The budget was calibrated on the assumption that the economy would grow at nine per cent. When the approach paper was discussed a couple of months before, we thought it would grow around eight per cent.
Now, we are talking about 7.5 per cent. I don’t put much store whether 7.5 or 7.25 is going to be correct. This is a short-term cyclical slowdown. We have to do something to reverse it; it won’t get reversed automatically.
The second important concern is inflation, stubbornly above 9.5 per cent, and clearly, the Reserve Bank strategy for tackling it is not working. Would you accept the government doesn’t have a clear idea what to do about inflation?
No, I wouldn’t accept that. It’s true that inflationary pressure is higher than what we had thought it would be. The RBI has taken a number of steps;, it’s too early to say it’s not having an impact. All the research shows that monetary tightening takes at least three to six months.
You’ve been tightening over 19 months. You’ve raised rates 13 times, by 375 points and inflation has shot up every month.
We were tightening from a very low position and started when there was a lot of global inflationary pressure. I agree with Rangarajan’s assessment that maybe by the end of the fiscal year, you will see inflation coming down.
You, Rangarajan, the RBI governor, Kaushik Basu, have all been making such predictions for a year-and-a-half. These have damaged government credibility.
It’s true we’ve been hoping this would have happened earlier and to that extent, our credibility becomes a question. But, I do not think we will have the same problem this time. There has been a lot of monetary tightening and global inflationary pressures are now not there. Nobody thinks you will get another increase in oil prices; metal prices are already coming down. I don’t think this is going to be pressure on food prices. Finally, a lot of the supply side, like what is happening on agriculture, is quite good.
So, I expect that from January onwards you should begin to see a slowing of inflation and, hopefully, when the figures for March come, it could be 7-7.5 per cent. By February, you will have the January data and if it turns out that inflation is not coming down by then, then we really don’t know what we were doing. My internal assessment is that when the data of December becomes available, which would became available in January, they will show a significant beginning of a decline.
If not?
If not, the government should be doing something else.
The third problem that affects the economy is the fiscal deficit target. With growth slowing, with tax collection less, with oil prices higher than the year before and with your disinvestment target unlikely to be met, do you really believe Pranab Mukherjee can make the 4.6 per cent deficit target?
When you set a target, it’s called a ‘structural fiscal deficit target’. Which means if everything goes as planned, the fiscal deficit would be 4.6 per cent.
Analysis is predicting the deficit could be as much of 5.5 per cent.
Not impossible. There are some unexpected increases in subsidies and so on. But, part of the problem with that projection is that it assumes all the expenditure planned in the budget will take place.
Cutbacks are the only things that control the fiscal deficit, nothing else.
Substantially true when you are going through a shortfall.
The fourth problem that faces you is the continuing euro zone crisis and the economic uncertainty in America. It has meant that export growth has slumped to just about 10 per cent. As a result, your trade deficit is hitting $93.7 billion.
It may not be as bad, though the trade deficit this year will be higher. But the external financing we have would be able to handle it.
Except that this deficit is going to keep your rupee weak, adding pressure to inflation.
If you’re running a market-determined flexible exchange rate, that’s one signal you get to see in the markets.
The problem with the market is that Moody’s has just downgraded the outlook on Indian banking to negative and government yields on debt are hitting nine per cent. Websites in America are asking whether India might be going down the Italy or the Greece way. It shows that confidence in India is dented.
Its absurd. Both the rating agencies completely failed to spot the sovereign debt crisis in Europe. They’re covering up so that they can downgrade. They downgraded the US, so downgrading the Indian banking system is just a part of the needed response. It’s just a warning signal because they don’t want to be caught not having been sent one.
There is erosion in the confidence not just in India but in the global system. Animal spirits are down, investors are choosing to be liquid rather than putting money into projects. So, everybody faces this problem. I would not read too much on the downgrading of the banking system.
If there’s a silver lining, it must be the fact that the government is beginning to talk about reforms and people believe it might be ready to bite the bullet on second-generation reforms. The real talk is about the possibility of FDI in retail and permission for foreign airlines to invest in domestic carriers. Is it just talk?
In all our reform efforts, we have tried to bring about the maximum consensus possible. So, it’s not surprising that they have a few more consultations. If it takes a few months longer, there’s no big deal.
Are you hopeful we will see FDI in retail before the end of this calendar year?
I’m always hopeful when things I think are good things are going to happen.
Suddenly, some measures that have been talked about for months, if not years, could be happening. We’ve got clearance for FDI in pensions, the new manufacturing policy has been agreed by the Cabinet, you’re saying there’s a serious hope of FDI in retail. What message would all of this, if it does happen, send out to the world?
I hope it sends out the message that some of the negative messages of, you know, government doesn’t want to do reform were not well-founded. When the economy goes down, people immediately look to reforms, as if doing some reforms will speed it up. Remember last year, 2010-2011, people said that ‘Well, we’re a bit slow’ and the economy grew at 8.5 per cent.
Major legislation which changes major systems can take a bit longer than people think. The goods and services tax involves a constitutional amendment. Can’t happen in April doesn’t mean it won’t happen during the year. It might take six months longer.
Major investors and industrialists like Mukesh Ambani, Azim Premji, Deepak Parekh and Jamshed Godrej have at various times in the last couple of weeks complained about policy paralysis.
This has focused a lot more on decisions holding up infrastructure, not these reform issues. It is something the government is very keen on and a lot work is being done on how to unclog projects in the energy sector. Many moved ahead without getting the clearance they should have got and its been difficult to determine how to find a solution.
The public wants a much more transparent adherence to rules and so if rules have been framed, even if they are not good rules, we follow them or change them, and that comes with a cost. We are aware of the problem and we are taking corrective steps.
The most important thing we should do is to take care of bottlenecks in the implementation of investment projects. The second thing, quite honestly, is that investment spirits are down across the world. Reviving these is going to be a global event.
