Karan Thapar: Hello and welcome to India Tonight and a special interview with the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, on growth, inflation, fiscal deficit and prospects. Montek Singh Ahluwalia, let's start with the figures that the government released today. There is no doubt that the good news is the economy during the year ending March 2001 grew at 8.5%. But the distinct cloud over the horizon is that growth in the fourth quarter came down to 7.8%, which is a full half per cent below quarter III and, within that, industrial growth has slowed down and services have slowed down. As Deputy Chairman of the Planning Commission, are you concerned about that?
Montek Singh Ahluwalia: Well, let me say that the change in last year's growth estimate is miniscule. I mean they had projected 8.6% for the year as a whole and now it's been 8.5% and I don't think that's something worth worrying about. It's true that if you look at the last quarter that growth is 7.8%. It's been declining over successive quarters because during the recovery phase you expect it to go down little bit. Real issue is, are subsequent quarters going to be better than 7.8% growth or is it going to remain at 7.8? Our assessment throughout was that in the next year we will do better than in the last quarter of the year that just ended. So from 7.8% the economy should quarter-by-quarter do a little better. What we'll end up with is current year people have been talking about 8.5%. My guess is that even if we are anywhere between 8.25% and 8.5% and some people go even below that, it's still a very, very good performance for a post-recovery year. The world as a whole, by the way, in 2011, everybody is expecting to slow down compared to 2010 which was the recovery year.
KT: You're putting a mark at 8.25%, but only a couple of weeks ago the governor of the Reserve Bank of India actually scaled down his expectation of growth between 2011-12 from 8.6% to 8% and now a couple of days ago, Chief Economic Adviser Kaushik Basu has said that in June the government may revise the figures that the Finance Minister based his Budget on. So don't you think 8.25% is actually a bit too generous? Many people fear that at 7.8%, the economy is slowing down.
MA: I see a number of investment analysts pitching it below 8%. Some are pitching it above 8%. I'd say that 8.25% is pretty good. It is recognition of the fact that the 9% is outside the ballpark. The 9% estimate which the finance ministry used for the purpose of the budget was not necessarily a forecast. They calibrated their Budget around 9%. As a result they came up with a certain fiscal deficit target. The name of the game is it works slower. They should still meet the fiscal deficit target I think they intend to do.
KT: Well I'll come To The fiscal deficit target in a moment's time because that's a second critical issue. But to clarify your position, I get the impression that you don't believe that the economy is slowing down. In fact, I get the impression that you believe that 7.8%, which is the growth in the last quarter of the last year, may be the bottom and you expect the economy to do better in the next quarter and thereafter as well.
MA: Yes, compared to 7.8%, if last year, that is 2010-2011, economy grew at 8.5%, we shouldn't be too shocked if in the current year grows at 8.25%.
KT: Except that wasn't our expectation in comparison to what the Finance Minister said in his Budget, which was 9%. (Growth of) 8.2% is not very good and 7.8% for that last quarter is particularly worrying.
MA: (Growth of) 8.2% is a significant downgrading from 9% but you know that the information that the Finance Ministry's estimate would have been based on is information they had in January that's when they freezed this number.
KT: Was this justified in January or now in hindsight you feel that they were being a little bit too generous?
MA: If you go back to Budget estimates, all Budget estimates are pitched at the optimistic end of the range. You have to remember the reason for that. You need some of these estimates to get estimates of expenditure and revenue and fiscal deficit. The important point is they should meet the fiscal deficit target.
KT: Let's come to that important point. Because the problem is, the fiscal deficit target is based on the assumption of the 9% growth you yourself said was difficult to achieve. In that situation can you meet the target of 4.5% or is it now looking unrealistic?
MA: The reason is if you go back in every year while certain expenditure is budgeted there is always a saving. A lot of the expenditure that is budgeted doesn't get done and then in the course of the year...
KT: Are you relying upon inefficiency?
MA: It's not inefficiency. It's just that you know very well two things are going to happen -- there will be some savings -- very often for reasons beyond their control. In the course of the year you authorise other supplementary expenditure. If growth is less, the real implication is people have to live with what they have got.
KT: Supplementary expenditure is a different matter at the moment. The real concern is whether revenue expectations will live up to what the Finance Minister said. Let me quote the revenue secretary from today's papers. This is what Mr Mitra said: "I have serious apprehensions in respect of tax collection this year." And side by side, oil prices (are) hovering at about $110-111 a barrel which means that you have a problem with subsidies particularly petroleum subsidies and you may even have a problem with food subsidies. So are you caught in a double: revenue failing to live upto your expectations and subsidies are booming upwards and upwards.
MA: Let's separate these two. I take the revenue secretary's comment as reflecting the fact that (if) the economy grows less faster than hoped, revenues will grow less faster than hoped. Always a lot of room in the sense that the expenditure you plan for, there are significant shortfalls which get made up by supplementary demand.
KT: But food security bill was fully accounted for...
MA: Food security is not a big problem. Of course, it will cost more, we don't have the details. I don't think we have difficulty on the food security side. Yes, petroleum is a different matter, but my view is and (that of) many people in the government (is), we simply cannot afford to have a delinking of the domestic price of petroleum products from the global price. If we are importing it, we cannot afford to subsidise it.
KT: But the government does not have the courage of conviction?
MA: There are meetings scheduled. Let's see what they decide to do. Let's see what they decide to do.
KT: That sounds more like hope than realistic expectations. Meetings have always been (held) and that's your problem--your subsidy bill will destroy...
MA: That’s a very serious point. It would be a major failure on our part of macro management if that turned out to be the case. I'm hopeful that if you interview me three months later then you would be able to say that and therefore ensure that the subsidy bill and the petroleum aspect of it in particular is handled with the tough decision that the bullet will be bitten. In my view and so far as my advice is relevant, that is the single most important...
KT: Newpapers today are speculating that you might have difficulty in achieving the small disinvesment target in the Budget. And the second thing that has emerged: eight out of 12 government disinvestments that hit the market in the last two years are trading below their issue price, which would be a disincentive if you were to go ahead and disinvest more. So are you going to go ahead and sail on the disinvestment front, if I am correct 48,000 crore?
MA: I would not come to that conclusion. Let me say that when you disinvest and the stock market goes up and down there are periods when people who bought the shares look as if they have made money and then may be periods when they feel they have not. This is not about disinvestment. Whether you can disinvest in future depends on how you have priced your disinvestment.
KT: Absolutely. If you can't achieve your targets your fiscal deficit is once again under threat.
MA: It's too early to say that. We have 10 months to go. It's too early to say the disinvestment target we had in mind can't be achieved. You know these things change in a period of two months.
KT: I note your optimism, but let me point out few months ago... I am quoting the Home Minister and once again I'm quoting what today's newspapers say. The Home Minister is certainly concerned about the fiscal deficit. He is suggesting two new taxes as a way of ramping up revenue--to begin with inheritance tax and secondly a consumption tax. Some papers call it conspicuous consumption tax. Do you think in the present circumstances these two measures are justified?
MA: Well, I have seen the newspaper report and I don't think it says that the Finance Minister has just said (that). It claims (what) an earlier minister, former Finance Minister P Chidambaram, something the Finance Minister had said: We should look at a broader range of taxes and not a long-term issue when you are doing tax reform is always relevant. He did not mean actual impostion of new taxes in the current year.
KT: That is reassuring. But introduction of inheritance tax 25 years after Rajiv Gandhi abolished it might just send wrong signals about this government.
MA: I'm not aware that it is currently being contemplated.
KT: Is it loose thinking?
MA: I won't call it loose thinking. In any kind of tax reform, always ask yourself: Do you have taxes which other people don't have and do you not have taxes other people have? In our case we have wealth tax which almost nobody has and we don't have inheritance tax which almost everybody has. So I think if you are looking at direct tax reform you should take a comprehensive look at it.
KT: What's your personal take? Do we need it or can we do without it? I think...if somebody were to say we should have an inheritance tax it should be considered as part of the overall tax reform, not a one-off measure taken.
MA: It should never be taken as a measure because of any one year and I don't think the Home Minister and former Finance Minister has that in mind. He said in the context of the next five years may be we should consider something like that.
KT: Before we take a break, look at a major problem. Part of the cloud on the horizon is inflation. The Reserve Bank has accepted it's going to stay within the range of 8-8.5%, maybe 9-9.5% and tantalizingly the same Reserve Bank (said) it could come down to 6% and now that sort of hope has been held out by the Finance Minister, Finance Ministry, by you in interviews to me, but has not been realised. Do we have a hold and grip on inflation?
MA: Nobody in the world has a hold and grip on inflation. You read any financial newspaper. One of the dominant negative things about the world economy is the rise of inflation especially in emerging markets. We are no exception to that. We had hoped that we would be able to bring it down quickly. (The) inflation rate is coming down, that's good news.
KT: It is zig-zaging...
MA: It is zig-zagging, (but) by and large it is coming down. Current expectations are that if you do not burst your fiscal deficit target, it looks as if we are maintaining the course on fiscal consolidation. We have a normal year so there is no inflationary outburst and if there is no sudden further disruption in global oil prices.
KT: And you are forgeting to mention that we have a good monsoon.
MA: Yes, that's also true. But it's early too say. The monsoons have just about reached kerala. If all these things happen then hope that the 8% will come down to 6% in the next few months is not unreasonable.
KT: Is inflation the Achilles heel of the government at the moment or the Achilles heel of economic planning in India?
MA: I think inflation has always been a subject of enormous interest to any government looking at political reaction. Indian public rightly in my view is very sensitive to inflation. Government would be well advised to take whatever measures that may be necessary.
KT: Including further interest rate hike?
MA: Inflation is out of control and small re-adjustment outcome on the demand side in order to bring inflation under control would be worth doing. (If) you don't control inflation now, then within a year it would become a bigger problem.
KT: So in your eyes it's a much greater priority than growth?
MA: A year ago I had said you don't need stimulus when the growth rate goes above 7.5%. Growth is in a range where that's not a thing you will be most worried about. We are still the second-largest, second-fastest of the large economies.
KT: We talked about growth, fiscal deficit and inflation. Let me come to a bigger, wider question. It's to do about reform. When this government came in 2009, free from the Left, with enormous support from the electorate, most people believed that we were going to see substantial reforms. Some measures that were talked about were insurance cap. Seven years ago but undelivered and now is the opportunity and people were talking about the need for second generation reforms.
MA: Second generation reforms are not like you change something and it is done. We are trying to build an institutional direction. I think more has happened than people give credit for. Let me mention three or four things that have happened gradually. Number one: (the) whole business of providing economic infrastructure in rural areas and improving economic conditions for farmers by improving prices, giving flexibility on marketing, hasn't happened as fast as you would want, but it has happened. That, by the way, was why last year you had a 6.6 % growth in agriculture GDP. If you average it out you are doing better on agriculture than the previous five years. Let me give you another example. The whole issue of building infrastructure by relying on public-private partnership. I have been a great advocate of that. I am happy about that many dimensions in the central government area you seeing a lot of private-public partnership in infrastructure. Now you see it in the state also.
KT: You hear a lot about it. Ministers talk about it and they make broad promises about it --like 20 km of road. We have never achieved it...
MA: I am not talking about the qualitative target bringing private sector involvement in infrastructure. Delhi airport it's there, huge big airport, working very well.
KT: What about the fact that the Finance Minister banking, insurance reform but all of it stuck at the finance committee level. In fact, the Finance Committee Chairman, Yashwant Sinha, has formally announced that the report he was preparing on the insurance bill that was promised seven years ago has been indefinitely postponed. So is that whole bag of reforms for many litmus test held up.
MA: Some of these reforms require legislation. Government cannot do much more than introduce legislation and then push the various committee procedures to work. I don't know what the outcome is going to be and I hope that is not delayed.
KT: It applies to GST and it applies to PTC as well?
MA: Anything that involves the Parliament, the government has to first introduce the legislation by introducing the legislation it has signalled that the cabinet has approve it. but it has to be passed by the legislature.
KT: Has it been held up by the legisation the introduction of FDI in retail. It's now formally recommended by the group of ministers that has met under Mr. Basu. It has been talked when the DIPP brought out a paper last year will the bullet be bitten? Incoming FDI was sharply down last year.
MA: It's true that FDI in retail the position that the government had taken was that they are going through a consultative procedure. Quite a lot of consultation had happened planning commission formally conveyed to them that we should introduce it and many other ministries have said do. I hope they will take a decision soon.
KT: Are you worried in the absence of a good positive decision what you saw happening to FDI --last year FDI was down by about 25-30% -- will continue.
MA: I don't believe that the FDI in retail is a trigger that is going to affect the whole FDI people are more interested in.
KT: It's not a catalyst?
MA: It does send out signals. But people are seriously investing in manufacturing which is the bulk of what are fdi is going to be. They are very aware that manufacturing is wide open and whether we have fdi in retail or not we are open to FDI in manufacturing. So i think we need to look at what's may be affecting them. One thing that is affecting the slowing down is in the aftermath of the great financial crash many programmes and plans would got have disrupted. I tend to view the slowing down in 2010-2011 a temporary phenomenon.
KT: My last question we are completing two years of of UPA 2 as an observer and critic are you satisfied with the way this govt has handled the economy in the last two years that are often a honeymoon period for every govt.
MA: In the planning commission, it's a bad idea to be satisfied. So, of course, we should have done better. Take a longer look at UPA 1 + UPA 2. By any standard of how the economy has performed it has performed better than the period before that. What tends to happen is people tend to think that the economy has done very well has nothing to do with what the govt does we are india and we are competent when you are not running your objective is are you creating an environment in which the Indian economy is doing a good job. i think it has done a good job sure it could have done a better job.
KT: Carping critics who just regret that you haven't undertaken further reform are failing to appreciate that 8.5% is superb performance.
MA: I would not call it carping criticism. It's good to criticise. If you are not criticised, you will not reach your full potential. There's a big difference between having a potential of performing 9 and performing 6 and potential of 9 % and performin 8 % ofcourse you should go to 9 but 8 is really pretty good.
KT: Montek Singh Ahluwalia, a pleasure talking to you.
