Deputy Chairman of the Planning Commission Montek Singh Ahluwalia has suggested a cut in wasteful government expenditure as a strong and necessary measure to control the fiscal deficit but defended financial burden of the Food Security Bill. He was speaking to Karan Thapar on Devil's Advocate.
Here is the transcript of the Interview:
Karan Thapar: Hello and welcome to Devil's Advocate and an interview with the Deputy Chairman of the Planning Commission on the falling rupee and the steps taken by the government of India and the Reserve Bank of India. Mr Ahluwalia given that at its nadir the, rupee has depreciated by 20 per cent since the start of the financial year and by over 7 per cent in August itself, would you accept that the steps taken by the government and the RBI to arrest its fall haven't really worked.
Montek Singh Ahluwalia: You know I think you need to put this in the right context. First of all this is not an India specific event. What you have seen in the last two or three months is an amazing volatility in global financial markets in which most emerging market countries have experienced a weakening of currency.
Karan Thapar: That I accept. But when the government and when the RBI step in to try and arrest the fall they believe that they can succeed and they haven't really succeeded.
Montek Singh Ahluwalia: No I think that is never the approach actually. Because I do not believe that either the government or the RBI have taken the view that we are drawing a red line on where the rupee should be. But what they are saying and I think I agree with the view, at the moment in my view, the rupee is a bit over depreciated but a lot of the correction that occurred may not have been such a bad idea.
Karan Thapar: You know it's not just that the steps that they have taken haven't worked because the rupee continued to steadily decline but some of the steps taken by the RBI, I am talking in particular about the sharp increase in the short term interest rates, I am talking about the control on capital transfers which the market at least interpreted as capital control, not only failed to soothe nerves they actually created a sense of panic instead. They were counterproductive.
Montek Singh Ahluwalia: I don't really know whether those particular steps actually created a panic but they were certainly misinterpreted. The RBI's view is that those were really very small steps affecting only domestic residents.
Karan Thapar: But they panicked international investors.
Montek Singh Ahluwalia:They were interpreted wrongly, and I think since then the Finance Minister himself has categorically stated that India is not going back to the world of capital control.
Karan Thapar: Except he took a whole week to make the statement and by then the international papers the Financial Times in particular were writing articles about India possibly closing its door.
Montek Singh Ahluwalia: Of course they were writing articles. People now-a-days write articles every 10 minutes. Every serious investor, when something like this happens, when markets are troubled, they want to look at what the authorities are saying.
Karan Thapar: And the authorities were silent and that is why the misinterpretation created panic.
Montek Singh Ahluwalia: It's quite possible that whatever was said could have been said a day earlier.
Karan Thapar: You accept that..
Montek Singh Ahluwalia: You know the authorities do not jump up the moment there is a change in the market.
Karan Thapar: Mr Ahluwalia the rupee is steadily sinking. It breached 65.50 as well and even then the authorities were silent.
Montek Singh Ahluwalia: What is so sacred about 65.0? I mean look, if you ask me, the usual calculation that people make when they say has the rupee over shot or not. There are two kinds of people in the markets, in the world. There is one lot who say you shouldn't bother at all, if it over-shoots it will come back. I don't share that view. I mean I think governments can tolerate some volatility but when things look a bit excessive they can send wrong signals so it is quite right to come in and explain your position and that's what the government has done.
Karan Thapar: But that's what the government didn't do right until Thursday evening. They could have done it a week earlier, they could have done it in fact 2-3-4 weeks earlier because the slide has been happening viscously since May but it has been happening since in fact April. And I put it to you that the silence from the government compounded by the refusal of the Finance Minister to actually speak on the subject to the press at all led to concern. If misinterpretations were happening that then led to panic. International investors read papers like the Wall Street Journal and the Financial Times and when those papers were predicting that the next control on capital flows will be investor money not being allowed back, people began to worry.
Montek Singh Ahluwalia: No, no. By the way that is a very serious issue which I believe was quite categorically clarified.
Karan Thapar: Only on Thursday.
Montek Singh Ahluwalia: No, no, no. Raghuram Rajan I think was quoted in the Financial Times clarifying that look this is not capital control.
Karan Thapar: But it didn't work. It needed the Finance Minister and the Finance Minister was silent
Montek Singh Ahluwalia: My point is that the Chief Economic Advisor is usually the mouth piece of the Finance Minister. So you know, this unfortunately is a day and age when people like creating panic so I don't believe by the way that the Finance Minister should start speaking every two seconds. That will be a wrong thing to do.
Karan Thapar: Accept that he should speak when it's needed and he got his timing hopelessly wrong.
Montek Singh Ahluwalia: As long as his officials are speaking.
Karan Thapar: No, his officials are not as good as the Finance Minister. There are times when the politicians need to stand up and speak and he didn't.
Montek Singh Ahluwalia: No he spoke in Parliament, subsequently had a press conference. Look whenever there is a problem, it's a judgement call. Nobody can argue whether you shouldn't do it 24 hours.
Karan Thapar: Quite right. He could go wrong and he could go wrong on the judgement call by being silent for too long. That's the point I am making.
Montek Singh Ahluwalia: No, I wouldn't say that because in my view we need to create an atmosphere in which markets take officials seriously and I think both Raghuram Rajan and Mayaram categorically said there is no question of going back to the capital flows.
Karan Thapar: But it didn't work. It needed the Finance Minister and he was late.
Montek Singh Ahluwalia: Absolutely.
Karan Thapar: Let's leave the past behind, on Friday the rupee did go up smartly by Rs 1.35 against the dollar. Do you believe it's is the sign of recovery or are you worried, that next week it could start heading south again particularly when quarter 1 performance results come out which many believe will be disappointing.
Montek Singh Ahluwalia: Let me say, I am not predicting what is going to happen to the rupee and nor should anyone in the government be actually predicting it. I think what is happening now for the first time, people are beginning to say that the rupee has over-shot. While I know there is one bank and in my view, without any basis what-so-ever has said that it will go to Rs 70. There are two or three others that have said that it will go back to 61, it will go back to 60. So we are facing a genuine uncertainty. Now how you handle that, people operating in the market will make up their own mind. As far as the government is concerned it ought to have three-four clear messages. I believe it has them and they are very good.
Karan Thapar: What are they?
Montek Singh Ahluwalia: Number one and the government has said this at the highest level which is the Finance Minister for this purpose that the current account deficit this year is going to be much better than it was last year. I mean in dollar terms it's like instead of 88 or 89 billion last year it is going to be something much closer to 70 billion.
Karan Thapar: At the moment that is a statement that the public have taken at face value and accepted because they want to trust him, but he hasn't provided any basis for believing it.
Montek Singh Ahluwalia: No. No. Let me say that the basis of believing can only be the details. I have seen some of them.
Karan Thapar: Share them with us, so that people have confidence.
Montek Singh Ahluwalia: Well I'll tell you. There are two reasons why I believe the current account deficit this year will be a lot better than the last year. First, last year saw a big burst of additional gold imports. That has already come down and we do not expect that to be repeated and that will be there.
Karan Thapar: And the second reason?
Montek Singh Ahluwalia: Second, prices of petroleum products have gone up, we think there is going to be a moderation in the demand of oil products. That will happen to some extent anyway because growth is less than we had originally projected and I think commodity prices are going to be relatively modest.
Karan Thapar: Let me accept that you can bring in the CAD to 70 billion which is 3.7 per cent which is the target that the Finance Minister set. The second question is will you get the finance that's needed to finance the inflows.
Montek Singh Ahluwalia: Very good point. You know I believe, You know the important point is that the last year 2012-13 we dragged in about 92 billion dollars of money from different sources.
Karan Thapar: That was before the threat of tapering and tapering could start end next month.
Montek Singh Ahluwalia: I agree with you, but tapering, by the way the markets have already factored in tapering, so the notion that whatever he is going to do is going to create a big change, the change already happened because the changes take place much faster than action.
Karan Thapar: Are you seriously saying when the tapering starts, which could start as early as September, that is next month, that in fact the flow of fund out India won't come a flood, because people are predicting, not just Duetsche Bank, many in your own country that at that time the rupee could sink to 70 and below.
Montek Singh Ahluwalia: No No, by the way the people are predicting both 60 and 70, don't take any of these seriously. The point I'm making is that the reaction of the markets to the anticipated tapering has already begun. Let me put this way..
Karan Thapar: So there will be no worse fall of rupee when tapering starts?
Montek Singh Ahluwalia: What we are saying is that, we in any case are expecting to draw in 20 billion dollar less, so it's not as if we are saying because we get 90 billion we need 90 billion, there is 20 billion less. Let's go little further, it is quite possible that you get a short term scarcity of funds because of uncertainty, for a month, for two months, for three months, for four months.
Karan Thapar: That will sink the rupee further?
Montek Singh Ahluwalia: Unless the safety net you have, which is your foreign exchange reserves are not deployed. Now, in my view, this is my view and I have no idea what the governor want to do or what the new governor wants to do or the Finance Minister wants to do. There is no point whatsoever of having foreign exchange reserves if you are not going to use them when necessary.
Karan Thapar: To what extent would you use them to shore up the rupee? How much would you be prepared to spend?
Montek Singh Ahluwalia: Well, that's actually a judgment which first of the all the government should keep you guessing. So, it will be foolish of me if I give any number. Let me put this way, I will answer this by an analogy not by a direct answer. What does a country do when it suddenly experiences a short term shortage of liquidity? The first question that markets have to ask is, is this government or country basically fundamentally sound. Are they going to bring the growth back? Are they going to keep the fiscal deficit under control?
Karan Thapar: Both of them are big question marks in this case?
Montek Singh Ahluwalia: We will come back to that. In my view the government has clearly given the signal that we are very concerned about growth. We are going to do what is necessary to remove the impediments to growth and the finance minister has categorically said...
Karan Thapar: First come back to reserves, you are saying that in certain circumstances the reserves should be used.
Montek Singh Ahluwalia: Yes. Further more in my view, if you are a normal country and you needed a liquidity protection you would use a swap arrangement or you would go to the IMF. We don't need to do any of that.
Karan Thapar: So you are ruling out those two possibilities, are you?
Montek Singh Ahluwalia: Well, I would personally rule out. We only have only swap arrangement with Japan, We don't have swap arrangement, many other countries do.
Karan Thapar: Will you use swap arrangement with Japan if push came to shove?
Montek Singh Ahluwalia: That really depends, that's a judgment call the government has to take.
Karan Thapar: That's the possibility on the horizon.
Montek Singh Ahluwalia: But you know that swap arrangement is of 10 billion dollars, we have 280 billion dollars of our own money.
Karan Thapar: So the reserve should be used first and second fall back is the swap arrangement?
Montek Singh Ahluwalia: No I'm not even saying that, those are the judgment call that the people managing the currency have to make. The limited point I am making is this. Even if you believe that we can get 70 billion in a year you can't rule out that for 2 or 3 months you may have a shortage. I think you have to keep in mind the reason we built up these reserves...
Karan Thapar: And that's the period we use the reserve for the shortage period of 2-3 months.
Montek Singh Ahluwalia: That is why we have got them otherwise we should have got rid of them long ago.
Karan Thapar: That I understand. The Business Standard in a lead earlier this week said that the government in fact should set up a standby facility to give it a safety net with the IMF.
Montek Singh Ahluwalia: Ridiculous suggestion, absolutely ridiculous suggestion. The reason is, the scale of facility you need to get from IMF is very small compared to the reserves you have. And if you were to announce half the policies that the IMF would want you to announce, in order to get a standby facility, you would need to use standby facility, you will need to use your own reserves.
Karan Thapar: In which case there is another alternative suggestion made by the well known economist Surjit Bhalla who says that in addition to this swap arrangement, as you already said, with Japan of only perhaps only 10 billion dollars, why not set up similar swap arrangement with the Bank of England and with the European Central Bank those would give you safety nets that you can use to reassure the investors?
Montek Singh Ahluwalia: Well let me say, as a general rule, I am in favor of exploring the possibility of regional swap arrangements. You know, globally, the international financial architecture now formally acknowledges that you have to have three levels of safety net. The first level is your own reserves, the second level is swap arrangements and the third level is IMF. I don't believe that the ECB would be interested in swap arrangement with a non reserved currency.
Karan Thapar: What about the Bank of England?
Montek Singh Ahluwalia: I doubt if they would be interested in that either. As a matter of fact, their whole approach would be, look because of the European crisis we have hugely increased the ability to borrow from the IMF.
Karan Thapar: Which means that the only swap arrangements possible is that the one you have with Bank of Japan?
Montek Singh Ahluwalia: Well, there is a Chiang Mai arrangement where we are not members of, but I think, long term, this is an issue that both the Finance Ministry and External Affairs all have to think about, do we need to join a regional arrangement? Let me say.
Karan Thapar: Could you do it at this stage or is it too late?
Montek Singh Ahluwalia: It is irrelevant at this stage, when you are in middle of a problem. That's not time you join arrangements.
Karan Thapar: Could you approach Beijing for instance?
Montek Singh Ahluwalia: I don't think that will be at all necessary in present circumstances.
Karan Thapar: One last question before I take a break and change the subject, what worries people is that if you find that growth falls below 5 per cent, inflation rises substantially above 6 per cent your current account deficit despite the Finance Minister's assurance is also above 3.7 and you miss the fiscal deficit target of 4.8. And I warn you that all of them are quite easily possible, what then happens to the rupee?
Montek Singh Ahluwalia: No, I think that is a very important point. I mean in my view, instead of worrying about the rupee and constantly looking at whether it's breached some level or not breached some level. 95 per cent of government's energy at this moment should be spent trying to make sure that the impediments to growth are removed. I believe we have done a lot and we can talk about that if you have time. We have done a lot, at the moment there isn't evidence yet of a response. But remember, you take a policy step, there is a time lag. I am still hoping.
Karan Thapar: It is very important that you say that there isn't evidence of a response even though you claim you have done a lot because people turn around and say that the multiple assurances Montek Ahluwalia used to give Devil's Advocate about how Cabinet Committee on investment has cleared obstacles and so projects that were on hold will now start moving and growth will pickup have not really begun to materialise?
Montek Singh Ahluwalia: Let me try to explain to those who remember earlier Devil's Advocates. When I last said that, we had a situation where 78,000 megawatts of generation capacity which had come on stream after 2009 and would begin to be on stream by 2015. 78,000 megawatts did not have fuel supply arrangements, so technically.
Karan Thapar: Have they got it now?
Montek Singh Ahluwalia: They have, I am told that by the August 30, which is only two or three days from now, all of them will have it. Almost all of them already have it. So this is a very big change. Now remember when projects are held up for a variety of reasons
Karan Thapar: Can I interrupt?
Montek Singh Ahluwalia: There are other reasons that may hold them up, but this is a big change.
Karan Thapar: Your third largest conglomerate, the Aditya Birla Group headed by Kumar Mangalam Birla, told the Financial Times in June that 10 billion dollars worth of its projects were held up. He certainly doesn't reflect any great confidence in the ability of the Cabinet Committee on investments to rapidly clear projects and that is what industrialists say, governments talks but it is not delivering.
Montek Singh Ahluwalia: Let us be clear, the first priority that the Cabinet Committee on investment quite rightly gave was for power projects that are supplying power to the grid.
Karan Thapar: And they will be now functioning on August 30?
Montek Singh Ahluwalia: August 30 absolutely. Now wait a minute, let me say, we are not saying that Aditya's case is not a good one. I personally think we should give that too but his was the next round I-captive power plant. They are being considered now.
Karan Thapar: Lets then take a break, you have raised a certain possibility of hope that as CCI clears projects that are stalled, growth will improve. I want to come back and talk to you about the fiscal deficit, the other deficit that worries people enormously. Can you bring that in at 4.8 or will the Finance Minister miss that promise altogether. That is in a moment's time, see you after the break.
Karan Thapar: Welcome back to Devil's Advocate and in an interview with the Deputy Chairman of the Planning Commission Montek Singh Ahulwalia. Mr. Ahulwalia lets come to the fiscal deficit. The Finance Minister has repeatedly said that he will bring it in at 4.8 per cent of GDP. I ask you in the present economic circumstances, can you really make it?
Montek Singh Ahluwalia: Oh I think you can make it.
Karan Thapar: Can I give you three reasons why I think you can't. First the fiscal deficit target of 4.8 is predicated upon growth of 6.4 which isn't going to happen, as a result of which your revenue targets will fall short. Secondly, with the rupee sliding perhaps as much as 20 per cent, your subsidy on fuel and fertilizer will over-shoot the 65,000 crore allocation. And third you have a disinvestment target of 40,000 and a target of money raised by sale of other shares of 14,000 more, neither of which look as if they can be met in present market conditions. So how can you meet 4.8 per cent on the fiscal deficit.
Montek Singh Ahluwalia: Well. First of all, you can't judge market conditions from what they are right now. You can always pick 3-4 things and say well you are not going to meet those. I think the real, the difficult part is this, if you are serious about meeting the fiscal deficit and you find that there isn't enough revenue, you just have to cut expenditure and any finance minister can cut expenditure. It's unpleasant, it's tough, but if people understand that you are trying to manage an economy, after all there are a lot of people who say there is a huge amount of waste in government expenditure, it is not going to be that difficult to cut it. It is not a pleasant thing to do but he has to do it.
Karan Thapar: Actually this year is particularly difficult and unpleasant. Last year you reined the fiscal deficit in by cutting expenditure by 92,000 crore but it wasn't an election year. This year is. Can he repeat that this time around.
Montek Singh Ahluwalia: No I think you should give him a chance. I mean when you say an election year, the election is in next May.
Karan Thapar: Nine months away. It could be earlier if things go wrong.
Montek Singh Ahluwalia: You keep judging. You have to judge the fiscal situation as it evolves.
Karan Thapar: So you are saying that the solution to the fact that growth may not match the estimate in the budget, that the cost of the subsidies is going up, that disinvestment may not happen, the solution is cut expenditure.
Montek Singh Ahluwalia: No, the fuel subsidies by the way are not necessarily reflected in the budget. They simply lead to squeeze.
Karan Thapar: Well you got an allocation of 65,000 crore last year, it was short by some 30,000 crore. This year people believe it will be short by the same. Let's not quarrel about the fuel subsidies, your real solution is that he has got control over one thing expenditure and he can cut it sufficiently even if it is unpleasant to do to ensure the fiscal deficit is no more than 4.8.
Montek Singh Ahluwalia: That's the only alternative unless you can, may be do better in mobilising resources. You know in principle you can always raise taxes, but I think in such a short time that is not likely to be important.
Karan Thapar: My last question, given the uncertainty and given that you made it crystal clear that the only really credible solution is to cut expenditure, why then go ahead with the Food Security Bill which is going to add possibly 40,000 crore more. Just under half a per cent of your GDP to your expenditure and send out the wrong signals and worry investors both internationally and at home. Why go ahead with that in these circumstances?
Montek Singh Ahluwalia: Well, the Food Security Bill is a long standing political commitment of the government
Karan Thapar: You can't afford it today so do it when you can.
Montek Singh Ahluwalia: No no I think, consider the following. First of all, the 40, 000 is a full year impact of the Food Security.
Karan Thapar: So in the remaining 9 months, you will get three-fourth or two-third.
Montek Singh Ahluwalia: Not necessarily, because it depends on the rate at which it is rolled out, etc
Karan Thapar: So you will delay it deliberately?
Montek Singh Ahluwalia: No I wouldn't say that. I mean after all its before Parliament, the act has to be passed, because the ordinance is there. States have to do a lot to be ready to take up the off-take of additional amount.
Karan Thapar: For once paralysis in Parliament works in your favour.
Montek Singh Ahluwalia: I am not saying that all, I am not saying that at all. But remember another thing that the Food Security Bill is just one component of subsidies. If we want to keep total subsidies under control, I don't think you should regard the food subsidy as the one that is most vulnerable.
Karan Thapar: Cut the others
Montek Singh Ahluwalia: Absolutely
Karan Thapar: Alright
Montek Singh Ahluwalia: Secondly, it's for the next year. Most people are aware that they are not judging what happens to the fiscal position this year; they want to look at the next year.
Karan Thapar: I accept that the full impact will be next year but the RBI has said that from the next year onwards when the full impact happens, they are worried. But let's leave it there, we have raised the question we have raised the doubt, you have given your answer and sadly at that tantalizing moment we are right out of time. A pleasure talking to you.
Montek Singh Ahluwalia: Thank you.