Devil's Advocate: Montek Singh on economy

Now that the new Government has taken office, how does it view the state of the Indian economy and what steps does it plan to take to restore growth. Those are the two key issues that Karan Thapar discussed with the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia on Devil’s Advocate.

Karan Thapar: Dr Ahluwalia let's start with the state of the economy. On one hand performance in Quarter 4 was better than anticipated and the economy itself over the last year has grown by 6.7 per cent. But on the other hand exports have fallen steadily for seven months in a row, manufacturing has dipped into negative figures and perhaps as many as 15 lakh jobs have been lost. So what's your considered view of the state of the economy?

Montek Singh Ahluwalia: Well, it is clearly going through a difficult time. Here the most important thing is that this is conceivably the worst year that the world economy has had for the last 60 years or so. If you take account of that, then given the external circumstances the economy has done well and I think its inherent strength is very good. It will be able with the right set of policies, incentives and stimulus. It will be able to recover very quickly to high growth.

Karan Thapar: I want to talk about the right steps and stimulus. But first let me put this to you. How much heart do you take from the better performance in Quarter 4 and the reason I ask is because the Business Standard has pointed out that more than half of that GDP growth in Quarter 4 was because Government consumption, as they call it, has increased by 22 per cent. So how much of an indication of return to health is that?

Montek Singh Ahluwalia: I wouldn't rely entirely on the fourth quarter numbers. I think let’s face it that the third and fourth quarter together did indicate a significantly slower growth than the kind of trend that we are trying to aim at. But the real issue is in the current year and not in the first quarter of the current fiscal year but maybe in the second half; I think there is a very good chance that you will see the economy rebound. And the main reason is the fiscal stimulus measures that were taken after December. They take sometime to have an effect. So most of the stimulus that the Government introduced in the previous fiscal year… the impact of that on production is likely to be felt in the current year.

Karan Thapar: I take your point that the impact of the stimulus is still to be fully felt. But in the meantime manufacturing in Quarter 4 dipped into negative figures and even if you look at full year it was down to just 2.4 per cent growth compared to 8.2 the year before. How concerned are you about the state of Indian manufacturing?

Montek Singh Ahluwalia: I think everyone in this government is concerned about the state of Indian manufacturing. Let's face it. The external adverse developments: a) on exports and b) the slowing down of investments... both of these things would have an impact on manufacturing. So manufacturing performance is much below what it needs to be. That's going to be an area that the Government needs to look at very hard to see what we can do in the current fiscal year to put in a much better performance.

Karan Thapar: Side by side with manufacturing you also have as I shall put it less than assuring figures from agriculture. Agricultural growth was 1.6 per cent over the last year compared to a much more robust 4.9 per cent the year before. Is that another area of concern?

Montek Singh Ahluwalia: Well, I think the agricultural growth does fluctuate. So I think if you are looking at agricultural performance you need to look at it over a three- or four-year period. My perception is that in the previous four years there is absolutely no doubt that there is more momentum in agriculture than existed earlier. Now that needs to be maintained, strengthened and enhanced. I don't think agriculture is actually a bad story.

Karan Thapar: Manufacturing is an area of greater concern?

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Montek Singh Ahluwalia: Manufacturing is an area of much greater concern.

Karan Thapar: In which case given your view of the economy is that we are going though as you put it perhaps the worst year on record and that there is still a while before we come out of the doldrums, do we need another stimulus package? Or do you think that uptake that you are seeing, such as it is, is sufficient?

Montek Singh Ahluwalia: That's a difficult question to answer because precisely it is this issue that we and the Finance Ministry will be trying to look at. Now I think one needs to remember that a fiscal stimulus has to be weighed against any impact it might have on confidence in longer term fiscal sustainability.

So I think we need to look at the fiscal situation now, what has been the actual fiscal deficit last year, what should it be this year and what are the other reasons why other than the stimulus... what may be the other reasons why the fiscal deficit this year may be under threat. Taking all these things into consideration, my suspicion is that we in the Planning Commission have always said that we need more stimulus in the current year. But it has to be in a framework of medium term fiscal sustainability. Those discussions have to take place with the Finance Ministry. We don't have the full information.

Karan Thapar: The interesting thing is that you suggest that there is a debate or at least an internal discussion going on about the fiscal stimulus and the level of fiscal deficit that are acceptable given that India's debt to GDP ratio is somewhere around 81-82-83 per cent. What level of fiscal deficit do you think you can consider in these circumstances acceptable?

Montek Singh Ahluwalia: You see I wouldn't focus on the fiscal deficit in the current year. I think making a fetish of the fiscal deficit in one year doesn't make any sense at all. I mean the United States has a fiscal deficit of about 11 per cent, UK has about 10 per cent. It's true that the debt to GDP ratio is high. We should make up our mind what do we want it to be five years from now and what's the fiscal deficit we need today and can we bring it down over the next five years sufficiently to reach a target debt to GDP ration?

Karan Thapar: From a personal standpoint answer this question. What would you like the debt to GDP ratio to be five years from now and what then in calculation with that should the fiscal deficit be?

Montek Singh Ahluwalia: Well that's exactly we are actually doing in the Planning Commission right now and I am not in a position to actually share numbers. But you know I would say that a very substantial reduction in the ratio of the deficit, five to six percentage points of GDP lower may be more over a five year period will be a very desirable thing.

Karan Thapar: So you would like to bring the debt to GDP ration to somewhere around 75-76 per cent?

Montek Singh Ahluwalia: Yes. But you know more importantly it's the trend that counts. I think if people sense that debt to GDP ration is going down and the fiscal deficit is going down... I think the concern about fiscal prudence will be met.

Karan Thapar: So some of it is not just actual numbers but perception and performance?

Montek Singh Ahluwalia: Well it's actual numbers of change rather than actual numbers in a current year.

Karan Thapar: Absolutely. And that in turn affects perception and gives confidence?

Montek Singh Ahluwalia: Yes, absolutely.

Karan Thapar: And that's the most important thing. As long as perception and confidence is there the absolute numbers don't really matter so much per se.

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Montek Singh Ahluwalia: Yes! They matter less. I mean let's put it very simply. If you had a fiscal deficit of say seven per cent in the current year, objectively that's high. But if you can set it in a set of policies that lets people know that it will be five per cent and then four per cent and then three per cent... I don't think people care too much.

Karan Thapar: Provided you stick to the five, four and three?

Montek Singh Ahluwalia: Yes! The credibility of that transition needs very hard headed look. I mean investors abroad will be looking exactly at that. Let me say that these concerns about the fiscal deficit are not just in India. Standard and Poor’s have downgraded the United Kingdom on the ground of debt. So if we also have a debt problem, we are by no means the only country having a debt problem.

Karan Thapar: But you are also keeping an eye open on how the investors abroad are looking at your debt problem?

Montek Singh Ahluwalia: I think that's very important and we are.

Karan Thapar: Okay. Let's come to some of the measures that were enunciated or at least hinted at in the President's address to the Lok Sabha the other day. To begin with the Government seems to have put a lot of stress on disinvestment. Let me first ask you if this is intended to tackle the fiscal deficit or is it primarily intended to send a signal of reform as well as to reinvigorate the PSUs affected. Which is it?

Montek Singh Ahluwalia: Well, I think all of these will happen and I wouldn't say by the way that the President's address has put a lot of emphasis. I mean if you look at...

Karan Thapar: How about my saying that the reporting of the President's address has put emphasis on it?

Montek Singh Ahluwalia: Yes, that's absolutely true. I mean the financial sort of analysts have a few things that they regard as signals of reform.

Karan Thapar: Disinvestment is a prime one.

Montek Singh Ahluwalia: I have no doubt that disinvestment is one of those. But we should be trying to do what is right and I believe that disinvestment that we are planning to is right. Well you know there are many, many other things in the President's address and...

Karan Thapar: I will come to that.

Montek Singh Ahluwalia: They are very important.

Karan Thapar: I would come to those in a moment’s time but let us stick with disinvestment for a moment. How extensive is the disinvestment the Government is envisaging? In other words are you thinking of three or four token companies and that's it or are you actually planning disinvestment across a range maybe even a plethora of companies?

Montek Singh Ahluwalia: Well, there isn't an actual Government decision on this as you can imagine since the Government has just come in. The President's address is only two days old. But I am sure that the Ministry of Finance and Department of Disinvestment are actually looking at what's feasible.

In my view assuming that disinvestment is going to be done which is clearly the case, it is more important to determine, lay down a clear programme for the next three years and not be worried so much about how much disinvestment you are going to do this year. It doesn't matter. I mean you have got to do disinvestment at the right time. It takes a certain amount of time to get things going. The signal that we should be giving is “are we willing to do a significant amount of disinvestment over a three- to four-year period?” Now the only limit in my view is that Government equity cannot go below 51 per cent. Other than that you can disinvest all the way.

Karan Thapar: A very clear signal that you personally believe that there should be a programme, the programme that shows extensive disinvestment over a period of three-four years and the real limit is that Government equity mustn't fall below 51 per cent.

Montek Singh Ahluwalia: That's what being public sector means. I mean there are some qualifications here. Sometimes companies want to raise money from the public directly and if they do that, that lowers Government equity. So as long as you have a target of 51 per cent for companies where you want to raise money into the company, you need to keep the scope for that while planning.

Karan Thapar: Absolutely. But there is a roadmap stretching beyond three or four years that will be made clear by the Government. So it will be quite clear and transparent what the Government intends and how extensive.

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Montek Singh Ahluwalia: I would hope that is what will come out of the current deliberations. Yes.

Karan Thapar: Let's now come to other matters referred to in the President's address. First are the hints given about pension, banking and raising insurance caps. Now as you know these are things that the Government has talked about before. In fact, insurance caps are something that the Government committed itself to in its first budget but didn't deliver. Are you aware that this time around, people are looking to see whether you are actually going to deliver or whether these are once again promises that you will resile from?

Montek Singh Ahluwalia: Well, I think the President's address lays out a very clear agenda and the Government is very serious about implementing that agenda. That does include the steps that you have mentioned and I hope that it will be possible to do that. It does also depend on Parliamentary support. I mean for example, the proposal to raise the foreign equity level in insurance from 26 per cent to 49 per cent makes a lot of sense to me but it does require an amendment of the act.

Karan Thapar: But you have 324 MPs in the Lok Sabha so why are you worried about Parliamentary support?

Montek Singh Ahluwalia: No, no, but you need to get it through both Houses. I am not saying that we are worried. I am saying that we will certainly make the effort, and if there is Parliamentary support, it should get done.

Karan Thapar: Let me put it like this. Analjit Singh, the Chairman of Max New York Life, one of the larger, more credible private sector insurance companies has said that in the eyes of the outside world, delivery on insurance caps is a credibility test for the Government.

Montek Singh Ahluwalia: I am aware that in certain circles, particularly among financial analysts that tends to be the case, but I would like to say that this is not something we are doing because they worry about it. This is something we think makes sense. What does worry me is that they focus on only two or three things. Our agenda is actually very wide.

Karan Thapar: I will come to the rest of your agenda, but you are giving me an assurance, aren't you that you believe this will go through and that you are genuine about it?

Montek Singh Ahluwalia: Oh we are certainly genuine about it. There is no question about that.

Karan Thapar: Let's come to something else. The President's address also hinted at - and I won't put it more strongly than that - on targetting subsidies better so that they reach the needy. Are you actually envisioning cutting back on them?

Montek Singh Ahluwalia: This is an issue that has been on the agenda for a very long time. I am not aware that we have at the moment, specific proposals, in that regard, but I think that clearly one of the ideas there is that the Food Security Act for example - which promises to provide very low-price food - has to be re-targetted. It is meant for the BPL population. So I think the reference there is that we need to find ways of making sure that these desirable subsidies actually get to the target group. And that we don't set up mechanisms where you have low-priced items with huge leakages – which just means a lot of cost without benefit.

Karan Thapar: What about in this regard, considering the deregulation of petrol, diesel and cooking gas? I know that the minister has spoken about this to the press, but it is not really a part of the President's address, given that the oil price is inching above 67, 68 and it could be hitting 70. You have a fairly small window of opportunity to deregulate the price before the price itself goes so high that it becomes a frighteningly difficult thing to do.

Montek Singh Ahluwalia: There is not question that the price reform which the Petroleum Minister has spoken about is a very important part of the agenda. I mean, in the previous Government, we had approved the integrated energy policy. Now one of the key elements of that integrated energy policy was linking petroleum prices to international prices.

Anything else, quite frankly, is not economically sustainable. It's true that oil prices are going up. It is unlikely that in the year as a whole - given that we don't expect to see the global economy make a very strong economic recovery - oil prices will get out of line. This will be a good time to bring about that rationalisation, but I think it is something that the minister has already spoken about. I have not seen the detailed proposals that they are working on yet.

Karan Thapar: But I want to underline what you said - 'this is a good time to bring it about'.

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Montek Singh Ahluwalia: I would say yes. If we accept the proposition that they are to be linked. The thing to do is to do it at a time when you don't expect to see too much volatility in the oil market and I don't think there will be.

Karan Thapar: Let's come to infrastructure. I know that you believe that the single biggest bottleneck to India's growth and development is the poor state of India's infrastructure. And certainly governments - not just yours but previous governments as well - have spent a lot of time talking and making promises, but the delivery and the implementation is very weak. This time around what guarantee can you give that when it comes to infrastructure, delivery and execution will match up to promise?

Montek Singh Ahluwalia: Well, I think that the main reason why I am optimistic is that in the last three years or so, we have spent a lot of energy in getting the process issues right and I think that we have made progress in that - whether you look at roads or you look at power. I think all the process issues have got resolved, we know how to do it, there is inter-ministerial agreement, and quite frankly, the pipeline is very strong. So I think that in the coming year, you will see a very significant improvement in the pace of implementation of these kind of things – ports, roads, power plants, all of them.

Karan Thapar: Let me put to you this proposition that CII has tabled and you have probably been formally delivered this by the CII as well. They have suggested a single-window agency for clearance of fully researched, designed proposals which have the clearances with them, which are then auctioned to the highest bidder. Does that make sense to you?

Montek Singh Ahluwalia: I think it does actually. When you say single-window, it's not really a single-window clearance. What they are saying is that for example if you want to build a power plant or you want to build a road with public-private partnership in some manner, so you are bringing in a private partner through competitive bidding. What they are saying really is, set up a shell company which remains with the public sector, go through the process of getting all these clearances and when the clearances have been obtained for the project that you have in mind, bid out the company. I think it can be done. But remember, what this means really is that all the time that will be taken, will be taken so to speak on the Government's watch. When you bring in the private sector, you will have the clearances. It's a separate issue to make sure that the clearances themselves are done very quickly and I think that that is equally important.

Karan Thapar: Now that is the real test because the Government's credibility depends on a) ensuring the clearances are done quickly and comprehensibly and b) delivered easily and effectively. Can the Government do its bit?

Montek Singh Ahluwalia: I think we can do better than we have done in the past. My personal view is that we should certainly experiment with this type of approach for the one very simple reason – when you are pushing to get clearance for what is at present a public sector company and the private sector person who will ultimately own the company is not known, it's much easier to push for the clearance because of the importance of the project. Once you have got a project that has been bid out, then you are pushing for an individual company and that becomes much more difficult.

Karan Thapar: One last quick question and give me a quick answer. Montek Singh Ahluwalia is in favour of this, I am sure the Prime Minister is in favour of this, but will the babus help you or will they be an obstacle?

Montek Singh Ahluwalia: I think we exaggerate the extent of obstacles put in by officials. I think if the Government is very clear that this is what we want to do it is perfectly possible to get the administration to be supportive. Yes, objections may be raised, they have to be addressed and a clear decision taken.

Karan Thapar: All right Montek Singh Ahluwalia let's hope you are right. You have held out a lot of promises, you have cheered many hearts. Now let's hope you deliver. A pleasure talking to you.

Montek Singh Ahluwalia: Thank you.