New Delhi: Planning Commission Deputy Chairman Montek Singh Ahluwalia has said that the Finance Ministry under Prime Minister Manmohan Singh will very quickly "resolve" uncertainty among investors caused by anti-tax avoidance rules which were unveiled in the Budget. Talking about former finance minister Pranab Mukherjee, he said that it was not right to put the blame for slow growth on any one person.
Speaking to Karan Thapar on Devil's Advocate, he said that General Anti Avoidance Rules (GAAR) is a larger issue and it "caused lots of uncertainties among investors".
Here is the full transcript of the interview:
Karan Thapar: Hello and welcome to Devil’s Advocate. What are the steps the government needs to take to restore growth, revive investor’s sentiment and remove the clout on the economic horizon? That’s the key issue I shall discuss today with the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia. Mr Ahluwalia, after the charge of the Finance Ministry, the Prime Minister spoke of reviving animal spirits, restoring investor’s sentiment and reversing the climate of pessimism, does that mean that it is imperative for the government to act decisively and quickly?
Montek Singh Ahluwalia: Absolutely, I think that is exactly what the Prime Minister meant and that’s what you should do.
Karan Thapar: And there is a hint that it is a serious situation.
Montek Singh Ahluwalia: It is true that for us to blame the world is wrong, there are lots of things domestically that needs to be corrected and I think that’s what we should do.
Karan Thapar: Let’s then come to the key problems we face and ask them one-by-one what you think should be done about them. First growth, last year it fell to 6.5 per cent, last quarter to 5.3 per cent and clearly you need to revive animal spirits if you are going to get it back up to 8 and 9 per cent level. But in reviving animal spirits how important is it to push for stalled reforms?
Montek Singh Ahluwalia: I think when you say animal spirit what you really mean is the pace of the investment must become high. It is true that last year investment went down. Now, in order to bring the investment up lots of things have to happen. One of them is bending reforms. A lot of it has to do with better implication of exciting projects which have got stuck and are in the pipeline, some of which has to do with the tax related changes that the prime minister talked about. I think the investors need to be reassured that the government is keen to promote investment, keen to attract investment and keen to support the domestic investors, and I think all of these needs to be done.
Karan Thapar: Now you mentioned three or four things over there, let’s take them one-by-one. To begin with pending reforms, there are some reforms that the government can push through on their own by executive decision. I am talking about FDI in retail, FDI in aviation, it’s being talked about, will it actually happen?
Montek Singh Ahluwalia: I think there are things that have to done, certainly FDI in retail, in my view, should be done, FDI in civil aviation should be done. But everything that needs to be done is not a reform. A lot of it is just implementation, bottlenecks being removed.
Karan Thapar: Let’s not call it a reform but these are two changes you are saying that should be done?
Montek Singh Ahluwalia: In my view that’s correct and let me not say just in my view, the government has said that they are going to do it, we just have to implement it, that’s it.
Karan Thapar: Now a second set of reform that are dependent on the Parliamentary legislation are the reforms to do with insurance, banking, pension, GST, GTC. Those are stuck in Parliament. Will the government be able to find a way, either by negotiation with the Opposition or by reaching out to a multiple lot of parties to push those through?
Montek Singh Ahluwalia: Well I would certainly hope that the government will reach out to all the stake holders to build a consensus in Parliament to get all the necessary legislative changes done. But let me say by the way that I don’t think that the deceleration of growth is because these reforms haven’t been pushed through. I mean please remember for four years we grew with 9 per cent with none of these reforms in place. I think there’s a lot that can happen if the implementation bottlenecks in infrastructure which are holding up investment are actually removed. None of these require legislative changes.
Karan Thapar: Now you talk about bottlenecks... there is another issue that I want to take up with you. Industrialists point out that there are a number of critical projects in the power sector, coal, gas, part of it are held up, because of the unavailability of coal, because of the pricing, because of the problems with the transmission of the wheel of power. Can that lot of problems be tackled so that the growth is not stalled as a result?
Montek Singh Ahluwalia: Absolutely yes, in fact in my view the highest priority for purposes of getting quick change of investors’ mood must lie in overcoming these bottlenecks. The legislative changes are important but they can be done over a period of time. We can sort these problems out in four months time or at least we can create evidence that they are being sorted out which will change the mood.
Karan Thapar: You really mean in four months?
Montek Singh Ahluwalia: I mean in four months time we can do enough that people looking back would say that during this period a problem solving mechanism has been put in place and things are moving.
Karan Thapar: Now FICCI points out that something else that is holding back reforms despite the fact that you have new manufacturing policy is that 66 clearances are required for a new venture to be up and started. Can you cut through that paper work?
Montek Singh Ahluwalia: Certainly you can and should but please remember we grew 9 per cent for five years needing 66 clearances. I think it is simply wrong to think that the slowdown is due to these factors. These are the next generation of reforms that we must do. It’s not all us.. there’s Central government and the state government.
Karan Thapar: You started this bit of the conversation by talking about the need to set up investment that was the critical factor to fire up the animal spirit. One of the factors that has dampened the investors’ sentiment, both at home and abroad, is the government’s tax avoidance proposal and what is in common parlance called the Vodafone oak. Can the government review and reconsider the tax avoidance proposal and somehow get yourself on Vodafone?
Montek Singh Ahluwalia: Well there are two separate issues. There is the tax issue of the Vodafone, and I don’t want to comment on which involves a private company, the larger issue is the general tax avoidance rules, the GAAR rules, a number of these were introduced, I think they have caused a lot of uncertainty among the investors, the government actually recognised that by postponing the implementation of GAAR and what they said was that they are going to bring the draft guidelines which will reassure people and most importantly I think the government has said quite often that the FII should be reassured that it is not intended to make prejudicial change in their tax situation. My personal view is that’s the correct thing to do. Now, the GAAR draft rule should reassure people, I believe two days ago they have circulated something at the official level, they invited feedback, these have been taken care of. I think the government should look carefully on informed opinion and informed comments on whether these rules take care of the problems that are creating difficulty and then address them. It is a very important area and it is not new, we have already taken steps and we should care those steps to a logical conclusion.
Karan Thapar: Now, I know that you are reluctant to talk about the Vodafone and individual company but you know and as well I know that it has worried investors to the point that George Osborne Timathy has raised it, it is an issue that has worried Vodafone and other investing companies also, let me ask you could the government considerably come to a conclusion that because the Vodafone was adjudicated by the Supreme Court and then upheld for review, that this company will not be affected by the retrospective amendment in the tax law?
Montek Singh Ahluwalia: As I said taxation matters are complex and I should not comment on complex matters particularly when it related to an individual company, but I what I am saying is that the concern that came up was just not because of Vodafone though it is possible that the high profile attention that the Vodafone got complicated everything else. I am talking about other things. Vodafone is an issue that the Finance Ministry will have to handle.
Karan Thapar: One other question, do you think it might be sensible for the government to give assurance to the investors that the retrospective amendment of tax legislation, something that unsettles investors all over the world, will not happen hereafter?
Montek Singh Ahluwalia: Well you know my view is that the restrospective amendment should be very rarest of the things. I do want to say if you talk to any investor they will tell you that we are not the only country that occasionally does something retrospectively. Other tax jurisdiction has done but very rarely.
Karan Thapar: We had 27 such in the last budget, I am told.
Montek Singh Ahluwalia: No, no, but those are related to other things.
Karan Thapar: Dr Rangarajan said to me three weeks ago that just because others have done it and got away with that is no reason for us to try it. We need to think carefully about the future.
Montek Singh Ahluwalia: I agree with that.
Karan Thapar: You agree with that?
Montek Singh Ahluwalia: Yes
Karan Thapar: Alright let’s come to the second problem that we face, the fiscal deficit. Last year it came at 5.7 per cent. But do you believe if we have to bring it down to 5.1 per cent, it’s absolutely critical that subsidies be cap at two per cent?
Montek Singh Ahluwalia: That’s correct. That has been the government’s policy, that has been the policy of the Finance Ministry, the previous finance minister, the prime minister have said that we must do it, there is no doubt about it.
Karan Thapar: If you are really committed to capping subsidy at two per cent, would you accept that Diesel and LPG prices and perhaps kerosene, needs to raised quickly and substantially?
Montek Singh Ahluwalia: You know the view of the Planning Commission and any economist on this is that the Diesel and LPG have to be aligned with global prices. We can keep in mind to subsidies vulnerable individuals certainly kerosene and maybe LPG but otherwise it is not possible to run an economy if you are going to maintain a substantial subsidy on these. Now how you do it, when you do it, in how many steps, these are the issues.
Karan Thapar: But do it you must.
Montek Singh Ahluwalia: In my view, certainly.
Karan Thapar: Now if you are really serious about that 5.1 per cent fiscal deficit target, remember it is predicated upon a growth assumption of 7.6 per cent which many believe is unrealistic.
Montek Singh Ahluwalia: We are not going to get 7.6 per cent.
Karan Thapar: We are not going to get 7.6 per cent?
Montek Singh Ahluwalia: No.
Karan Thapar: You are absolutely clear about that?
Montek Singh Ahluwalia: I am, I mean it is not a forecast that I am making, my view is the best hope we have for the current year given the slowdown that has occur, the economy could grow somewhere around 6.5-7 per cent depending on what happens in the next six months. I don’t think 7.5 is possible, we should assume growth will be lower.
Karan Thapar: Alright, you are saying the growth should be somewhere around 6.5-7 per cent, that’s half a percentage point or even a full percentage point less than 7.6, in which case if achieving the 5.1 per cent fiscal deficit target is important do you think expenditure has to be cut
Montek Singh Ahluwalia: You know globally this tweaking fiscal deficit target as a rigid fiscal target is not a contemporary fiscal practice.
Karan Thapar: But are you saying you are willing to accept higher fiscal deficit?
Montek Singh Ahluwalia: Let me explain what I am saying, any time a budget is made, a budget is made on the assumption that the growth will be something. Then variations in growth it is assumed will impact the fiscal deficit. If the growth is less than projected in nominal terms the chances are that the fiscal deficit will worsen, if it is more then the chances are…
Karan Thapar: But can still keep the fiscal deficit target even if the growth is less provided you reduce your expenditure.
Montek Singh Ahluwalia: I am not sure that is recommended by the way, most people let us determine what is the structural fiscal deficit that we want and then if the growth is less you should accept the deterioration, That’s what we are doing around the world.
Karan Thapar: So you are saying there is no argument for cutting expenditure because in the last budget you cut the expenditure by 22 per cent, grows borrowing requirement from rupees 5.1 lakh to 5.7 lakh, you are saying there is no argument to cut the expenditure.
Montek Singh Ahluwalia: I am saying we should continue with the 5.1 per cent fiscal deficit target defined as the structural deficit target and if the growth is less than that we should accept that the fiscal deficit in the current might worsen and in the next year’s budget we’ll have to set a more appropriate target.
Karan Thapar: Alright the second deficit that worries the people is the current account deficit which is coming at unprecedented 4.2 per cent of the GDP. Now, I know the steps that you take to improve investment will help the current account deficit as well as the weakening of the oil price will help but beyond that do you have steps?
Montek Singh Ahluwalia: There’s a lot of talk about the deterioration of the current account deficit so let me clarify one thing, a very large part of the deterioration in 2011-12 over the previous year was due to a huge import of gold. That import is choked off anyway and I think that deterioration is less a development on the current account than a sort of a substitute for the capital outflow because people are uncertain about the exchange rate in other countries you see a capital outflow in India.
Karan Thapar: So you are saying to me because the gold import has been choked off the current account deficit next year will on its own will come down.
Montek Singh Ahluwalia: I think the expectation that the rupee will keep weakening is no longer there. If you remove the gold imports from the accounting the current account deficit of the first three quarters of the 2011-12 is pretty much the same as it was in 2010. It’s high
Karan Thapar: So the message that you are saying is that the current account deficit will over a period of time correct itself?
Montek Singh Ahluwalia: I am saying that in 2012-13 it will not be 4.2 per cent.
Karan Thapar: Are you also saying that by that account the slide in rupee will slowly reverse itself?
Montek Singh Ahluwalia: Well I don’t like predicting exchange rate but in my view the weakening of the exchange rate has gone a little beyond what underlying fundamentals were suggesting.
Karan Thapar: So these are the two areas, the current account deficit and the slide in the rupee, where the government doesn’t need to do much because those are situations which are correcting themselves?
Montek Singh Ahluwalia: Well I would say that you always need to worry about the current account deficit but I don’t think it will be 4.2 per cent. You yourself have said that the oil prices have softened quite a bit, if they remain soft, then I think in the current year, in 2012-13, we will not have as big a deficit as we had last year. The key thing is we still have a deficit. So we need the foreign inflows – FDI and FII to finance.
Karan Thapar: And therefore you need to ensure that the attitude of this government remains one that attracts investors...
Montek Singh Ahluwalia: Absolutely. And the government has made that very clear.
Karan Thapar: Finally, What about inflation? It is stubbornly stuck above 7 per cent. What, if anything, can you do about it?
Montek Singh Ahluwalia: Well I think what has happened with inflation is that… a year ago, the fear was double-digit. It is not double-digit. But it is still uncomfortable. I would be happier if it were 5 per cent.
Karan Thapar: Are you also trying to say that there is nothing much we can do, but we are hoping it will come down slowly from 7 to 5, but beyond that, there is nothing much we can do?
Montek Singh Ahluwalia: No, no, no. I would not put it that way. I mean a lot of what needs to be done on the inflation front is keeping the macro under reasonable control. We will not have the pressure on commodity prices which we had in previous year. So I think that will be a softening effect on oil prices. And I think if we have a reasonable monsoon, given that we also have a pretty big food stock, I don’t expect to see too much prices on food prices.
Karan Thapar: Mr Ahluwalia, in part you have clearly sketched out what the government needs to do. And this has been known to everyone for quite a while. So why did not the government do anything about it earlier?
Montek Singh Ahluwalia: Well the government has started on many of the things that I talked about and let me give you two examples.
Karan Thapar: No forgive me, don’t give me examples. Answer the public perception that for six to eight months, the government knew what it had to do, but it did not act.
Montek Singh Ahluwalia: Well I won’t say that, because in the whole area of infrastructure, a lot of stuff has been done to put in place a system that can start unblocking things.
Karan Thapar: The whole problem of GAAR was allowed to develop particularly when the economy was slowing down. Why was that problem allowed to develop in the first place?
Montek Singh Ahluwalia: Well in our system the budgets are secret. As soon as the budget was presented, it was realized that the GAAR was going to be a problem. And the previous finance minister then postponed it by one year in clear recognition that what had been put forward is not acceptable. I hope they resolve this uncertainty very quickly.
Karan Thapar: Was the previous finance minister himself the problem? Many people are asking that question. You must have seen it in newspapers and television channels. Let me ask you bluntly: Was the previous finance minister the problem?
Montek Singh Ahluwalia: No no, I think this is something that you don’t want to be carried away by newspapers. They are always trying to put one minister against another. Look, the art of taxation is difficult. I do believe there were problems but you have to give credit to the previous finance minister especially because he postponed the application of GAAR.
Karan Thapar: Except for the fact that within twenty-four hours of Pranab Mukherjee resigning, course correction has started. The Prime Minister using a different language...animal spirits are suddenly being worried about. No longer is the line of the Finance Ministry that the India growth story is intact. The Prime Minister said something different. So I ask you again, was Pranab Mukherjee the problem? Are you relieved that Pranab Mukherjee is gone?
Montek Singh Ahluwalia: I really don’t think this is an issue that you pin on any one person. The India growth story having slowed down is not something that the previous finance minister is denying. If you look at the last six months, time and again, people have admitted that growth has been slowing down.
Karan Thapar: Oh previously they denied there was policy paralysis, now there is admission that there was. There is a change in language, even if it is a bit embarrassing for you to admit, and there is a change in action too.
Montek Singh Ahluwalia: You know using terms like policy paralysis is good TV. When things happen you take a corrective step. Let’s see how it works out.
Karan Thapar: Mr Ahluwalia, let’s see how it works, and let’s keep our fingers crossed. A pleasure talking to you.