Jan 10, 2013 07:42 PM IST | Source: CNBC-TV18

Budget 2013: Govt ready to take tough decisions on CAD, says Montek

In an exclusive interview to CNBC-TV18, Planning Commission deputy chairman indicates that the governmt was ready to get tough on CAD in Budget-FY14

Explaining the government's proposal to hike diesel prices among other initiatives, Planning Commission deputy chairman Montek Singh Ahluwalia indicated that the petroleum ministry is likely to decide on the fuel hikes in about two weeks' time. He called for the need of a graduated adjustment on fuel prices as the current account deficit (CAD) was a key worry for the government at this point of time.

In an exclusive interview to CNBC-TV18, Ahluwalia said that government expects to bring down the CAD to 3-percent of GDP in the next two-to-three years and was willing to take tough decisions in this regard. He signaled that the Budget would contain measures to speed up the implementation of infrastructure projects, boost GDP growth to 8 percent in two-to-three years and lure adequate inflows to finance the current account deficit.

The Planning Commission deputy chairman pointed out that spectrum auctions need not be viewed as a capital receipt  and that the reserve price signaled the minimal expectations from the government. He added that the commission was examining the issues hindering the award of projects by NHAI and called for the need of procedural improvement to speed up the award of projects.

The Prime Minister is focusing on power projects suffering from linkage issues and highlighted the necessity to streamline environment clearances for execution of projects. Commenting on power-generation capacities, Ahluwalia said that the mismatch in production at Coal India was a key hindrance and added that coal price-pooling issue is under consideration at this point of time

"Do not expect a further deceleration in GDP growth. The GDP growth in the second half of FY13 will definitely be higher than the first."

Below is an edited transcripts of the interview on CNBC-TV18

Q: Current expectations, over the next 48 hours, hover around the fuel price policy. Do you think it will be one more of those ad hoc diesel price hikes or could it be a durable, graded and phased plan?

A: I am not speculating on what government might do in the next week or two. That is something the ministry of petroleum has to decide.

Q: Is it imperative, from the perspectives of the fiscal deficit and credit rating, that an attempt is made to cut the subsidy on fuel on a durable basis with a concrete roadmap?

A: We have made that quite clear in the 12th Plan document. The Planning Commission has made it very clear that there is a need to align domestic fuel prices with global prices. The Plan document emphasises that the under-recovery on petroleum is very large and that it cannot be rid of at one go. Some graduated adjustment is necessary but exactly when and by how much, is really left to the discretion of the oil ministry.

Q: What is the solution to significantly stemming the current account deficit (CAD)?

A: It is one of the major factors causing significant stress to the economy at the moment. The Plan document suggests that the CAD has to be brought down to maybe a little over 2 percent by the end of the Plan period and that means that over the next few years, an attempt has to be made to finance a CAD of approximately 3 percent of GDP.

I think the government can do that if the fiscal correction outlined by the finance minister is credibly reflected in the Budget, which I am sure, will be and that will prove that the government is not unwilling to take difficult decisions. The government has already taken several of them.

The government has clearly stated that its policies welcome foreign investment. I do not believe that our fiscal deficit is out of line with the global economic situation.

Six-to-seven years ago, this fiscal deficit would have been viewed very negatively. But today, in terms of debt-to-GDP ratio, virtually all the industrialised countries are much worse than India and they are going to grow between zero and 2 percent. India is growing just below 6 percent at the moment and the government hopes to take it to 8 percent over a two-to-three year period which is not an unreasonable expectation.

Q: One part of the deficit constitutes capital receipts which have not been significant as the first auction of telecom spectrum did not go well. Though the second round of the auction witnessed a significant cut in reserve price and industry observers stating that it would be better than the first auction, the statistics show no indication of the target being anywhere in sight. Do you think the second spectrum auction may not delight the government?

A: I think this arithmetical focus on how much the auction will achieve is not important. What is key is that the government having run into difficulties regarding the allocation of telecom spectrum, switched to what is visibly a totally, transparent method of allocation. What is important is that telecom sector is poised to move forward. I do not think that these little calculations about how much money is going to come in before March, make any difference.

This whole focus of how much the auction will realise completely misses the point of what the government has done by way of establishing a telecom policy that is transparent, widely accepted and provide a boost to growth in telecom.

Q: Why is the government setting reserve prices so high? Why does it not leave it to the market to decide? If it is not fixated on the price but the process, then why set very high reserve prices in the first auction and probably for the second auction too?

A: I am a little puzzled. Two seconds ago you said the government has cut the reserve price and it seemed to imply a criticism. Now are you are saying that the government should cut it even further?

Q: The government had reduced the reserve price, but it was not adequate.

A: So, you feel the government should cut the reserve price even further, fair enough. Incidentally, there is wide-spread criticism of the government in the press for cutting the reserve price. But there is no rule on what should be a reserve price. The price is actually going to be fixed by the auction and I agree that if we had chosen a reserve price that lead to the failure of the auction, we would have made a mistake.

But I think that a decision has to be taken. There is a logic to fixing a reserve price. It is true that the earlier price that was fixed was too high, but remember, it was fixed on the recommendation of the Telecom Regulatory Authority of India (TRAI). The government was directed to conduct the auction as recommended by the TRAI. I do want to emphasise that a reserve price is only a starting price. We expect to see the price determined by the market and I hope that the auctions will succeed.

Q: There has been a lot of concern about the very poor award of road projects by the National Highway Authority of India (NHAI) and right now there seems to be a public spat between the ministry of environment and forests (MoEF) and NHAI.  The Planning Commission keenly tracks the road sector. What’s the solution because NHAI has fallen well short of what it set out to achieve during the course of the year?

A: It is true that the award of projects in the case of NHAI has not gone according to plan. The Planning Commission is studying the various ways to see how the entire process could be speeded up. Though I don’t want to pronounce on the particular spat, it is quite clear that the manner in which the clearances are issued needs to be streamlined and transparent. So the Planning Commission is consultation with the MoEF and the Cabinet Committee On Investment need to holistically study the problem and address it.

Q: By when do you see the Cabinet Committee on Investments start resolving some of bottlenecks at these major projects?

A: The Cabinet Committee has been notified about three or four days ago. The reason the notification took a little time is that its objectives were changed in order to authorise the committee and that required consultation with the ministry of law.

So any ministry that wants to take an issue to the Cabinet Committee on Infrastructure can actually do so and I am sure that ministries whose projects are stuck will in fact be preparing notes that go to the committee. The Planning Commission has been directed by the Prime Minister to look at the problem of fuel supply for power projects.

This was presented in the Planning Commission meeting with Chief Ministers who raised the issue that power projects in their states did not receive adequate coal linkages. The Prime Minister expects a comprehensive overview of the power projects that are stuck for lack of fuel linkages within a week or 10 days.

If the review reveals that some of these bottlenecks could be resolved by the Cabinet Committee on Infrastructure I propose to send a note to the committee. I am very confident that over the next month or so, the Cabinet Committee will actually have on its agenda a long list of proposals to resolve certain problems.

Q: Are you saying that you are confident that in the next four-to-five weeks, problems such as those faced by large projects like Mundra, can be addressed and resolved?

A: I don't want to comment on individual projects, but I want to put a few things in perspective. First of all, the reason for the problem is that while the coal supply has been increasing at an annual rate of about 5 percent, the pace of power generation has surged ahead exponentially. In the last year of the 11th Five Year Plan alone, the sector added about 21,000MW.

So the pace of setting up generation plants has suddenly caused a huge demand on coal and Coal India is not able to expand production to meet all of it. Now the solution lies in importing coal and that is possible. But imported coal is much more expensive.

Now this is linked to the whole issue of energy pricing and the markets are not ready to absorb those imports at higher prices. So, the solution to that is price pooling and that proposal is under consideration. I am not sure why it has been delayed, may be there are different points of view but that’s one of the issues that the Cabinet Committee On Infrastructure could take a call on and simply overrule certain perspectives.

Q: HSBC has cut India's GDP forecast for this year to 5.2 percent from 5.7 percent. Is that too pessimistic?

A: I think HSBC probably got it wrong, but we will know soon enough. I do not expect a further deceleration of GDP growth. In the first half of the year, GDP growth was around 5.4 percent. My expectation is that in the second half of the year, when the data comes in GDP growth will be higher than 5.4 percent. I think the HSBC forecast is excessively pessimistic.

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