Jan 03, 2013 04:46 PM IST | Source: CNBC-TV18

We cannot afford our current subsidies: Montek Singh

In an interview with CNBC-TV18‘s Siddharth Zarabi, deputy chairman Montek Singh Ahluwalia highlighted that the current subsidy levels are unsustainable, and continuing to burden oil companies could cause the sector to collapse. Further, he added that diesel and LPG are currently hugely under-priced.

In an interview with CNBC-TV18’s Siddharth Zarabi, deputy chairman Montek Singh Ahluwalia highlighted that the current subsidy levels are unsustainable, and continuing to burden oil companies could cause the sector to collapse. Further, he added that diesel and LPG are currently hugely under-priced.

Below is the edited transcript of Montek Singh Ahluwalia’s interview with CNBC-TV18.

Q: Is it finally now time that we will address the pending issues on oil pricing as far as diesel, kerosene is concerned?

A: If the expenditure has got to be increased in the planned side and if the fiscal deficit has to go down, this can only happen if you either increase some revenue or cut some expenditure. Indeed both have to be done. What the plan says is that better revenue mobilisation is a principal thrust of the revenue strategy. We have said that since 2007-2008 central government tax revenue has fallen by about two percentage points of GDP. So, that has to be reversed. This is no reason why our tax revenue should have fallen.

In my view there is huge scope through modernisation of tax administration and changing the structure. For example, the GST would be the single most important thing for raising revenues not just of the center but also of the states because you need both. At the same time, it would actually increase efficiencies. So it would be a win-win situation. Its true that subsidies also have to be brought down.

As far as the diesel issue goes, the plan makes it plain and I believe all economists would say that fuel subsidies are the least justifiable kind of subsidies. From the point of view economic efficiency and sustainability, if you want to encourage efficient use of not only a scarce resource but an imported resource like petroleum, it ought to be priced appropriately.

Petrol is price appropriately and it’s even taxed beyond what pure international pricing would suggest and that is also reasonable. But diesel is underpriced and LPG is hugely underpriced. There we have made a change, we have put a cap on the amount that is available at the subsidised price and the rest will be at market prices. It is a very good move, I know it hurts some people and we are not getting enough appreciation that these things are necessary.

If you could just carry on having an under recovery it wouldn’t matter. The fact is you can’t. Some of it will go as a burden on the budget.

We will need to reduce that burden if you want all the health expenditure etc. You can’t load all this on the petroleum companies unless you want the oil sector to collapse. If you let your oil sector collapse there won’t be any exploration, there won’t be any production and we will be importing even more oil. Quite frankly, the present level in my view as an economist, we should never have allowed petroleum subsidies to reach the level they have. Very often depending on circumstances you can’t always do exactly the right things. They are at an unsustainable level.

Q: What would be the right thing? Would it be a graduated phased increase because that would in some ways lessen the political backlash?

A: All this tends to become academic. We are not talking about what is going to be done today, tomorrow or day after, but my view is that when a large increase becomes necessary it is better to do it in phases because people see the fact that it’s not a sudden huge hit and they get a bit of time. Exactly what the phasing should be, its no use saying we will phase it out over 10 years.

In petroleum prices if we could eliminate the entire subsidy on petroleum during the course of the 12th plan, say over the next three years if you could eliminate the entire subsidy it would be quite a gain. If we have to give a subsidy to some defined low income categories, I would even prefer that, that subsidy is transited into a direct cash transfer. Kerosene in particular lends itself to shifting to a direct cash transfer

Q: The finance minister recently while speaking about the direct cash subsidy basically told us that a large amount of subsidies including the oil subsidy and the food subsidy would not go through the direct cash subsidy programme?

A: The present government policy is that we have identified a large number of schemes which involve the transfer of money except it takes place through banks and through post offices and at multiple levels, like various scholarship schemes, various pension schemes, Janani Suraksha Yojana (JSY) whole lot of such schemes.

In the first stage we want to send these via the Adhaar system. Public Distribution System (PDS), kerosene and fertilizers are not part of this plan at all. But, experiments have been tried in the case of kerosene. The assessment is that when we move to the commodity replacement, kerosene would be the best thing to replace, because people who are receiving it at the moment would find it the most attractive switch.

I was speaking to the collector of the Godavari District where they have tried to not doing via cash, but they have tried to link kerosene with Adhaar identification They find that the number of ghost cards and duplicate cards is huge. At one point, it was 40 percent. 40 percent of the ration cards against which kerosene was being provided would not have been entitled to it according to what he told me.

Q: I am going to quote something that Kirit Parikh, your former colleague in some ways had said today. He had said that if there is a full increase in the price of diesel it is going to be a one shot increase of 30 percent and the inflation impact over the next three years would be perhaps marginal. Is it therefore likely that as far as the diesel pricing issue is concerned, kerosene is concerned before the next general elections we will not see a complete adjustment? You would rather advocate a graduated increase linking it to Adhaar by 2016 which is the year that you seemed to mention?

A: This is an operational thing, so I would need to consult with the ministry, but my own view is that on a pilot basis we should try to shift the kerosene in selected districts and if the state wants to experiment in the state as a whole to the Adhaar payment system, but obviously we would have to consult the states, so a lot would depend on the states. Certainly for example Delhi, the Delhi chief minister is very keen that get rid of this subsidized supply of commodities, lets give the people the corresponding amount of cash and let them pay for the Kerosene whatever it is in the open market.

Q: Given the status of Adhaar  and all other preparations that will be required  is there a timeline that you could sort of just throw up of the major subsidy accounts to move to a Adhaar linked system, is that at all going to happen?

A: I assure you it is going to happen, but I want to clarify because we have said in official pronouncements that it is going to roll out from January 1. What does that mean? What it means is we will select the schemes concerned and that process is going on even now and hopefully it will be finished and then the system would actually follow.

Q: Since we have been discussing energy and fuel pricing. Let me move to another point that the plan document makes and this is for allowing private players in the coal mining sector something that’s happened to a small extent in the state of Meghalaya. Is this a indication towards a more concrete development that is likely to happen?

A: Plan document is not an indicator of development. This is a legislative issue. In order to allow private players in other than captive mining you would have to amend the coal nationalisation act. It is my personal view that it should be amended and that is also what the plan document says. The point being, that gas and petroleum are far more valuable and cleaner fuels than oil. We are allowing private mining in gas; we are allowing it in petroleum. We are not talking about privatization of Coal India. Coal India can stay, I believe there are a lot of reforms needed there.

All we are saying is given that we have Coal India there is no reason why private mining should not be allowed. The government has already changed the policy regarding the allocation of coal resources; it is now that there is competitive bidding. So, there is really no impediment to letting people come in, transparent way, bid for the coal and get on with it. I believe that in all energy sectors we must ensure the best technology that comes into the country. If you have a monopoly, whatever they say, if you have a monopoly its not going to come.

So, we need competition, we need competition in energy. Energy is going to be a big constraint to our development and all impediments to domestic production should therefore be removed because we are not able to produce enough coal. We are actually becoming import dependent even in thermal coal. We were always import dependent in coking coal, but thermal coal we are going to have to import 150 million tonnes of it and to have to do that – in effect you are willing to buy coal from private sector people abroad but you are not willing to let private sector people mine your own coal, it makes no sense in my view at all.

Q: Given the current scenario and the assessment that have gone into the plan document two key messages coming out one, that we are lowering our growth expectations and the second a sort of mid way message, a half way house message as far as fiscal consolidation is concerned, the growth issue getting the plan document some political brickbat, how would you react to that criticism?

A: In a vibrant democracy you expect to get criticism but lets get the facts right. There is no point becoming macho on economic performance. I think if the plan is to serve a useful purpose it should set a sensible target that is the most important thing.

Q: You say that what has been set in the plan document is sensible, it is not sort of being over cautious?

A:  No, as a matter of fact we have gone beyond that. We don’t just have one target, we are saying first of all the old fashioned idea that we have a target doesn’t make any sense. So, we have laid down three different scenarios and what we think the plan is really about scenario one, it is a scenario where all kinds of things that we have talked about in the plan document gets done. Lets say most of them, nothing ever gets done 100 percent most of them get done. They very well selected points of intervention which will leverage strengths in the economy. So, what we are saying is, in scenario one, we earlier thought 8.2 percent and we are now saying 8 percent. Is this pessimistic? I don’t think so.

I think people are not aware in India that the global assessment, I think the Finance Minister brought this out very nicely in the NDC, that global assessment of the state of the world has deteriorated quite a bit in the last three months. Europe is in recession, Japan is in near recession, US is growing at less than 2 percent, we don’t know what their fiscal cliff problem will mean and the United Nations (UN) has jus brought out its assessment. 2013 growth projections globally have been lowered by something like 0.5 percentage point if not more. Now, what we are saying is we'll grow maybe at 5.8 percent this year. That’s the middle of the Finance ministry's statement to Parliament recently.

To achieve an 8 percent growth average, 5.8 percent will have to go well above 7 percent next year and then in the last two years go above 9 percent. If somebody believes that this is not sufficiently ambitious, I can only admire their determination. States can do better, the meaning of an average is that some states will do better and some states won’t. So, no state should feel that center is constraining them from growing fast. I would be the first person cheering all the states and it is not just the rich states, in the last five years Bihar has grown very well, Rajasthan has done well. Maharashtra is done very well.

Some states will do better than average but let’s face it some states wont. So, we are putting an overall picture, I think 8 percent is pretty good. If you go around the world and you look at what people think people who actually think that India is quite capable of growing they would not pitch it above 7.5 percent average. So, what we are actually saying is we should prove them wrong, we should prove that we actually have the extra capacity. But we have also said that if you don’t do all the policy we are talking about you will get some intermediate scenario between 6-6.5 percent and frankly if you don’t do anything because you get stuck in what we call a policy logjam growth maybe 5-5.5 percent.

Q: Are we over with the policy logjam period? Is that sense that we had of despondency and doom three to four months back is that over?

A: Certainly from the government’s point of view it is over. We have quite clearly signaled that we are moving ahead to do all the things that are necessary to stimulate the economy. Lots of policy decisions have been taken; lot of decisions that are relevant for implementation, actually if you ask me in the next six months it’s not the big policy decisions, its implementation, particularly getting large infrastructure projects moving. The fact that these large infrastructure projects are stuck and these are infrastructure projects dealing with energy is what sends the signal that maybe we are not ready for rapid growth, we should change that.

Q: Between now and the Budget do you think a possibility of any rating revision, a downward revision rerating for India is therefore perhaps a remote possibility?

A: I would never want to predict what other people do but if you ask anybody, does India look better today than it did four months ago? Absolutely unanimously they would say yes. What people are wondering is that will we maintain this momentum, will this positivity fizzle out? So, in my view if they didn’t downgrade us four months ago, it'll be absurd to downgrade us now. They may not upgrade, they may say, we want to wait and see. After all, many of the decisions we have taken, some of them are subject to parliamentary ratification. So while the government’s willingness to take risk on FDI in retail is very clear, investors will actually want to see whether the Parliament backs this decision or unwinds this decision. 

Q: There is a retrospective clause in the Land Bill where a lot of feedback that has come in after this decision was taken is that it will apply on a retrospective basis to current land acquisitions where people would now say that they took the payment under protest and now seek recourse to the new provision as and when it becomes effective and therefore derail a whole lot of projects, this is something that we have been hearing quite a bit from industry and other participants. Is this an issue that has come to your notice?

A: I thought we were quite careful when this was discussed. It was actually emphasized that there should be complete clarity in the sense that you should not be in a situation where you are reopening all kinds of things. I don't recall the exact details but the bill has still got to go back to parliament, so there is an opportunity in parliament to rectify any detail provisions that are somehow not acceptable.

Q: Is Kingfisher for instance because there are a lot of common people who are suffering high air fares still an example of how the government is not able to do enough in a country like India which has so many multifarious problems?

A: I am aware that Kingfisher is having a problem but whenever you open up a sector you do get private players to come in, they take an aggressive position whether they are able to meet their obligations or not is something that the market will tell. I don't think that government when this sort of situation arises, I think while government has to take a broadly supportive approach it also has to allow market discipline to work and therefore I don't think that what is happening there is necessarily all negative. The signal that is been given in the Kingfisher case is that if you an aggressive expansion policy and you find that you are not able to make it work there is going to be some cost. To have a policy which is, as soon as an airlines runs into difficulty you start sort of bailing it out would not be a particularly good policy in my view.

Q: Just one quick message for the New Year for investors and the Indian public, what would you like to say?

A: One should always regard a New Year as a new beginning. I personally think that we will get a better year than the last one we had and I just think people should remain optimistic. There is a lot to be optimistic about.

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