Inflation unlikey to hit double digits: Ashok Chawla

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The recent budget while probably satisfying economists and experts on its basic accounts and lower fiscal deficit has turned hornet's nest with a couple of other announcements, its proposal to set up a financial stability and development council comprising with all the regulators to deliberate on inter regulator co-ordination and to watch over the country's macro economic stability has raised suspicions that it maybe a super regulator that will ultimately carve down the RBI's independence. The other criticism against the budget has been that it may have panned inflation considerably. Indianomics caught up with the Man of the Moment, Finance Secretary Ashok Chawla to thrash out these and other issues.

Here is a verbatim transcript of the interview. Also watch the accompanying video.

Q: I want to begin from the economy and then work my way to some of the institutions in the budget, the inflation level as it is the budget has some inflationary measures in terms of the taxes on some very basic items like Fuel and Coal and now the international commodity prices are also showing some fairly severe signs of inflation, but what is the government's take on inflation is it not worrisome?

A: We have been anxious and worried about food inflation. We are not so much yet about fuel price inflation and we took a call on this and our assessment was that this increase to a nominal extent the inflation in non food items. But this would be kind of one shot and that the economy would be able to absorb it and on the other hand if we continued with a reasonably high deficit and didn't raise resources then there would be a bigger problem and a larger hole to address and that would be a systemic problem.

Q: So I certainly take your problem that you couldn't have had a larger deficit than what you already have but nevertheless growth is very good and added to that international commodity prices are not helping would you think that the double digit inflation at any point of time cross to the mind of the finance ministry?

A: It certainly did and as I mentioned we ran through the kind of numbers we were confronted with and we genuinely believe that the double digit inflation as and when it comes is not going to be there for long, the WPI is still lower than double digits and while food inflation is high but overall inflation is not likely to go beyond double digits and certainly not for any reasonably long period of time.

Q: There is a cascading effect the fuel prices get passed on and coal prices could mean higher electricity prices and now it is iron ore and coking coal so whether there was any assessment on inflation even after the budget?

A: Well not really after the budget and it's just been a few days but our numbers seem to indicate that this is not really a problem which will really be worrisome for a long period.

Q: Let me come to the government borrowing program while the fiscal net borrowing number was at the lower end of analyst's estimates even then a 4.57 lakh crore of government paper coming in is a large amount and already the yield on the ten year paper has gone almost 8% that is 7.95 plus, so is there any gameplan on making the borrowing program market friendly?

A: We did try our best in the current year that is 2009-10 but as for 2010-11 the numbers are what you mentioned and they are in the public domain, we will sit down with the RBI who is our debt manager and work out a borrowing plan and the idea is to see that its as less troublesome for the overall market and for the private players who should come and borrow more than they did during the current year and in 2009-10.

Q: Are you expecting that like last year the RBI maybe able to do some open market operation?

A: That is up to them and I can't really say what the RBI has in its armoury but they have a lot of instruments as we know which come in at a time when they are required so that is the stress and strain on the market which is not troublesome.

Q: I heard about the Debt Management office process being under way when you do expect a debt management office in the finance ministry itself to start doing all this borrowing?

A: We have started with as you know the middle offers which is the first step but that's still quite some time away maybe about 18-24 months before the debt management office really becomes functional and is actually in a position to carry out in the operation. I don't think it would be a part of the finance Ministry and that's not the idea, the idea is to have it reasonably independent away from the finance ministry and we don't think that it would be fully functional atleast for another two borrowing cycles.

Q: I was only thinking that the manner and the cycle in which our country is in terms of development there will be an issue of borrowing and development and therefore would it not always want the RBI to help in the form of an OMO do you see all those issues being swept away in even two years?, some synchronization with the RBI for reasons like this to manage large programs would always be needed isn't it?

A: We will work out the contours as we go along and nothing is the casting stone at this point in time so we will have a framework which in keeping with what the international practice is and in keeping in what the country and the economy needs and hopefully we should be in a position to slowly taper down the borrowing and its not going to be as high as it is at this point in time. That's the objective.

Q: One hopes this is a growing country and a lot of governmental responsibilities are yet to be discharged so perhaps fiscal consolidation could take some time, but let me come to the other institutions that the budge speaks about, the financial stability and development council, what are the contours, we hear that the finance minister could be the head of this body, is that a done deal or is that a decision taken?

A: Its not really a done deal as yet but that's the proposed architecture that we have in mind and at this stage we have a budget announcement as you are aware, the finance minister is going to meet all the regulators sometime towards the end of this month, we will put out a paper so that everybody gets an idea of what we have in mind essentially the objective is not to supplant but to have an apex body which includes all the regulators including the RBI and to take a holistic view at a senior level because the government and the finance minister come in when there are large systemic issues for there are problems that could land at the door of the government in terms of the fiscal problems as is happened in many other countries, so that's the broad idea and we need to still fully flash it out and as I said in relation to the debt management office here too if the process is going to evolve we are not coming with anything very specific and absolutely a casting stone.

Q: By when may you arrive at the specifics?

A: We will arrive at the specifics maybe in a month or so and then carry it forward maybe with some adjustment or changes as maybe required as we go along.

Q: It doesn't supplant the HLCC?

A: It does not, because it should continue and will continue as a body of the technical regulator and they have a lot of functioning to do and they will have issues to address but there could be issues beyond that which will be looked at now and then as they need demand or as the situation demands by this council.

Q: So how frequently do you think it will meet since it is looking at extremely macro issues, you think the stability council doesn't meet as frequently as the HLCC?

A: Our assessment at this point and this is a very sensitive assessment is it could lead at about twice a year unless the situation warrants otherwise.

Q: So its more in terms of if the macro economic situation warrants specific care or the greater coordination, so its more on those lines?

A: I think so.

Q: Let me come to the next item that the budget proposals speak about the financial sector and legislative reforms commission any ideas as to how it maybe constituted, will it be a standing commission, does it have a time that it will give its report and end, how is it envisaged?

A: This is still work in progress the idea is that we should have an independent body maybe headed by a judge or could be somebody equally eminent with a few members and they should be in a position to take a call and look at all the legislations which is presently the law of the land and see what changes are required and what kind of things to bring in and if amendments are needed or a new legislation is needed, we are not sure so that's the job of the expert body, they will look at those issues, now if you ask me the timeframe this is not something which we intend to do in a day or in a month this is something the commission itself is going to take a reasonably long period of time maybe a year or so or maybe slightly longer than that and they will then build and architecture and putting that in place will also take some time so I don't think we are looking at something for the next three years or so.

Q: Just one point back to the financial stability council, a critic's way of maybe looking at it could be that the HLCC is headed by the RBI, so does it happen that things get a little unmanageable at that level because of the strong positions taken by the RBI or some regulator and you want it resolved by the financial stability council, is that the right way of looking at it at all?

A: I don't think that's the right way at all and that's a mischievous way of looking at it, the developed world and the developed economies as you maybe aware are also putting in place such institutions and structures, the US is looking at it seriously, the UK is trying to write a low on this subject, so the idea is that the regulators get together with the treasury secretary or the finance minister to look at the whole picture and look at the early warning signals and make sure what needs to be done is done and that nothing really falls between the crack so the idea is not at all to encroach on the functioning of the authority of any regulator.