IIP growth seen at 9-10% by FY12: Montek Singh

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Deputy Chairman of the Planning Commission Montek Singh Ahluwalia said he expects inflation to fall to 6-6.5% by March-end and said he sees India's GDP growth at 8.5% or little more this fiscal. He added that a GDP growth of 9% was not above the potential of the Indian economy.

Raging inflation figures, however, continues to be a spoke in India's growth cycle. Ahluwalia said he had expected a sharper decline in inflation but said that international commodity prices continued to be high and there seemed to be no respite to the spike in oil prices. Ahulwalia said he believes there could have been some market manipulation in onions and feels good and modern marketing would help reduce prices.

Ahluwalia rues that the economic situation was more worrying than it was six months ago.

The year FY11 will see robust growth in agriculture, probably to the tune of 6-7% he said and expects IIP to go back to 9-10% by the next fiscal. However, he said if the industry did not pick up then the government would have to take measure that would help revive business by next quarter.

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

Q: Let's start with the situation facing the economy, and then we can broaden our discussion to talk about other important issues. At the moment, you have high inflation, it's still as far as food is concerned its 15.5%. General inflation is 8.4 and yet at the same time you have growth that sums to just 2.7% in November. Do you fear the prospect of stagflation?

A: That's a very odd way of describing the situation. Actually, the correct description is that inflation was a big problem about a year ago. It has been steadily coming down. It shot up again in December unexpectedly; we didn't expect that to happen. I think it's due to seasonal factors affecting some prices. Right now, inflation is more uncomfortable than it was in November, but prices are already beginning to come down of some of these commodities. We think that by the end of the year, end of the fiscal year, inflation could be back in the 6.5%, may be a little higher level. So, I think inflation has ratcheted up, unexpectedly, has been steadily coming down, I think it's getting under control.

As far as growth is concerned, the index of industrial production has shown a sort of very low growth in the last month. That may actually continue for another month because it all depends on base level effect. But as far as growth in the economy is concerned, I think we are on track for something like 8.5%, may be a little more. We have been saying 8.5% officially and we have been saying it could be a little above that. The above that isn't very important in my view, 8.5% is quite important.

Q: The Finance Secretary just as you said a moment ago yourself has predicted that inflation will be down to 6.5% by March. The problem is from the Finance Minister downwards officials have been making this prediction for the last six months, you made it several times to me in an interview. Do you really believe that it will be 6.5% or is that brave talk, perhaps even just bravado?

A: No, certainly not bravado. I had expected that we would be down to 6.5% actually in December. I think that make a prediction at a certain time making some assumptions about how things are going to proceed. I think a couple of things have happened. One is as I said there has been a spike in certain vegetable prices, particularly onion which is due to very unseasonal rain. Nobody could have predicted that, so it is a new development.

The second thing I think is internationally commodities prices are heating up. Oil prices are high. I do not see any early return to low levels of oil prices and all. So, it is true that compared to what we thought would be the economic situation, maybe five months ago, it is more worrying on the inflation front.

Will it come down 6.5% by end March? I think if there isn't any new impetus on the external front, the seasonal factors will have worn themselves out, so there is a good chance somewhere between 6.5% and 7% in March is a very good prospect for inflation as a whole. I hope it is 6.5%, but every forecast has an era. Anyone who says it is going to be X really whatever their technical sort of models are they involve an era and you have to allow that also.

Q: But when you were a moment to go explaining why onion prices have suddenly spiked, you blamed it on erratic rain. Many of your collegues talk about hoarding, in your eyes is hoarding a red herring?

A: Well, onions are not as perishable as vegetables. It is very difficult to hoard vegetables. I mean you can't hoard them for very long. You can never rule out market manipulation in a commodity that runs in a short supply and where an artificial scarcity can be created. So, I would rule it out. But I don't think that hoarding is the underlying factor that is behind the pressure on inflation over a long period. It could be in the case of onions, that there was market manipulation.

And that I think reflects the fact that we don't have much modern storage as we should, that our markets logistics are not good as they should, that are shortage in one area is not easily compensated by bringing in commodities from other parts. Within the country, prices vary a lot. I mean they are quite high on some parts, low in other parts. And that shouldn't happen, if you have good modern marketing.