Growth to pickup in H2FY14; need lower rates: Montek Singh

Montek Singh Ahluwalia, deputy chairman of the Planning Commission, refuses to call September monetary policy moves either tightening or loosening. According to him, what the central bank did was more of a rebalancing act. Last week, the Reserve Bank of India (RBI) reduced marginal standing facility or MSF rate by 75 basis points to 9.5 percent from 10.25 percent and increased repo rate by 25 basis points 7.5 percent. 

He feels that the RBI and the government need to do a lot more to revive growth. But the RBI can't cut long-term rates by tinkering with short-term rates, he cautions. He says lower long-term rates are a key to growth and expects growth to pick up in the second half of FY14. Also Read: Rupee's intrinsic value is between 58-60/$: Arvind Mayaram Meanwhile, he informs that the government does not intend to cut planned expenses. On talks of one-time major hike in diesel rates, he advises to progressively phase out diesel subsidies. Below is the verbatim transcript of Montek Singh Ahluwalia's interview on CNBC-TV18 Q: It does look like the Reserve Bank of India (RBI) sees itself having too much of elbowroom to support growth, if one more repo hike is also possible. Do you think this can have some kind of an impact on growth? A: I see what the RBI has done as a very sensible rebalancing because the marginal standing facility which is sometimes called the bank rate have been raised at one time as a signal, but the reverse repo rates were much below that. It made a lot of sense to bring those two rates in line, lower the MSF, raise the repo, bring them closer. I would not call that a tightening or a loosening but more like a rebalance. Slightly on the CRR the way it is calculated, the RBI has given the bank a little more flexibility in exactly what they have to do to meet the requirement. So, on margin, it is a policy that is not designed to give a signal that the interest rate instrument is now going to be the key for kick starting growth and I think there is some merit in taking that. It’s a policy that says we have got an issue on the current account, which you are handling and that is coming under control; we still have problems in inflation and hopefully that is going to ease. So, it is a fine tuning, a rebalancing. I do not believe by the way that the critical constraint on revival of the economy is to tinker with the short-term rates. I know that nothing would be better for growth than for the long-term interest rate to come down but the idea that the RBI Governor can lower the long-term rates by lowering the short-term rates, no matter what is happening in the macro economy. It is just plain rock. If he could do that, if he could lower the long-term rates by lowering the short-term rates; he probably would do that but the fact of the matter is he has to send a signal as what is your interest rate, is it real interest rate that will attract savings and if it is not real interest rate that is going to attract savings then all that is going to happen is you have little bit too much inflation, not enough savings, a lot of problems. So, I personally feel that we need to do a lot to revive growth, we are doing some, we should not let up maybe there is more realisation today than there was three months ago. The government has taken a number of steps, this is very important given a lot of strong signals on the fiscal deficit. The finance ministry has issued circulars containing non-plan expenditure and also laying down the rule of bunching of expenditures. All of this will help to keep the 4.8 percent, the finance minister’s red line well be observed. Once the market realise that, you will have much more positive signals, maybe give the RBI some room in the future, plus lowering in the rate of inflation. That is what we should be looking for. Q: The short point I was making with the RBI action is that actually the long-term yields have moved up from 8.15 before the policy to 8.67. It is a jump of about 50 bps and the bankers we are talking to are telling us that base rates will go up. My point is that the onus for encouraging growth now falls more on the government. You spoke about 4.8 percent fiscal deficit. So, let me start there, last year that was achieved also because and maybe even largely because the plan expenses came down from 5.2 lakh crore to 4.2 lakh crore, a cut of 95,000 crore. This year also will that be the path the achieve 4.8 percent, a l lakh crore cut in plan expenses?
A: We are not planning cuts in plan expenses. Last year - when you say cuts in plan expenses - what actually happened was that the finance ministry enforced well established rules, which say if you haven’t spent the money until December end then how much you can spend in the last three months is limited and as a matter of fact most ministries had failed to do that expenditure, so as a result their revised estimate limits got contained to whatever fits these rules. They have had one year of experience in that and we have been telling them that they ought to make sure that they do not sit back for nine months and then rush to make expenditures in the last three months.
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How far they will be able to respond to that? I do not know but if it turns out - it’s not just them, it is also the state governments. A lot of plan expenditure is just released to state governments which then operate the centrally sponsored schemes. The state governments do not send utilisation certificates saying that the first tranche that has been released has been spent. They won’t be able to draw second tranche.
I would not call these cuts in plan expenditure. I would call them procedural limits which will prevent plan expenditure from going up. It is possible that if everybody has worked within these limits. That is when the issue comes, are you actually cutting below the entitlement. Last year there was no cut below entitlement, people haven’t spent the money and they know perfectly well the rules that you cannot spend more than 1/3rd of the total in the last quarter. So, if you haven’t spent very much in the first quarter, it automatically limits the total amount you can spend and whether the same thing will happen this year. We will have to see. Q: The RBI’s communication on Friday hinted at a potentially larger role of the government now in spurring reforms going ahead. In that context do you think a contentious issue like a diesel price hike that was long pending may now be pushed to the backburner because we do have the upcoming assembly elections as well and at this point in time undertaking a reform like a diesel price hike may not be the best thing to do?
A: I cannot second guess what the ministry will do on matters of timing. When timing does become an issue in any political process, the general policy is very clear and I hope that the public and all political parties and the media put across the message that the general policy of the government is that we must progressively phase out the diesel subsidy. I do not believe that India will look credible in terms of basic macro economics unless people realise that this policy is going to be implemented. If a bit of timing, election timing alters this sequence. That is a small blip but the basic policy stance, we have to do this and we have to do this gradually. Q: One was expecting quantum cut rather than 50 paise. The expectation was that after the parliamentary session maybe Rs 3-5 hike will come. Is that still being contemplated?
A: I do not know. The thing is that nowadays everyday in the morning the newspapers speculate on everything that could possibly be speculated about. Since I am not directly involved, I do not want to comment on. Q: Last month you had a meeting of secretaries; the power, railways, roads to discuss the problems that some of these public private partnership (PPP) projects are facing. By when do you see some of these bottlenecks getting sorted and the impact on the ground?
A: This whole issue of the government having to take action to free up projects that have been caught in one or the other regulatory hurdle. This is very high priority; the apex decision making body which tries to solve these problems is the cabinet committee on investment. It has been meeting quite frequently. I think it has solved some problems; some of those solutions are less evident to the market because between a decision and a notification of the decision and the communication to the project authority also takes some time. But I do believe that we have in the last two months and we see more in the next month, efforts to get projects moving.
The biggest thing that has been already achieved is that fuel supply agreement for coal, which was not available as of last March, almost 70,000 mw of generating capacity setup after 2009 or in the process of being setup, which would become operational within a year-and-a-half didn’t have any firm fuel supply agreements and that was mainly because all of it couldn’t be done through domestic coal, some of it had to be imported and there was a lot of tussle on who is going to get the domestic coal and who is going to get the import that is much more expensive. Now that has been resolved and my understanding is that certainly more than 70,000 mw of capacity has now got firm fuel supply agreements. That eliminates a very important uncertainty in this area.