Don't see marked improvement in Q2 GDP: Montek

With the second quarter gross domestic product number due today evening, a lot of discussion is underway regarding India's performance. Planning Commission deputy chairman Montek Singh Ahluwalia does not expect a marked improvement in Q2 GDP over the first quarter. He, however, expects the second half of the fiscal year to be better than the first half due to good monsoon and better global scenario. He says: "If H2 GDP is over 5 percent, then FY15 should see over 6 percent GDP figure." He is confident that FY14 will end with improvement in sentiment.

Also Read: Q2 GDP seen at 4.7%; agri growth at 3.1%, industry 2%: Poll
According to him, the economy is in a far better shape than it was a few months ago. Concerns on current account deficit too have abated, he says. He is confident of not allowing the fiscal deficit to exceed the 4.8 percent target, despite lower revenues. The government is mulling re-calculation of expenditures, but not cuts, he adds.
He expects the general elections to push real recovery to the next fiscal. He says it will be a major achievement if by the end of the 12th Plan period the economy gets back to where people say India is capable of 8% growth. Below is the verbatim transcript of Montek Singh Ahluwalia's interview on CNBC-TV18 Q: We are going to get gross domestic product (GDP) number later today. What is your sense about how the second quarter might have panned out since we got some decent core sector numbers at least on September as well your forecast for the second half of the year, what might the year do in terms of GDP?
A: I don't know what the Q2 numbers are going to be but we never thought that the Q2 numbers would show a very marked improvement. I would be delighted if they do but our assessment based on the industrial production index is that the kind of turnaround that we were hoping to get is more likely to be there in the second half of the year. And the numbers you get today will be for Q2 which is part of the first half so I am not really focusing too much on that.
We do believe that the second half of the year will be better. I think the key point is that global uncertainty which was a big problem in the first half is now a lot better. The situation is much more stabilized, second there was a lot of concern about India's current account deficit (CAD) being far too high and it was far too high last year. That concern has now abated because sometime in May or June finance minister had said that whereas it was 4.8 percent of GDP last year, it was going to be improved to around 3.7 percent. The latest assessment is that it is going to be below 3 percent and that means that on the CAD we are in a much better shape than people thought.
I think the rupee depreciation, a lot of it has been very logical correction, the rupee is now in a better positioned as far as competitiveness goes, has reflected a little bit on the exports that always involves a lag but more importantly it will also have an impact on the ability of domestic producers to compete. So the benefit of the rupee is not only limited to exporters, it is also beneficial for domestic industry becoming more competitive vis-à-vis imports.
The finance minister has categorically said several times and I think people believe him that the fiscal deficit will not be allowed to exceed the target even if revenues are below expectations. So there is a bit of urgency on bringing the fiscal deficit under control. And most people also recognise that the government is taking a number of steps to get rid of regulatory impediments on large projects.
So all this together, plus the good monsoon suggests that the second half will definitely be better than the first half. How much better we haven't made a forecast but my guess is that at the end of the day if the first half is below 5 percent and the second half is higher than 5 percent we may still end up with a year which doesn’t look very different from 5 percent. So it is a bit of a glass half full or a glass half empty.
If you are focused on a very early revival to robust growth, I don't think the news suggests that but quite honestly nowhere in the world is anyone on the path of an early revival of a robust growth. This is the second year in which the Eurozone will experience negative growth and I think that a 5 percent looks very poor to Indian observers who have become used to very high growth. But given where the world is if you are getting out of it, most important thing in the second half of the year is to judge whether India is stuck or India has turned around. I am hopeful that people will say well things were improving. I honestly don't know how much they are improving.
The one big confusion here or uncertainty, we are moving into the last six months before a general election. I mean in any democracy a general election is an occasion where more differences within the system are articulated in the political space than consensus. So it is quite possible that the real recovery to our natural growth potential is likely to be in the next fiscal year not in the current fiscal year but I do think that the current fiscal year will end with people saying yes the macros are under control, yes turnaround has begun. Q: If you are reconciling yourself to 5 percent this year and you believe that a robust recovery is no where on the cards in no country then how will you make peace with this 8 percent average growth that you have in the 12th plan. Will that have to be willy-nilly revised lower?
A: That is a no-brainer. For the first two years of the 12th Plan for reasons that are there in the whole world, growth has been off target. I still believe that our natural target of sustainable growth, once we take care of some of the existing problems is around 8 percent. It is going to take longer to get there and the first two years of the 12th plan make it very difficult to achieve that in the remaining three years.
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What it will be is something which the planning commission - we are working on that. It will be the next occasion for us to estimate that, would be the mid-term appraisal. Plans are not meant to be rigidly fix things. If the world economy experiences the worst two years that it had, you do not expect Indian clients to not to be affected but that is not the important thing. If in the 12th Plan period, we get back to where people say yes, India is capable of 8 percent even if the average is less than 8 percent, I think that would be a major achievement. Q: How much do you think the government will have to cut planned expenditure further given that we have seen declining revenues?
A: Obviously one view with how you handle fiscal deficits is that if revenues fall then you should allow the fiscal deficit to expand. Under normal circumstances many people would say that’s the right thing but I think the finance minister rightly has said that because there was a lot of concern on the fiscal deficit this time around he is going to stick to 4.8 percent, I think that is a good strategy. Now how do we achieve that if revenues have fallen short but first of course they fell short in the first half of the year, I don't know whether they are going to improve in the second half. However, let us assume that revenues will fall short.
When you say cut planned expenditure that looks as if there are expenditures happening and we actually hold back, that is not what happens. What typically happens at the start of a budget is that you assume that the ministries will be able to spend a certain amount and typically many of them are not able to. So it is not that you are cutting expenditure, you are recalculating the likely expenditure which they are able to bring about. But in the past what has happened is that taking account of this in the supplementary a lot of new expenditure demands get approved.
Now if the finance minister simply decides to take the benefit of all the under spending that ministries may be doing and not approved new expenditures he will get a lot of savings. Exactly how much we will know by December end because at the moment basically the ministries are below what they should be in order to hit the target but they are above what they were last year. Now we have been telling them that look last year they lost a lot of money, many of them because they didn’t spend fast enough and they should do better spending. They have improved so that part is good but the expenditure is not at the pace which would meet the targets and there are two reasons for that.
First of all four states are going for elections, many of the government schemes that involve expenditure in these states would be slow and then the general elections are going to come and that means that almost certainly the month of February and month of March expenditure in any case will be less because the whole system will be geared to election. So I think there is room for him to be able to meet the 4.8 percent target. Q: We fell from Rs 5.2 lakh crore budgeted to actual of Rs 4.29 lakh crore last year, a fall of about 18 percent. Would it be 15 percent this year? We are sitting and budgeted at Rs 5.55 lakh crore?
A: That is a very complex exercise in which we get involved only on the plan side. Q: I am asking you about planned expenditure?
A:Yes but when you are talking about planned expenditure, once a budget is fixed, we are constantly urging the ministries to do better, we have no bases for knowing how much better they can do compared to the performance that they have shown so far. So, I do not want to hazard a guess but I am 100 percent certain that there will be savings. Exactly how much, I think one needs a much better calculation to be able to judge well. Q: I have one follow-up to the point you are making about GDP. If you do believe that we are going to return to the growth trajectory, what kind of GDP assessment would you have for FY15? You spoke about how FY14 second half will be better but FY15, what would your estimate or assessment be?
A: I haven't actually made an estimate and this is something that normally is made at the time of presentation of the full budget which since this is an election year, whichever government comes in the full budget will only be presented somewhere around June, but I would hope that if my judgement that the second half of the current year shows more than 5 percent then it is not unreasonable to expect more than 6 percent in the next financial year. The reason for that is that all the political uncertainty that is inevitably associated with the general election will be over, the new government then has an opportunity to lay down clearly what it is going to do and there are many items currently in the pipeline which are held up because there is not enough legislative time.
If these can also move forward, for example one of the biggest things that would impact the economy, impact the investment climate is the goods and services tax. Now for a variety of reasons it has not been possible to get a political consensus to push this through. I am hoping that if early next year, after the general election the goods and services tax legislation is put through even if it is implemented several months later, the positive impact on expectations will be very high. So, going for 6 plus in fiscal year 2014-15 is a perfectly reasonable thing to do and then go to 7 percent plus and then get to 8 percent is not unreasonable. This depends on what happens in the world economy but I feel that things are stabilising there. So, we could do this, we could even do a bit better.