Deputy Chairperson of the Planning Commission, Montek Singh Ahluwalia, while admitting that the H1FY14 was not good from an economy point of view, says better days are now ahead of us.
Speaking to CNBC-TV18’s Shereen Bhan, Ahluwalia says that the government took preventive steps leading to the current account deficit (CAD) expectations to fall to 2.5 percent.
Also read: Vote-on-Account: Chidambaram seen walking budget tightropeWhile the government has done its bit (by setting up the cabinet committee on investments), financial constraints are causing a lot of strain for businessmen, explains Ahluwalia.
The key for the economy, Ahluwalia, says is a revival of investment sentiment.
“Entrepreneurs have to look to their financials a little more carefully. Banks all over the world are under a little bit of strain so people are not throwing money at projects. Globally also the mood is only just beginning to change. So, when the financing side becomes more supportive we will see better investment; I hope that happens in the next year,” adds Ahluwalia.
Below is the edited transcript of the interview.
Shereen: I know you are not going to make any comments on the VoA, you are not going to share anything in terms of what you expect; I am not going to ask you about that. Let me ask you about the fears and the concerns on the state of the economy and what kind of a fiscal position the next government stands to inherit? Is this is a legitimate concern? There is absolutely no uncertainty over the fact that Chidambaram is going to deliver on 4.8 percent as the fiscal deficit number is concerned, perhaps he may even better it and deliver a 4.65 percent number but there are concerns on the quality of the number?
A: You started off by saying what it looks like for the economy? I think that is what one should look at first, because in the end, fiscal policy and fiscal deficit and so on are meant to make sure that the economy performs well.
From that point of view, the first half of this year was not a good year; we knew that. The economy had been slowing down. We had said that in the second half it would do better. The latest official numbers seem to suggest that that is what is going to happen because having given a gross domestic product (GDP) forecast of about 4.6 percent or something for the first half; the CSO has come up with 4.9 percent for the year as a whole which implies above 5 percent in the second half.
It is a kind of recovery from 4.6 percent. The key thing is that indications are consistent with the expectation that the next year, i.e. 2014-2015, the economy is well set to put in a better performance both on the growth side and in terms of external pressures.
Last year we had a current account deficit (CAD) of about 4.8 percent and when the first news of the taper came in, in April or May, led to a lot of nervousness and volatility in the exchange rate. Now, the current situation is a lot better. The CAD is going to be below 2.5 percent; some people say it could be very close to 2 percent but certainly below 2.5 percent.
It is no longer the case that India’s CAD is way out of line. Growth is low, investment is what we need to look at and the question is can investment pick up?
I think the focus for the next year should be on the revival of investment. The government has already taken a number of steps and this is acknowledged now that the effort to setup a cabinet committee on investments has led to a large number of clearances being taken out of the way.
It is fair to say that although these clearances have come, getting the projects going is going to take a little bit more time and that is for two reasons. The first one is the financing constraint, because there is much less easy money lying around than was the case a 1.5 year ago.
Hence, entrepreneurs have to look to their financials a little more carefully. Banks all over the world are under a little bit of strain so people are not throwing money at projects. Globally also the mood is only just beginning to change. So, when the financing side becomes more supportive we will see better investment; I hope in the next year.Shereen: At this point in time there doesn’t seem to be an indication of the investment cycle picking up. We have been talking about green shoots emerging but we haven’t really seen that in terms of cash flows from projects for the reasons perhaps that you mentioned. I want to come back again and talk about the issue of fiscal consolidation. I want to go back and quote to the manifesto that the Congress party presented in 2009. One of the issues that the party had stressed on is that we will maintain the path of high growth, fiscal prudence and low inflation. As far as fiscal prudence is concerned and low inflation would you atleast today admit now that you have had time to introspect that on both those counts this government has failed – both on the issue of low inflation as well as on the issue of fiscal prudence?
A: One needs to separate these two issues out. As far as fiscal prudence is concerned, when the manifesto was written, the impact of the financial crisis in particularly the euro zone crisis just wasn’t known and all over the world, economic outcomes look very different from what they did if you made an assessment in 2009.
In the fiscal case, initially we had a deliberate stimulus. In retrospect many of us have said that may be the stimulus should have been withdrawn a little earlier. Part of the problem here by the way is that the GDP growth rebounded very strongly but we did not know how strongly it had rebounded until the data came out.
At one point, the 2009-2010 or 2010-2011 data showed a growth rate of about 8 percent but when it got revised it went up to 9 percent. Clearly, there was a delay in withdrawing the stimulus.
Since then, the finance minister has recommitted himself to the path of fiscal prudence. When an economy faces a very depressed situation around the world, I don’t think industry wants to hold you to fiscal prudence promises.
One of the key problems here is that internationally, fiscal prudence is usually meant in terms of a cyclically adjusted deficit. This means that if there is a cyclical downturn thrown on the economy, one should tolerate a somewhat higher fiscal deficit than one would have tolerated otherwise.
On the fiscal side, one should never think that what they have done is perfect but it will be completely wrong to say that all we did was throw the fiscal prudence out of the way, that is just not the case.
Yes we could have managed it better. My concern really is that we would have been much better off if more of the stimulus had taken the form of direct investment into infrastructure rather than into holding back price increases.
Shereen: I understand the issues with regards to the stimulus but let me ask you about what we now expect the next government to inherit. Chidambaram has made a valiant effort to try and reign in the fiscal deficit to deliver the numbers that he has promised in the Budget, but that’s on the back of significant expenditure cuts. Also you squeezed special dividends, you have squeezed out dividends from public sector companies, you forced them to go to cross holdings and so on and so forth. The question still is you have got pending oil subsidies, you have got pending fertilizer subsidies, you have got pending food subsidies which is also going to be deferred now and that’s going to be the next governments problem.
A: We don't follow an accrual system of accounting. So, every year some part of last year’s bills spillover into the next year. If some of that happens this year it wouldn’t surprise me. Since I don’t have full information on what the interim budget will say or would be like, I can't comment.
Broadly speaking, the most important thing isn’t whether some expenditures were held back. I mean, of course, if the revenues are low, if growth is low and revenues are low and you don't want to completely ignore the fiscal deficit, clearly you have to hold back expenditures.
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In many of these cases, the expenditures that are held back will spillover into the next year, but if the next year’s budget is also well designed, then essentially something else will be less of an increase in expenditure. So, I don’t think that the fact that there is a spillover is very damaging.
Shereen: Given the external situation, given the internal situation, given the fact that growth had come down and come down very sharply that the government ought to have pushed ahead with things like the food subsidy? I am asking you this from your personal point of view, do you believe that while politically it might served a purpose for the Congress party but do you believe it was reckless to have push ahead with things like the Food Subsidy Bill?
A: No, I know that most industry channels whenever they talk about expenditure zero in on food subsidy. The first point to make is in the current year there has been no change in the food subsidy. I mean the new system is now going to become operational which means in effect it will become operational in 2014-15.
The additional subsidy that will be incurred as result of the expansion is not at a moment easy to quantify, but I can assure you that whatever the level, given the size of the economy, if everything else is working well, then that can be accommodated.
It is not the full subsidy that’s the real problem, some of the other subsidies which are much less targeted and much less justified are the ones that we actually need to address. I think the new government, after the elections will basically be inheriting an economy in which growth will not be in freefall as many people sort of predicted. Inflation is coming down, so, it won't be a raging inflation situation but it will be a situation where inflation is getting back into more comfortable position.
One should never say that inflation is not a problem because some people would like zero inflation. With the WPI at 5 percent and if it falls a little more one would have to say that inflation has got out of the danger zone, although the CPI tends to be little higher than that.
Secondly, the growth will be recovering and lastly, with a new government in place, if the new government sends out sensible signals that most of our economic policy directions are going to remain where they are and we’re going to try and improve the climate for businesses, then a lot of things that are holding back investments just to see what the new government is in place, will eventually fall into place.
I think that the economy will be positioned well before the new government actually takes over and unless the new government mucks up the signals, we are quite well positioned to get revival of investment.
The biggest thing is that unlike last year, when there was a lot of concern about external instability, this year there will not be that concern about external instability. The new government will inherit a CAD which is very comfortable, foreign exchange reserves are extremely comfortable, and I think a very positive attitude towards India.
In my view, whatever government comes in, if it signals a continuation of policy with an implementation of many of the reforms which are actually in the works, we will have no problem in financing our CAD.
If the new government produces very negative results, then that’s a different issue but I think it will be well positioned to cash in. We keep focusing on the growth rate and indeed I think we should, because some of our problems were domestic. But all said and done, if the economy is then set for say a growth of about 6 percent with China growing at a 7.5, then India will be growing only one and half percent less whereas in the past we have been 3 percent less than China. So, the relative positioning of India vis-à-vis the emerging markets (EMs) will actually be not bad at all.
Shereen: I will talk to you about the continuity as far as the reform agenda is concerned in just a bit but you were talking about the current account deficit, do you believe the time has now come for the government to look at relaxing or reversing the measures that have been brought in to prop up the rupee and bring down the current account deficit? There has been a lot of clamor to the finance minister to do that, we don't know if he will but what's your sense?
A: I don't want to speculate on measures that people are looking at what he might do in the Vote on Account.
Shereen: Do you believe that the time is right for a relaxation or a reversal?
A: I am not sure what measures you are really referring to.
Shereen: The gold import measures for instance.
A: I will leave that since those things relate to import duties, I will leave that to a post Budget discussion. To my mind, I don't think that’s very crucial for all the kind of growth and investment related considerations. As a general rule, when one takes some measures due to an emergency, then you signal a return to normalcy when you feel the emergency is over, but I don't want to second guess whether that time is right or not.
Clearly, things are much better than they were earlier. There is no question about that. I mean the only additional uncertainty is we now have a firm declaration by the Federal Reserve that they are going to actually withdraw the stimulus. I think we are much better placed to withstand the withdrawals but whether this is also a time to introduce relaxation is a very fine judgment between the finance ministry and the RBI and they should make it without being under pressure.
Shereen: You were talking about continuity as far as the reform agenda is concerned, do you believe that goods and services tax (GST) is going to be a reality if there is a BJP led NDA government at the centre or do you believe the Congress will then play spoiler and de-wave the GST negotiations again?
A: I don't want to get into political speculation, but our position and the position of the UPA government and where the Congress is the leading party is that the GST is one of the most important reforms before the country.
Also read: GST inescapable; 3rd Front likely post polls: Ex-fin secyPolitics has prevented that from moving forward and that has delayed what otherwise could have been a big benefit to the country. So, I hope that after the elections, it will be easier to bring it in. I have no doubt whatsoever that of all the items on the agenda, the GST is the single most important and I hope that it actually gets done. It does require constitutional amendment, so, it depends on how things work out.
Shereen: We are talking about the India story and we are talking about the UPA’s performance. Would you say that the retrospective tax amendment that was brought in by former Finance Minister Pranab Mukherjee perhaps to a large extent was the turning point as far as the growth story was concerned? That would you say was one of the biggest turning point in the growth story, the retrospective tax amendment which continues to be unfinished?
A: As a general rule, I think one should avoid retrospective tax amendment. But to say that everything would have grown at 9 percent but for the retrospective tax amendment is simply false.
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What happened around that time is that we had a much more prolonged slow down in the world economy than we thought earlier. The second is that there were a lot of regulatory impediments that arouse because of the opposition from different groups to clear large projects. That led investors to wonder whether we want more investment or not. I agree that in pink papers and in the investment conferences, the retrospective tax amendment played a very big and a very negative role.
However, if these other things had not happened, it would still be negative but the growth consequences would have not been so great. So, to hang everything on that particular decision is just not fair.
Foreign investors in particular were very concerned about that retrospective amendment. We should give clear signals. Whatever happens in that particular case, my view which is also being repeated by many people and the Partho Shome Committee report says that all countries use retrospective amendments now and then. This was viewed as perhaps too severe an action and in any case such thing should happen very rarely.
However, I don't think that the India story hinges only on that, although I can well imagine that it created a lot of uncertainty and we must move to persuade investors that such a thing wouldn’t happen again and that is important.
Shereen: Do you believe the 2G scam was the unraveling as far as the UPA was concerned. It was the scam change, then forced this government into a shell, it brought on the policy paralysis and the government sort of lost directions in terms of where it was headed, do you believe the 2G scam was perhaps the turning point and the unraveling of the UPA?
A: By calling something a 2G scam, I think it is very clear that the government’s own view through out that period was that there are better ways of doing it than have been done before. The most important story on telecom is that the government got it right for the future.
I mean it said all future telecom spectrum is going be auctioned, it did an auction and it is currently doing an auction. It is unfortunate that the headlines around the scam contributed to a perception of lack of trust in the system which does not actually do anybody any good. The fact is if there were some problems, they were being investigated, the law must take its course. However, I regret the way it played it out.
Also read: Govt rakes in Rs 61,162 cr from spectrum auction: Sibal
Shereen: Hasn’t that cost you dearly because I want to quote to you this business of Chidambaram calling Modi’s statements on growth and so on and so forth a fake encounter with facts. The truth is that the UPA has delivered higher growth figures than the NDA did but nobody wants to buy your story? The scam taint has brought the credibility to such a point of crisis that nobody wants to buy what you are selling anymore?
A: I am not the one doing any selling. I am just giving you the facts. It is unfortunate that the media has not focused enough perhaps on the facts. Scams always attract eyeballs, so, if one can talk a lot about scams people will take an interest.
When scams happen, they do need to be investigated. I am not saying that the government should ignore what happened. What I am saying is that when it happened they launched investigation, some people actually got charged, some got arrested, those investigations are continuing. In these last four days, for example, India has been declared polio free. I was there in the prime ministers office (PMO) in 1985 when Rajiv Gandhi started this mission mode immunisation program, 150000 cases of polio. Can you imagine what that means?
Every year, 150000 mothers faced the terrible fact that they would have a child crippled for life. In 1995 we started the pulse polio program. At that point this number had gone down to 50,000; today its zero. I don’t find any channel celebrating this; I don’t find any newspaper celebrating this.
We have a record food grain output. The UPA record in agriculture is much better than the previous years; nobody is talking about that. We have diversified in agriculture, we have become an agricultural exporter; nobody is talking about that.
I agree that what happened in telecom distracted attention and maybe what happened itself needs to be investigated but nobody is also talking about the fact that if the system which this government inherited of allocations was wrong.
In 2008 or whatever it was, they decided that all future allocations will be by auction and they have implemented that. So, I personally think that this obsessive focus on a particular event with no regard whatsoever to the progress that is taking place on the issue of the system is very seriously distortive of the fact. Any investor looking at India, any economics person looking at India would be giving a lot of credit to these system changes. Shereen: 10 years of the UPA, opinion polls seems to suggest that there is no chance in hell that the UPA is coming back to power at this point in time but if there is a miracle and the UPA were to return to power in terms of the economic emphasis, in terms of the economic agenda what would you like to see being done differently?
A: We are just entering into an election and all the major parties will be putting out their manifestos. So, I personally think that rather than speculating about what individual parties would do, we should look at the manifesto. My own view is that the broad directions that we have been following are the right directions. We need to get back to high growth, policies have to be geared to that and that means policies must be investor friendly, that means we must build a lot of infrastructure and it is also true on the social side, health and education- we need to do more than we are doing.
I think that has been the strategy we follow so far. I think many states are following the same strategy and states belonging to different political parties. Secondly, India has to remain an open economy. One of the most dramatic things that has happened in the last 10 years is that the degree of integration of the Indian economy with the global economy has increased massively.
The ratio of imports and exports of goods and services to the GDP was 40 percent when this government came in; it is now 60 percent or something like that. It is so big increase; that has to continue. So, it is possible to generate higher growth and better benefits and that is the big achievement in the last 10 years; biggest possible reduction in poverty whichever way you measure it. We need more of that. Individual policies let the parties bring out their manifestos and you can see for yourself.
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