In an interaction on economic policy at CNN-IBN's India Tonight programme, Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, says what is important is the commitment and direction of a reform policy. Edited excerpts:
With inflation at 4.7 per cent and food inflation above 18 per cent, has the time come to wind down the stimulus or would that be hasty and unwise?
There is no doubt that economic growth has picked up. It's also true that inflation has edged up. We had said at the beginning that sometime in the course of the year we would begin to slowly wind it down and what has happened is on course for that decision but exactly what, it's too early to say.
You suggest one shouldn't directly link inflation with stimulus; one should look at them separately and perhaps tackle them separately as well?
Many factors are involved. The bottom line is that inflation has edged up and policy in the course of the next year has to take that into account. The real concern is with food inflation and I think the factors driving that are supply side ones and expectations.
People say the key issue is, will raising key interest rates damage the recovery? The Director General of Confederation of Indian Industry has said it is uncertain if recovery can be sustained with a withdrawal of monetary stimulus. He says the areas doing well are driven by consumer demand, which he says is very sensitive to increases in the interest rates.
I assume he is referring to the interest rates the RBI fixes, the repo rate. In the linkage between the short-term repo and what happens to the interest rate structure, there are many steps. In any case, on the monetary side, interest rates are not the only instruments RBI has.
We will know in 10 days or so what RBI will do. The concern should be focused on the long-term interest rates, not the short-term ones. What drives the former is really the overall flow of funds into the economy, the size of the fiscal deficit, etc.
I suppose the central point the DG made and also by his counterpart at Ficci is that the recent pick-up in growth needs to be nurtured by a soft interest rate regime. If you suddenly drive up interest rates, you could damage the recovery we hope to build on.
A universal concern and it's good we have got a recovery. It looks much better than most other places. You do need to nurture it. So, I agree we need to be careful in how we moderate policy. It's not a situation where growth is now out of control and needs to be reigned in; it needs to be further supported.
A second concern is investment. Many believe it is still subdued and so, the government should be very careful on interest rates.
Nobody knows the investment rate at the moment because it takes a long time for that data to become available. But, if we want to counter the loss of export demand, then it's not just a question of maintaining the earlier investment rate. We actually want to put in more investment into the economy and so, creating an environment that will support investment is very important.
Which means keeping interest rates on the lower side?
Ensuring an adequate flow of financing. There is too much focus on the discussion on interest rates, as if the repo rate determines the long-term interest rate or the rate that affects investors. There are many other factors at work.
You are confident that investors would look at the broader picture rather than the narrow picture of the repo rate?
They should certainly do that. I have no idea what the RBI wants to do on the rate structure but the prospects for investment should be looked at broadly in terms of the economy recovering, what is the investment environment like, the financing environment. Not what is happening to the short-term rate.
General inflation is at 4.7 per cent, food inflation is hovering somewhere around 18-19-20 per cent. If this is not a good reason for tinkering around or reducing the stimulus, then how do you tackle the food price inflation?
In my view, the food price inflation strictly on vegetables, etc is temporary. Even in the case of grains, there has been too much talk that this is a drought year and there will be an adverse effect on agricultural production. The adverse effect is much less than what was thought.
We have a lot of stock, a new harvest is coming in and I am quite sure that by the end of January, when people get a much better idea if the rabi crop is going to be okay, you will see a drop in the cereal inflation compared to what it is now. All that we know suggests we are going to have a good rabi.
The Hindu on Sunday reported that rabi acreage under wheat, coarse cereals and oilseeds was lower than last year. And, that critical reservoirs in Punjab, Rajasthan and Himachal were below normal. Isn't that going to keep the pressure on prices up?
It's always possible to look at one aspect of something. For example, in Punjab the groundwater very often makes up for any deficiency in the reservoir. These are important issues; you have to wait and see.
But, my information is not that you are going to have a bad rabi at all and, remember, there has been a very substantial rebuilding of stocks. So, we could through efficient public supply management get a softening and some decisions have already been taken.
So, you stand by the comment and your counterpart, the Chief Economic Advisor, Kaushik Basu made much the same comment, that food price inflation will start coming down within four weeks on its own?
Yes, I stand by that.
Although India has food inflation above 18 per cent, we also have record buffer stocks of wheat and rice. Why can't we get the distribution of stocks and important cereals better?
I agree we should use the stocks and I think we are. Decisions have been taken recently that would enable the Food Corporation of India to offload the buffer at a price that would make it possible to cool the markets and I hope that will work.
Are you suggesting this decision should have been taken earlier?
Those are matters of judgment. Any decision you take could always have been taken a few days earlier.
A second concern is the fiscal deficit, at 6.8 per cent. Do we need to start scaling down the stimulus to reign in the deficit or do you believe the growth a continuous stimulus will generate will itself create the resources that will bring the deficit down?
We had said last year that the deficit should come down to about 5.5 per cent. I am not sure what the deficit will be this year. We have to wait and see because revenues could well be less than what the government had projected. It would be wise to signal that we are on track for reducing the deficit. We need not be rigid about how much the reduction should be.
You made a point about revenues being less than what the government had projected. Are you beginning to fear that will be the case?
I would not be surprised if revenues are lower. Last year, there was a very substantial fiscal stimulus in terms of excise duty rebates, etc and that could affect the growth of revenue.
You are also suggesting bringing the deficit down to 5.5 per cent may not be achievable.
It is achievable but you may have to limit your expenditure growth significantly. A reduction is in order but I would be less hung up about a particular number. We need to look at that number in the light of what are the different demands we have on expenditure.
This is not an India-specific issue. Around the world, people are now saying the important thing is to create a credible environment where people believe that over time that will bring the deficit down. I don't think it's very important to get hung up on one particular number for 2010-2011.
You said the deficit may not have to go necessarily down to the earlier 5.5 figure, but the important thing is to create an environment that makes that deficit understandable.
In the medium term, we should have a credible fiscal prudence policy.
While we are talking about creating the right environment, how much of a role is being played by reform measures? How important is it that those should be nailed down?
Reform includes a large number of initiatives in infrastructure, agriculture, health, education. In each of these sectors there are some reforms and the totality must be a picture that we are pushing a reform-oriented agenda.
There is a lot of talk about disinvestment, but banking and pension reforms seem to have slipped away. Also the insurance reforms.
A lot of it is in the form of bills that are before the (parliamentary) standing committees.
Are we making enough haste?
At all times, when we have good reform (ideas), we should do them faster than we are actually doing them. But, the important point is that they get done. That's more important than whether they got done one month earlier or one month later.
So, whether reform or deficit or stimulus, a bit of slippage is understandable but what should be clear is the intention and the commitment?
And the direction. It's got to be clear that we are moving forward.
That's the most important thing?
Yes.
Today, the government announced that the Index for Industrial Production for November has risen by 11.7 per cent, considerably more than anyone expected. Not so long ago, we discovered that the recent quarter of growth was 7.9 per cent, considerably above the market expectation. Do you believe the economy is going to show us a rate of growth around 7.5 per cent or a shade higher?
One month at 11.7 is very good news but this is on a lower than normal base. At the Planning Commission, we are going to look at this in the next two weeks, when we prepare the mid-term appraisal. It will come out shortly after the budget.
So, the first estimate you get of growth will be what the economic survey says. My own view is it's very likely to be above 7 per cent but whether to project it at 7.5 or some different number, I would leave that open at the moment.
In the Commission, we have been working towards defining a policy scenario in which we can do 8 per cent or a little bit more next year and get to 9 per cent some time during the last year of the Plan, which is 2011-2012. It's worth aiming at and not impossible.
India getting into a 9-plus per cent trajectory and remaining there for a couple of decades is entirely possible but it requires a lot of hard work. Possible with a bit of determined effort.
How seriously do you take Paul Krugman's fears that the recovery in America might just be a blip?
He is looking at relatively a short term. I am not making the assumption that the world will get back to what was earlier called normal. So, the real issue is, the industrialised countries are going to grow more slowly; can we, nevertheless, get back to 9 per cent? I think the answer is, Yes.
On the supply side, we can actually do 9 per cent. We know the policies that we have to put in place, mainly related to infrastructure, and we just have to be determined and get it done. If you are okay on the supply side, will we be let down on the demand side? In our case, exports are not such a huge part of GDP.
Yes, we will lose on exports and we need to offset that through investment and that investment should be infrastructure investment. There are a lot of implementation issues, process issues, conveying investor confidence issues but a doable job.
