‘The economy has begun to turn around’ - Montek Singh Ahluwalia

Vinay Kamath, R. Balaji
Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, Government of India, exudes confidence in India achieving its growth targets with the Finance Ministry charting out clear plans for fiscal consolidation and drawing in investments. “There is a lot of liquidity in the world economy and India is still seen as one of the countries whose economic performance could be quite good.”

But perception is important and people should see that the economy is well managed and is turning around. The Ministry has taken firm steps, including measures to control deficit and subsidy outgo.

While the year ahead of elections may not be good for trying out new ideas, the Government can focus on implementing policies that have been announced. They may not require any legislative changes, but just decision-making.

With the current account deficit touching 6.7 per cent in the third quarter, what’s the Government’s next move going to be?

We knew that the current account deficit for 2012-13 was going to be higher than the previous year’s though the third quarter number is worse than I had expected. However, the quarterly figure should not be mechanically projected. It looks as year 2012-13 will end up with a CAD of around 5 per cent of GDP which is twice what I would call a ‘comfortable level’. We have to bring it under control. There can be no question about that.

What can the Government do then to bring it under control?

From a macro-economic perspective, the current account deficit is a measure of excess demand in the system. It is the excess of investment over savings. Investment has actually fallen as a share of GDP, but savings have fallen even more and a lot of the problem is on the Government side, with Government savings levels declining. This is reflected in the rise in the fiscal deficit in the last three-four years.

Bringing the fiscal deficit under control is, therefore, a key element in the strategy. The Finance Minister has outlined a fiscal consolidation path which involves a reduction of about half a percentage point per year in the remaining four years of the 12th Plan. This amounts to a reduction of 2 percentage points over the period. That will certainly bring the current account deficit down over time.

But it does mean that even if the coming year is better than in 2012-13, the deficit will still be high and we will have to finance it. ‘Can we finance it?’ My guess is that we can do so. Remember, we have been able to finance a deficit of about 5 per cent in 2012-13 without really drawing down reserves.

There is a lot of liquidity in the world economy and India is still seen as one of the countries whose economic performance could be quite good. Much will depend on whether people see that the economy is well-managed and is turning around. If the fiscal deficit doesn’t turn around, or is not seen as turning around, we may have difficulty but if it is seen as turning around we should not have a problem. Markets understand that if you have a quarter where the CAD is very high, you don’t have to correct it in the next quarter, but there must be signs of a turnaround. That’s important.

What about gold imports? Any policy prescription to control imports?

Part of the reason for the high current account deficit is the exceptionally high levels of gold imports. High gold imports are a reflection of individuals’ perception of gold as an investment asset. In recent years, gold prices globally have risen and, of course, the rupee has also been under pressure, and the two together probably increased the demand for gold as an asset. Things may be turning around.

Globally the price of gold is actually now going down. The perception that the rupee could weaken has been driving gold demand but as the current account comes under control, that will correct itself. The figures for the quarter ending December 2012 are before the Budget outcome was known.

By the end of December many people were saying that the fiscal deficit in the current year would be much higher than it is. Actually it was contained by the Finance Minister at 5.2 per cent.

Do you think one can expect even higher duties on gold to curb consumption?

We have raised the duties on gold but if you take duties beyond a point, the gold trade just goes underground. It becomes an invitation to smuggling. I don’t want to speculate on whether gold duties should be raised, but the real solution to this problem is ensuring that the economy is doing well and that financial instruments have a good rate of return. If we can do this the demand for gold will automatically go down.

Oil imports too perhaps need a different policy prescription? Oil imports too have been surging…

On oil, what we have to do is very straightforward. We should eliminate, over a period of time, the subsidy on petroleum products. Obviously, this is politically difficult. That’s why the diesel subsidy is going to be phased out over an eighteen-month period. However, the perception that eighteen months from now we won’t be having a diesel subsidy is very positive. I have no doubt that if we could phase it out in half that time, it would have been better. But, one has to live with political constraints.

Will 2013 be a bit of a write-off because of electoral compulsions?

The Prime Minister has said, in his Press Conference returning from Durban, that managing a coalition is a difficult thing. Obviously, when a government is in the last year of its full term, the room for manoeuvre is lower. However, the last year of a government before a General Election is not the time to throw out some new ideas. We should concentrate all our energies in this year to implement policies that have already been announced and which do not require any legislative changes, but simply require decision-making on the part of the government. That is what the Prime Minister means when he says, we are determined to do reforms. If it doesn’t require legislative action, then coalition management is less of a problem.

This BRICS Bank which has just been announced………. Will it confine itself to infrastructure funding or would it become like an IMF-like lender helping out in BoP crises?

I do not know the details. The countries have agreed in principle that there should be a BRICS bank but the details have still to be worked out. It won’t be like the IMF.

It will be more like the World Bank or the ADB, it will be a development bank where countries will contribute capital, some of which will be actually paid in, and the rest will be callable, and on the strength of that capital the Bank would borrow money and that borrowed money would then be lent to individual developing countries.

I assume that it will take at least another year before the details, such as the size of the capital, the voting structure, location of the Bank, etc., are sorted out.

Even this year, despite a drought, we will end up with a record foodgrain output, but we will still have higher food inflation. Why?

The inflationary pressure prevailing in the economy is a complex phenomenon. Food inflation is not just a foodgrain inflation problem. The rise of non-foodgrain prices is quite substantial. The interesting thing is that in these non-foodgrain items, such as vegetable, milk, eggs and so on, the growth of supply is actually greater than for foodgrains.

However, with the rising income levels in the country, the demand for these products is rising much more sharply than supply. These commodities are perishable and marketing arrangements, including logistics and storage are critical. Weaknesses in these areas are being reflected in higher price.

The best way of controlling food inflation is to aim for an even larger increase in supply to meet growing demand. Higher productivity and better marketing will help.

Farm income is a function of prices and production. We want farm incomes to rise but the way to get both the farmer and the consumer benefited is to make sure that productivity goes up. In that event the price doesn’t go up that much, supply goes up quite a bit, the consumer gets the stuff at a good price and the farmer also gets a larger income. I think we need to concentrate a lot more on these productivity questions in non-food and agriculture.

Power seems to be the biggest bottleneck in the India story. What does the government need to do?

If you ask me what should be the single-most important agenda for the Government in 2013, it should be to address the fuel supply problem facing power stations. In one sense, generation capacity is at a faster pace than earlier. If that had not happened, we would have a power shortage but wouldn’t have a fuel supply problem.

Today the position is that in the last couple of years there has been a huge increase in generation capacity but the power stations are stranded for lack of coal. It’s very clear that we will need to import more coal; there is no question about that. Whatever we do domestically in the next two years, a substantial import of coal is going to be needed.

The real problem is that imported coal is about twice as expensive as domestic coal after you correct for the calorific value. Whereas a lot of people want coal, they don’t actually want imported coal because if they get imported coal, the marginal cost of their power becomes higher and they feel that in merit order dispatch they will be ranked low.

We have suggested different ways of resolving this problem. One is some form of pooling which would moderate the whole thing.

Pooling means those who earlier were getting 100 per cent domestic coal will now get some domestic and some imported coal. So the cost of fuel has to go up. The Ministry of Power and the Ministry of Coal at the moment are actually trying to work out a solution to this problem. I am hoping that a workable solution will emerge in the next few weeks.

The problem has been in evacuation of coal, not availability?

Well, there are some coal fields where there is scope for expansion but evacuation is a problem.

There are two or three railway lines, for example, if they could be built and cleared environmentally it would allow another 100 million tonnes of coal to move, but that is stuck because of environmental clearance. But I believe that they are trying to resolve that problem. Forest clearance is involved.

Is there some disconnect between the RBI and the Government on the issue of curbing inflation?

I don’t think so. The real issue on inflation is that core inflation has been coming down.

It is food inflation that has not come down. A lot of people say that food inflation is not something that can be tackled by keeping tight monetary policy. My own judgment is that the economy has begun to turn around and we have unutilised growth capacity.

The RBI’s earlier view was that if you don’t have fiscal space please don’t rely on monetary policy. Now the dispute is only speed and pace. Some people think there should be more monetary loosening, while others think it should be a more careful process. In my view it’s not the monetary side that is the most crucial.

The most important thing is to remove impediments to projects implementation so that investment can start increasing. If the Government is able to solve these fuel supply and regulatory clearance problems, I think we could see a big boost in investment in this coming year.

This will help the growth revival and generate supply to moderate inflationary pressure.