‘I Hope Long-Term Commitment To Reforms Remains’

As a key player in crafting the government's economic agenda amid a global downturn, Montek Singh Ahluwalia admits the immediate concern is to revive the growth momentum.

There is a sense within the Congress that conservatives are holding sway and the reformers are lying low…

At any given time, there are longer-term objectives and there are immediate concerns. I would hope that the longer-term commitment to economic reforms remains. But I have no doubt that the most immediate thing to focus on is short-term economic slowdown and how to revive the momentum of growth. And reviving the momentum of growth compels you to deal with what will give the biggest positive feedback in the short run -- that may not be trying to move reforms faster than what you would have otherwise done. When you have a major global slowdown, then the major focus has to be on what you can do by way of a stimulus. More than that, what should the stimulus be? Should it be by raising private consumption by lowering taxes, or a stimulus through greater investment, or through incentives to corporate sector in the hope that they will make investments? If you are doing investments or trying to support private investments, which sectors do you concentrate on?

To my mind, whatever the normal flow of economic activity, until we can be confident that the economy is turning around, which it seems to be now, the primary focus of anyone interested in economic management would be on how to respond to global slowdown that is impacting India. Also to some extent how to give a particular amount of support to sectors that are worst hit. That is what I think we have all been doing. In this process a lot of the effort remains in areas where a lot of reforms are being done, for example infrastructure development through PPP. Certainly in education -- implementing new directions to improve the quality of education is clearly an area of reform. In implementing some of the big schemes we are talking about like NREGA, how do you make them contribute more to land productivity? These are the reforms that are really important.

Is NREGA being revamped to provide more than assured 100 days employment to poor families?

NREGA has two objectives - one is to provide employment when needed. The second is the recognition that if you are spending a lot of money, you can always provide employment in a manner where the person gets employed to do some work to improve (rural and agriculture) productivity in the future. I mean if you are going to spend Rs 40,000 crore to provide rural employment then it is very important that the employment gets done on works that can contribute most to enhancing productivity. In order to do that the design of the programme needs to be constantly improved upon, and we are looking at doing that.

Is this part of the ongoing or incremental reforms that the government is looking at?

I would call it part of the reforms. I think the notion of reforms as being different from economic management and improving efficiency -- just fiddling with three or four things that some economic journalists think are the most important thing -- is a mistaken notion. If you are trying to improve the quality of higher education -- is it reforms or not? I think it is major reforms. In a period when you have suddenly lost about two per cent of your normal growth capacity, you are not going to get it back by waving some reform wand. If you were moving along well and were committed to certain reform process, when something is interrupted, you should address that ‘something’. And when that ‘something’ has been addressed and you are back to normal growth path that’s when maintaining the momentum of reforms become important. When getting back to normal growth path requires you to concentrate on certain areas, which happen to be reform areas like investment in infrastructure and PPP, then the two go together. Whatever we were going to do to stimulate PPP we better do it double quick if we want to use investment as the basis of counter cyclical stimulus.

How soon do expect the growth to come back to the normal course?

Seven per cent is our expectation for the current year. It could do better according to some people, and it could do worse according to some people. Early in the year, the summer monsoon is just hopefully beginning to recover and we don’t know quite how strong the global recovery will be. So there is uncertainty but our planning target is seven per cent for the current year. The prime minister has said, and I agree with him, that within two years we should get back to nine per cent growth.

Recent signs do not point to India having a normal monsoon. What sort of impact do you see?

I agree it is still too early to be confident about the monsoon. The rains have not yet come to the northern parts, though it has come to the rest of the parts of the country. The northern part of the country is also the area where irrigation is pretty well developed and temporary moisture stress situation can be countered by relying more on irrigation. Of course, it is a little more expensive if you have to do that, but they have an option. The present situation remains a matter of concern though the fact that there has been some revival of the monsoon is a good thing but it is not yet clear how rapidly the monsoon will recover. So that is an uncertain thing.

Coming to the budget, in a recent interview you mentioned there is unnecessary hype about the budget speech as if what isn’t in it is not going to happen. Does it mean the market sentiments attached to the budget are unnecessary? Do media and market not matter?

Media matters in any democracy and I just hope media fulfils its responsibility of going beyond the immediate excitement of the moment. I have always felt that the TV presentation of the budgets where you have a little inset where they are watching the stock movement -- there is no other country where they do that kind of thing. I mean the movements in the stock markets within a day, the degree of randomness in those movements is so large that to attribute them to the budget is a mistaken notion. That is not to say markets don’t matter. Markets matter a lot but responsible participants read the whole budget document.

I have been on a lot of TV interviews where people are constantly asking why wasn’t it presented differently, this is a matter of aesthetics -- one person might want to understate, somebody else might want to emphasis something. Serious market players are not bothered about presentation, they want to know the government intention in the budget documentation and that intention is reasonably clear. We are focusing the budget right now on how to revive the growth.

The budget makes it very clear that private sector investment is very important and we want to stimulate it. The additional investment we are making is going into infrastructure and social sectors, which is absolutely right. And he (the finance minister) has given some signals of future reforms, which are very crucial, one of which is the introduction of GST from April 2010. The second one is the direct tax code, which hopefully could simplify our tax structure, which is exactly what our reformers want. These are some of the really important things. Obviously we are really only laying down the roadmap and would have to first get the things done. It is a tough job but that is what we should look at.

The stock market continues to be edgy (at the time this interview took place)?

But the stock markets are edgy around the whole world. I don’t think it has anything to do with the budget. Anybody who believes they can attribute the movements in the stock market over the last three days to any one factor is making a very bold statement. Stock markets are extremely important for the efficient functioning of the economy but over a reasonable period of time they would reflect the economic fundamentals. Basically most people correctly read the economic situation in India. India had broken through to a nine per cent growth in a period when world growth was very good. Now that world growth this year is not good, India is not achieving nine per cent growth. But if India achieves seven per cent it would be pretty good and much better than most other countries.

Most people still see India among two or three developing countries that will remain on the move even if industrialized world slows down significantly for a few years. Second, they recognize that getting back to a normal growth process requires a continuation of many of the reforms that we have talked about. To say the FM did not repeat some of the things in the budget is not important, because they are going to judge by what we do. For example, when the cabinet under UPA-1 approved the integrated energy policy, one of the key elements of the policy was to make sure domestic petroleum prices get linked to world prices. Now we have raised the petroleum prices -- the soft option is not to do it, but I am glad the government did the right thing (to raise the prices ahead of the budget). The finance minister said he is setting up a committee to study how the domestic prices can be linked to world prices, that to my mind would be the implementation of the integrated energy policy. That is a clear direction. So similarly, there are many things that need to happen, and there is no reason to believe they will not happen.

Also lots of action here lie in the realm of other ministries. Like Mr Kamal Nath has made several announcements about how much emphasis he wants to give to the roads and highway programme, which is absolutely crucial. The budget speech made no mention of the highway programme but the minister concerned is talking about it. The people are not looking at the budget speech as the only source of information on India. (HRD Minister) Kapil Sibal has also been talking about reforms in education sector, which is equally crucial. Taking as a whole the markets will judge -- is the Indian government willing to move or not.

The government has been arguing that policy pronouncements have nothing to do with budget. Are we reverting back to the pre-1990s style of presenting the budget --more a statement of intent along with expenditure and revenues?

In my view, that is the correct thing to do. If you are doing a major road programme or a PPP programme, or an energy policy, then it should be the relevant ministries that should be announcing them -- and in the President’s address all this should be put together. The key job of the finance ministry should be macro economic balance, tax policy and to some extent the financial and monetary policy. But if you make any pronouncement on any other ministry…actually it is the relevant ministries that are going to be pronouncing the policies and going to the cabinet for approval. It is not necessary to do that in the budget.

In the 1990, there was a big change being made in the policy. Those changes are now known. For example if the cabinet has approved an integrated energy policy, the budget can also state that. The FM has also mentioned about the expert panel for petroleum fuel. But it is not necessary. Otherwise the budget document becomes very long and would repeat what the President’s address has said.

Does this imply a change in the finance ministry’s role? Will there be more decentralized planning? Who will do the monitoring and ensuring proper fund utilization?

I am not aware of any change. I don’t think the budget should contain a summary statement of what every ministry is going to do. There is nothing wrong in not doing it. Every ministry is monitoring programmes under it. Now we are setting up an independent monitoring unit in the PMO, hopefully that would provide a basis for seeing what the various ministries are doing. Of course on a plan basis we also monitor performances of ministries -- all of that will continue.

The President’s speech mentions quarterly reporting by various ministries and now that a monitoring unit has been set up in the PMO, how will these checks and balance work? Have we moved towards an accrual budget?

This is not an accrual budget but a performance budget. There is no harm in having a monthly target. If you miss the target in the first month you can hope to catch up in the second or third month, but by the sixth or seventh month if you have not met the target than the argument of trying to catch up will not hold. Having a system for monitoring -- the PM or the cabinet committee -- can start putting pressure on the implementing ministries. Anyway it is a way of letting people know that their performance is being monitored and it helps to improve their efforts.

Isn’t this a change from what was happening in the previous five years when lot of targets were missed or not even met half way, particularly in areas like power and highways? Is this an effort to ensure better fund utilization?

I don’t agree that in the previous five years targets were not even met half way. In highways it is correct. In power the story is a little bit mixed in that the end result takes some time lag. If you judge the performance by how much new generation capacity was added then you would get one answer but if you judge by how much start was made on new capacity than the performance was quite good. In fact, in the last four to five years we did better than in the previous five years because the number of projects that got started was three times as much. I am in favour of modernizing power generation and distributing infrastructure, and more effective monitoring.

Looking ahead, which among the reforms will have greater priority- governance, fiscal discipline, stepping up government investment in infrastructure particularly in rural areas, social sector? Have the priorities been redrawn post the electoral verdict in the general elections?

I think the priorities laid out in the President’s address is a clear statement of the post electoral perception of the government. Clearly, the government regards the election victory as an endorsement of the strategy of inclusive growth, therefore we want to get back to rapid growth as quickly as possible and continue the focus on inclusiveness. This not a change of strategy but a refocusing of efforts on growth side to deal with the short-term problem and on the inclusion side to learn from the experience.

The emphasis remains infrastructure and social sectors but we are (moving) further ahead in that and can learn from the experience so far, and improve the functioning of these schemes, which we will. Some new ideas like the new unique identity card initiative --which could make a huge difference in ensuring targeting and efficiency of delivery -- will take possibly three or four years. It is not going to happen quickly, but if you don’t start you are never going to have it.

Coming to disinvestments, over which there is some lack of clarity, the finance minister has said there will be a roadmap in three months. Would dilution of government holding in PSUs to 51 per cent also mean greater autonomy to the companies where public holding increases? In particular how would it apply to an oil company with the government controlling the prices?

That is a separate decision. I am in favour of much greater autonomy. There is no point in having PSUs and have them run through backseat driving by the ministries. You need greater autonomy, more accountability and more transparency. It should be clear what decision of the PSU is not being taken because the ministry is interfering and what decision is actually being allowed to be taken because the managers want it.

Unless you do that you cannot have accountability. I do believe that disinvestments down to 51 per cent will make it more likely because if you have private shareholders the demand for transparency goes up. Fact is if the government forces a PSU to take a decision, which is not in the interest of shareholders, then more the private shareholders the more people would be interested in knowing why you took a particular decision. The two go together.

In the case of oil companies, if the policy is very clear that government will fix the prices and there will be no other criteria, then it is up to the private shareholders whether to hold the shares. On the other if the policy, which it is, the integrated energy policy that we want to link the domestic fuel prices to world prices then the shareholder has the right to expect that some mechanism of linkage will be established. If the world prices are going to rise then you would want to buy shares of a petroleum company only if you think it would be allowed to raise the prices otherwise why would you want to invest in petroleum.

So, are you sure of a clearer roadmap coming up on this issue?

I am very hopeful from the discussions that we will have a clearer roadmap on disinvestments.

What sort of impact has the rising fiscal deficit made on the 11th Plan targets? Are some of the targets expected to be lowered in the mid-term review, particularly since the private sector sentiments appear to be low and there are expectations of greater hand holding by the government? Will this see a further rise in public spending on infrastructure and social sectors?

The higher fiscal deficit this year is partly in response to the Planning Commission’s view that we need more counter cyclical stimulus and that stimulus took the form of additional support for critical areas of infrastructure. So higher fiscal deficit actually helped to achieve Plan targets. Our idea was that this is a year when private investments are low, so let us compensate for that by having more public investments. And when the economy recovers, we can go back to a normal level of public investment. What has been done has been entirely consistent with good planning.

During economic slowdown there is a slowing down of private investments. But the signal that the government is giving is that it remains very keen to have an environment which is conducive to a healthy growth of the private sector, and which is investor friendly. With the recovery of the global economy both FDI and domestic investment will expand.

With the government planning to raise Rs.4.5 lakh crore from the market, will it not make it difficult for the private sector to source funds?

Not at all -- we are raising funds because private investment is low. If private investment were booming there would be no need for counter cyclical expansion. The reason we are doing is so because a lot of private sector investment that would have come, is holding back. So it is in the transition that we are replacing private investment with public investment.

How soon do you see the government meeting the FRBM targets? The FM has set out a target of lowering the fiscal deficit to 5.5 per cent and to 4 per cent in two years. How realistic is this target?

The FM has indicated that they are waiting for the report of the 13th Finance Commission to see how the future FRBM should be set. I have been of the view that we need to modernize our FRBM targets setting. The earlier system, in my view, did not set the right targets. It focused on things that were most logical and did not allow for a cyclical change in deficit. All this has to be built into for a sensible FRBM. The FM has indicated that the fiscal deficit would be lowered to 4 per cent over a two-year period, which is a very sensible thing. I don’t have a clear picture now how it will be achieved. It has to be through a combination of more revenue and less expenditure, which expenditure can be reduced has to be studied. I hope we are not reducing investment expenditure or social sector expenditure. But there are other expenditures like untargeted subsidies that need to be reduced

In the case of subsidies, is there any particular sector where you feel it needs to be cut substantially?

I think untargeted subsidies need to be brought down to a more reasonable level. We are going to go into all these issues at the time of the mid-term appraisal. By the end of this year, we would have completed our mid term appraisal. The appraisal should clear answers in the light of the global slowdown what is going to be the target of the Plan and in the light of that target is there any change in the sectoral allocation that makes sense. We are also going to give a clear signal that given that there has been a slowdown and we need to stimulate investment, what are the main policy recommendations that we push for. One of them would have to be on how to bring subsidies under control.

A shorted, edited version of this transcript appears in print