Mumbai: After cutting the cash reserve ratio by 50 basis points, the governor of the Reserve Bank of India said that it was now the government's turn to take a step towards fiscal consolidations. Speaking exclusively to CNBC-TV18 for the first time since the RBI policy announcement on January 24, Deputy Chairman of Planning Commission Montek Singh Ahluwalia said that the government will signal fiscal consolidation in the Budget, but it will not take massive contractionary steps.
"The broad focus will be on cutting down the fiscal deficit and containing subsidies, but it will not be an easy task," he said, adding that the government will make its move gradually. He further goes on to say that reducing subsidies will have no impact on inflation whatsoever. "Food inflation is likely to cool off and stabilise at 5-6 per cent," he said.
Another key concern on the government's mind the past few months has been its disinvestment target, to which Ahluwalia said that it is alright if the government does not meet its target. "Disinvestment will be decided by market conditions, so if market conditions are not normal, it's sensible for the government to hold back," he explained.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee.
Question: In cutting CRR, the RBI said that it needs to see fiscal discipline before it can actually go ahead and cut interest rates. How much elbow room do you think the government has going into the Budget to show some signs of fiscal discipline to the RBI and to global investors?
Answer: This is a signal you should actually wait for the Budget to give because normally we don't speculate on the budget. But the finance minister on several occasions has said that he does intent to get back onto the fiscal consolidation path. Now exactly how much is something that only the Budget will tell us, but I don't think there is any doubt that the government intends to return to the consolidation path beginning next year. We need to know from the Budget exactly how much can be done and over what time period.
I would only emphasis by the way that right now what most people around the world are interested in knowing is what our medium term fiscal trajectory is. I don't think anyone expects to see massive contraction on these steps, but people do recognise that fiscal deficits all over the world have expanded a little too much and they want to be reassured that the corrective process is underway and I hope the Budget will give that signal.
Question: Without speculating on what this Budget may or may not contain, what are your thoughts on where discipline might be got in? Is it on the subsidies front or do you think taxes can actually be taken higher when growth is sluggish, because that's the dichotomy that we might be dealing with here?
Answer: That goes into Budget risk. I mean obviously in many of these things you act on every front. There are lots of questions about what growth is likely to be in India next year. I have earlier said that we'll probably end this year somewhere around 7 per cent and if you look at it purely from a domestic point of view, I think the circumstances are there to try and accelerate that. I had suggested that we should have a target of around 8 per cent for the next fiscal year.
Of course this has to be moderated by the fact that global economic projections don't look particularly optimistic right now. Most people knew that 2011 was going to be a bad year and they thought that the global economy would recover in 2012. But the way the eurozone crisis has prolonged and uncertainty has continued, I think most people think that 2012 globally will not be a much better than 2011 and actually could even be a little bit worse.
So the question is can India accelerate its growth rate above 7 per cent this year in a global environment where global growth may be somewhat slower. Personally I think it can because there will be some negative effects from the global side, but we can get rid of a lot of domestic supply constraints which actually are major source of slower growth in India. I think the government has identified a number of steps, particularly in coal, power, energy related sectors, where we can get rid of impediments to implementation of ongoing projects. If people see that happening, then you will see a bit of a recovery in the investor sentiment and we could get higher growth then we have in the current fiscal year.
But this is a matter of weighing a lot of pros and some cons and I don't know what the finance ministry's final conclusion would be. I think it would be sensible to have in mind a high end outcome and a low end outcome. All of that is consistent with basically trying to convey an impression that we are acting on all fronts and certainly containment of subsidies is very important. We have consistently said in the Planning Commission that we cannot achieve the planned targets for investments, including expenditure in critical social sectors, if we are not able to contain subsidies. Now that's not easy to do and it can't be done in one year. But we need to give a signal that that side of the equation is going to be brought under control.
Question: What are your key recommendations on the subsidy front and how soon do you expect to see the government or the finance minister take a stand on it; if not in the Budget how soon do you expect any action on that front?
Answer: In the Planning Commission we are trying to identify long term constraints. Issues of timing are very difficult to determine, least of all when you are in the middle of an election in very important parts of the country. So we are not in fact engaged in determining issues on timing. I am talking about a longer term assessment that some signal of this kind at a certain stage has to be given and I hope that we will be able to address these issues.
The most urgent thing in my view is to make sure that impediments to project implementation are actually taken care of. I believe quite an extensive exercise is now underway to identify these impediments and deal with the different ministries in a manner where problems can be resolved quickly. So I would say that in the next three months, that's the single most important thing to focus on.
Question: Do you get the sense that the government may be willing to go the full mile and actually look at decontrol on some of the sectors?
Answer: These are all well established policy directions and the timing of the steps taken depend on when it feels appropriate to move. For example on fertiliser, we have moved to what we call a nutrient based subsidy in all fertilisers other than urea.
The next step is how to implement that in the case of urea. There are expert committees within the government that have recommended that just as we have done it for non urea MOP-DAP, the same steps should be taken in urea. But when it can be implemented is not something that I can speculate on.
Question: The hope is that once the UP elections get out of the way the government might be able to move in some of these sensitive areas in a slightly more unfettered fashion. Is that what you are hinting at when you said in a three month window you will begin to see a lot of action?
Answer: What I was saying is that the most important thing in the next three months is getting rid of impediments to project implementation. These are not controversial issues, they lie within the domain of the government and I believe that the greatest support for investor sentiment is going to come from the perception that the government is addressing these issues.
Now other issues like decontrol or price reform or so on, these are on the agenda, they are part of the broad direction of policy and the timing of these can be left to be determined by the ministries and the government on what is most convenient basis. Except of course over any period of time, people must see movement in all these areas. We have seen movement in these areas. For example in the case of petrol you did see decontrol of petrol prices. So it's not as if there has been no movement at all, I am not just in a position to predict when the government will decide to do anything in future. I do think that in terms of priority, it's the things I have talked about that are more important in this next three months period.
Over the longer period, I think the Budget will outline and provide answers to the broad directions that we are going to take, but in the nature of our system nobody wants to second guess the budget. So I may not even know, but certainly I cannot speculate on what the Budget will say. That will take the mystery out of a very important event completely away, so you just have to wait and see what the Budget says.
Question: Do you think inflation might still be a challenge for 2012 or do you think the current moderating trend will only accentuate as we go deeper into the year?
Answer: I am not aware of anyone anywhere in the world who believes that subsidies are the way of controlling inflation. Subsidies are a way of controlling a particular price, so the proposition that if you do something on subsidies is going to have a harmful effect on inflation, I don't buy that. What will happen if you do something on subsidies is one price might go up but to the extent of which the subsidy reduces the fiscal deficit there will be less pressure in the system on prices in general. So if you are going to look at inflation, you should completely ignore the impact of subsidies except may be for a one week period or a two week period.
As far as inflation as a whole is concerned, obviously what you are seeing in food inflation is a very low level. I would expect by the way that you should not think that food inflation is going to remain negative. In a well functioning system, if you are targeting 5-6 per cent inflation for the country as a whole, then on balance most prices should move in the 5-6 per cent range. So what that really means is that over time, food inflation will pickup but you expect other non food inflation to actually come down.
When we say that we'll probably end the year with inflation at 7 per cent, some people are now even more optimistic, basically what we are saying is we have definitely got out of the double digit inflation phenomenon. We are also getting out of what people would call the very uncomfortably high single digit range, which is above 8 per cent, and we are getting into a more comfortable range. Time will tell, but so far, if you have to make a summary statement the most important thing is the news on inflation has turned very significantly positive. Now this doesn't mean that things can't deteriorate, hundreds of things could happen, but the bottom line your breaking news on inflation has to be that things have eased.
Question: The most severe disappointment has come on the entire disinvestment process, it seems to have gone completely wrong for the government. Last we heard was about cross purchases which have been shot down by ministries because they don't see any sense in it. What is the plan in terms of monetising some of these assets for the government?
Answer: I don't think there is any change in the government's plans that we can realise the value of these assets over time. If the government decides not to disinvest in the certain period because it feels the stock prices are unduly low, that's not only understandable but it is actually quite a sensible decision. If for example a certain amount of resources get shifted from one year to the next, I don't think that the impact of that on the fiscal deficit should be a matter of great concern.
I think we will continue with the disinvestment and the timing of the disinvestment will be decided by market conditions. Which means that whenever we put a number in for disinvestment, it assumes normal market conditions. If market conditions are not normal, it's sensible for the government to hold back.
Question: Would you admit or agree to the RBI's observation that it would be difficult for them to move in terms of aggressive rate cuts if it's not backed up by any fiscal policy action?
Answer: I don't want to enter into an argument with the RBI. The job of reserve banks around the world is to be striking notes of caution. So what the RBI has done in the last policy is giving a clear signal that the period of monetary tightening is over and that is a genuine reflection on their part that the warning signals on inflation are certainly no longer red; they may even be changing from amber to green. But obviously the RBI wants to hold back until it's absolutely sure.
As far as fiscal deficit is concerned, there is absolutely no doubt in anyone's view that you cannot expect to get a soft interest rates purely through monetary policy if the fiscal situation is not supportive. So that's not new and what the governor is saying is that he hopes that the Budget will signal a process of fiscal consolidation and that will certainly give him more room to act. No doubt that the room that the RBI has on interest rates is very powerfully affected by what the fiscal stance is and we will only know that when the Budget is presented.
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