Aug 27, 2008

India - Interview;Montek Singh Ahluwalia;Planning Commission Deputy Chairman

Planning Commission deputy chairman Montek Singh Ahluwalia speaks on GDP growth forecasts, infrastructure investment, energy policy and financial sector reforms in an interview with ET. Excerpts:

What is your take on the current scenario with respect to the Indian economy, which is marked by high inflation, a credit squeeze and reasonable fears of low industrial output? The Economic Advisory Council to the prime minister has forecast that GDP growth this year would be 7.7%, a significant dip from last year’s 9%.

There is a wide range of predictions. The EAC has projected that growth this year would be 7.7%, but the Centre for Monitoring Indian Economy has predicted 9%. My view has been that a range of 8-8 .5% is reasonable and maybe, the low end of that range is likely. However we should be quite satisfied if we grow at around 8%, given the current global economic conditions.

How much does the current rate of inflation worry you? How would the graph of weekly WPI-based inflation move in the short term?

A year on year inflation rate exceeding 12% is a cause for worry but inflation is a worry all over the world. There is also a question of what index to use. The CPI shows a much lower inflation rate of 7% and that is the way inflation is measured in most countries. I expect the WPI inflation to come down over the next three to four months.

The global slowdown has already adversely impacted India’s exports, as is experienced by industries like textiles, engineering goods and chemicals. Even the IT sector is now feeling the pinch thanks to the spending slowdown in export markets like the US, indicating that the services sector wouldn’t be left unhurt either

A slowdown in GDP growth will obviously be reflected in individual sub-sectors so this is not adding anything to what is known. I will only add that the projected slowdown (of Indian economy) does not reflect a basic deceleration in the country’s growth momentum. India can doubtless grow at an average rate of 9% over five years (in the 11th Five-Year Plan), provided sensible policies are in place. The proviso is important.

So, I don’t subscribe to the view that 9% growth is going to happen no matter whatever is done or not done on the policy front. I’m confident that it (9% growth in 11th Plan) is achievable, but we need to do many things—in agriculture, infrastructure, energy policy and also in a number of other areas—to really accomplish it. The Planning Commission has outlined the whole policy agenda for the 11th Plan. Even if three-fourth of what has been prescribed by the commission is actually acted upon, then we will certainly yield an average growth of 9% in the current Plan period.

EAC has said agriculture growth this year would be just 2% as against 4.5% last year. Your comments.

Our target concerning farm sector growth for the 11th Plan as a whole is 4%. We have already had a year in which the growth exceeded that figure. In the current year, the growth could be a little less than 4% though we need not conclude just yet that it will be only 2%. A lot will depend on the quality of monsoon—thankfully , monsoon has already picked up in certain areas, but we still have little more time to go (before deciding on the quality of monsoon).

What are the policy measures required for the farm sector to gather further growth momentum?

There are a number of things we have to do. There is tremendous scope for increasing productivity of land with existing technology, if the right kind of farming practices are adopted. There is need to have more (public) expenditure and also better implementation in areas such as irrigation , watershed management in rain-fed areas, production and distribution of seeds, and providing technical knowledge to farmers , particularly on soil nutrition, which is necessary for bringing about scientific application of fertilisers . We also need to develop infrastructure that will support agricultural diversification.

When it comes to the objective of increasing farm output, what are the segments that should get high priority?

The projected farm sector growth of 4% is not expected to come from food grain sector which needs to grow at only 2% per year. It’s the non-food grain sector, which will grow at 6-8 % and result in 4% overall growth. This sector comprising horticulture, dairy, livestock, poultry, fisheries etc—produces perishable goods, and to have an expansion of this segment of agriculture, it is very important to develop marketing linkages, logistic and transportation capacities . These are areas largely in the domain of the state governments . In this regard, many states have already reformed the Agriculture Produce Marketing Committee (APMC) Act, but some of them haven’t yet notified all of the relevant rules for the reform to be implemented.

While better management of public expenditure is crucial for farm sector growth, it is also necessary to involve the private sector in its development. We need to have mechanisms for contract farming that can help link farms to markets and also a system for transmission of technical knowledge. Improvement in rural road connectivity is also important. All these areas are being addressed through a variety of government programmes.

Have you in mind any specific measure that could make a big difference to the agriculture sector?

We need to use the resources being made available for the National Rural Employment Guarantee Scheme about Rs 18,000 crore a year—for improving land productivity and thereby increase farm output. The NREGS is already performing a really useful function of generating employment. Converging the NREGS resources with schemes to increase land productivity would be a sensible way to increase farm incomes and employment.

All this, of course, will have to be supported through sufficient expansion of agriculture credit. The UPA government has done an excellent job when it comes to expansion of agriculture credit and this is reflected in the major increase in credit flows to the sector in the last three years. In addition there has been a one-time loan waiver for a large number of farmers.

When it comes to increasing farm productivity, balanced use of fertilizers is very important. It’s only recently that a new investment policy for the fertiliser sector has been announced, even though the sector has been witnessing an investment famine for the last few years, making the economy much more vulnerable to the high prices of imported urea.

The new investment policy (in the fertiliser sector) gives incentives to the right kind of fertiliser production. But for the full results of this new policy, we’ll have to wait for another 3-4 years. As an immediate priority, we need to focus on utilising as much of the (existing) capacities as we can, and also taking timely steps for needbased imports of fertilisers.

Off-budget liabilities like oil and fertiliser subsidies, it is estimated, would be 5% of GDP this fiscal. Ideally , these should also be reckoned as fiscal deficit.

I think the 5% estimate is from the EAC report. Whether to bring these off-budget liabilities on the book, or to keep them off the book is essentially a question of accounting. The important point to note is that most of this (off-budget ) deficit is really due to the very large increase in international prices of petroleum and fertilisers . We’ve passed on some of this price increase to the consumers, absorbed a fraction by reducing taxes and also forced the producers to take a hit. But a very large part of this price increase has not been passed on and this enlarges the subsidy bill.

Clearly, it is not a sustainable solution to maintain this level of hidden deficit (off-budget deficit) year after year. The objective of policy should be to bring down the total deficit—sum of off-budget and on-budget deficits — to a comfortable level. Right now, it (the total deficit) is definitely not comfortable. However, what exactly will have to be done over the next year to achieve this objective is not something I want to speculate about.

The petroleum ministry and public sector oil companies are reportedly opposed to the main recommendations of BK Chaturvedi committee on financial health of oil companies.

I don’t know what view they have taken. Personally, I agree with the Chaturvedi committee’s views on the approach to pricing of petroleum products, which calls for a phased adjustment to reach trade parity prices.

Right now, there’s a lot of uncertainty about how the global oil market would behave in the coming months. We may need to wait a little longer before making a final decision . Phasing is the right thing to do. I don’t think the government could have raised the prices to full parity in the current year. No country in the world has passed on the oil price rise fully to the consumers. Besides, we can’t be sure that prices will not soften. Some very responsible people have said they could go below $100 per barrel.

What happens if global prices remain high?

If that happens we will really have to take some hard decisions. The ability of the economy to grow at a healthy rate will depend on our ability to take these hard decisions. I’m not pessimistic about India’s ability to grow even with high global oil prices, provided we take the right policy decisions. If we are moving on to a world in which the medium-term prospects are that of expensive energy, we must make sure subsidies are meant for only the really needy.

There’s a need for lifeline availability of energy at affordable prices, and we should assure that, but beyond that energy should be fully priced. The rationale for kerosene subsidy is apparently that the poor use it for lighting. If the Rajiv Gandhi Gramin Vidyut Yojana is properly implemented, it can potentially bring down the use of kerosene for lighting and therefore, largely obviate the need for subsidy.

Despite the ambitious targets set for power generation in the 11th Plan, the situation on this front doesn’t seem to be encouraging, despite Ultra Mega Plants.

The dip in generation growth that you are referring to is a transient one, which I don’t regard as pointer to the medium-term prospect in this regard. In the last Five Year Plan, we could add just 21,000 MW to the generation capacity. I’m reasonably sure that in the 11th Plan we will add three times of that to the generation pool, even if we fall slightly short of the target of 78,000MW. As for ultra mega power plants, they will mostly come up during the 13th Plan, but we have other projects that will help meet the target.

As regards the viability of the power sector, coal sector reforms are very important. So, too, are measures for addressing the investment torpor in the distribution sector.

Yes indeed, a rational approach to energy must cover all relevant sectors. Having said that, it is not the case that there are no reforms in the coal sector. By allowing captive mining of coal for power production, we have allowed new private investment into the industry. This is a substantial reform measure that we are closely watching to see if the process of allocation of captive coal mines is being accelerated.

I also agree that the single most important challenge facing the power sector is the one concerning distribution. The AT&C losses continue to be 35%. No system can survive with losses of that magnitude. The 10th Plan target was to reduce these losses to 15% but we could not achieve that. Now, the 11th Plan target, again, is to cut these losses to 15%. Some states like Andhra Pradesh (18%) and Tamil Nadu (20%) have brought down AT&C losses substantially . We’re encouraging other states to learn from the experiences of these states.

Attracting investment in the power sector won’t be a problem if we cut the AT&C losses and also accelerate the move towards open access. Open access is to become mandatory from Jan 1 2009. However, it is important that wheeling charges are made reasonable. Unfortunately , most of the electricity regulators continue to have a public-sector protection mentality and this hampers open access initiatives, which, if properly carried out, could have brought distribution companies under competitive pressure.

The ambitious project to attract $500-billion investment in infrastructure doesn’t seem to fully fructify.

The target is to increase infrastructure investment from 5% of GDP now to 9% by the end of this Plan. This corresponds to investment of $500 billion, over the five year period . This means attracting an additional $150 billion over what would happen with normal growth. That is indeed ambitious, and most of it will have to come from public sector corporations making an extra effort, and from public private partnerships (PPPs). Fortunately, we now have a policy in place that has generated a lot of interest, but there are also problems. To generate the massive flow of investment , transparency and better project preparation are vital . We have to do more in this area.

Many state governments are doing a very good job in this regard; some are seeking our help to structure the projects . Andhra Pradesh has demonstrated an outstandingly successful pure PPP model for a metro system by bidding out the Rs 12,000-crore Hyderabad metro to a private party without requiring the centre or state governments to pay anything—in fact, the state will get some revenue from the proposed metro. The revenue model of the project involves land associated with the metro being aggressively developed to subsidise the metro.

Do you think the pending Bills of financial sector reforms will pass muster in the tenure of the UPA govt?

Let me not speculate on what will be passed by the Parliament . In fact, we have a very clear agenda on financial sector reforms – the bills pending in parliament are a small part of that agenda. We need to take a much broader approach to financial sector reforms. The Planning Commission is about to receive the report of the high-level committee headed by Dr Raghuram Rajan, which is expected to outline a ten-year road map for reforms.

This should be the basis for intense discussions on the next steps in reforms. We will put this in the public domain to elicit views and stimulate discussions. It should be noted that India’s savings rate is much lower than China’s and so, for us to grow at 9-10 %, we need much greater financial sector efficiency than China. This makes financial sector reforms especially important in our context.

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