India - Q&A Dpty Chairman Planning Commission;Montek

The Planning Commission has been working in close co-ordination with the finance ministry and the PMO to take stock of the current turmoil in the financial market. ET spoke to Montek Singh Ahluwalia , deputy chairman of Planning Commission, to find out about the road ahead, measures that the government could take and the future of the Indian economy. Excerpts:

What kind of impact would the global liquidity crisis have on the Indian economy? How long would the crisis last?

The world is going through a very difficult time with a great deal of financial turmoil. This has generated a lot of uncertainties and it has created a freezing of liquidity in most of the industrialised countries. The authorities in those countries have taken unorthodox action and they are currently talking about further global co-ordination. It is in our interest that they succeed in stabilising their markets as soon as possible because these are the markets that dominate the global flows. As far as India is concerned, this uncertainty can impact India in two ways.

First, there is a slowdown globally and this would impact India. We have said for 2008-09, our growth rate will slow down when compared with 9% plus that we got last year. I think the most recent estimate that the prime minister has given was between 7.5% and 8%. I am aware that some financial analysts are talking of the lower end of the range some even below that. It is very difficult to judge what the growth rate in 2008-09 will actually be. In the first quarter, it was 7.9%. IMF has said for the current calendar year, it is likely to be in the range of 7.9%. If you combine all this, something like 7.5% is the consensus.

That will be a significant slowdown compared to the previous year but it will still be a robust growth. About the next year, my feeling is that if you have a normal world economic situation, on the supply side our growth potential is close to 9%. But whether there will be demand that will allow us to produce that kind of growth is the issue. So I am holding back from making a forecast for the next year.

Can domestic investments sustain this growth?

In my view, most of India’s growth has been driven by domestic demand. There is likely to be a slowing down of investments in any downturn of a cycle. The component of investment that can play a counter cyclical role in my view is the infrastructure investment. People who are investing for normal consumer goods look at the demand and can hold back for a while.

But infrastructure investment is being planned for demand over the next 10-12 years so I think whatever is in the pipeline will not be affected by a one-year downturn. My view is that we should do everything necessary to give a push and boost to infrastructure investment. In infrastructure, the pipeline is very large. Yes, there will be financing problem, depending on what happens to the global financial situation. We can do something about that.

We have set up the India Infrastructure Finance Company, which is basically capable of providing finance to infrastructure projects to fill financial gaps. We should leverage own foreign exchange reserves to provide finance to speed up these projects. IIFCL has already committed approximately Rs 10,000 crore of sanctions. If there are projects there is no reason why it cannot scale up, to say Rs 30,000 crore.

There is a big clamour for rate cuts. Your views?

Across the world, central banks have increased liquidity and they have lowered rates. But there is a difference. Many of these central banks have very low GDP growth and they have also got moderately low rates of inflation. In our case, the GDP growth rate is high and inflation is high and that’s what makes the slight difference. However, we should look at the case for reviewing rates but let me explain. The most important thing was the injection of liquidity.

When you say cut rates what you really mean is that either you cut the short-term rate, at which the bank provides liquidity, the repo or you cut the bank rate which is a notional thing. The real rate determined in the market for medium term and long-term rate cannot be cut by adjusting short rates. What you can do is to inject liquidity. It is normal demand-supply situation. If you want to lower price just put in lot of supply. If you flood the market with liquidity, the rates will come down. Announcing the change in rate is not the most important thing. But from a signal point of view, it is something that RBI should consider because across the world that is what people are doing.

So has the emphasis shifted from combating inflation to protecting growth?

Most people focus on the wholesale price index. There is big debate on what’s the right index to use but let’s just focus on the wholesale price index for the moment. In the last few weeks, the annual rate of inflation has gone down, it is now 11.8%. This annual rate of inflation only tells you what the prices are compared to prices a year ago.

If you see the wholesale prices over the last 4-5 weeks, it’s kind of flat coming down. And if you project that forward what it really means is that at present the momentum of inflation is not there. Secondly, numbers you are seeing do not reflect that commodity prices have come sharply down they also don’t reflect the fact that the decline in stock market value will lead to some depressive effect on demand. You can never give up being vigilant on prices but the way it works now is that price inflation is not the most important thing. It is coming down.