Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, said the government is looking at problems that have affected the pace of investment in the power sector. In an interview, he said he’s hopeful of a definite improvement in the pace of implementation in many of the infrastructure projects over the next two or three months. Edited excerpts:
What do you make of the November inflation numbers?
We are obviously glad that the inflation numbers that came in for November showed an expected decline, 9.1% on a year-on-year basis. Actually, food prices have continued to decline. I think the prices that came in for the week ending the 2 December; the year-on-year inflation in food prices is down to about 4.35%, on the food front, you are really seeing a base level effect coming into play. We expect that the annual inflation rate will decline further in December. I am not aware that anyone has said it will be 6% in the next two-three months, but I think a lot of us feel that somewhere certainly between 7% and 8% it should reach by March. So, that’s roughly the present forecast. I think inflation would definitely be coming under control, but it may take a little longer to get to 6%, that’s the present assessment.
One criticism has been that, so far, it’s only the Reserve Bank of India (RBI) which is doing its bit and maybe that’s not helping matters too much. Do you think the government and RBI should jointly try to curb inflation?
RBI and the finance ministry work very closely together. The control of inflation is not only a monetary phenomenon. Inflation is affected by a number of supply-side factors, positions regarding the fiscal stance and, of course, monetary policy plays a very important role. So, somewhere between the finance ministry and the Reserve Bank, that coordination does take place.
You actually spoke about infra structure bottlenecks and slowing growth of the Index of Industrial Production (IIP). What is being done, quite clearly there is a bit of a slowdown now?
The decline in the IIP is a matter of concern; it seems to suggest that the slowing of the economy hasn’t actually stopped. I should say that past data indicate that monthly in- formation on the IIP is actually a very subjective error, but there is no doubt that there is a slowdown going on and it has yet to come to a stop. So, that’s certainly a matter of concern. I think one of the very important factors behind that slowdown is a slowing of investment.
This is reflected in the fact that the biggest negative effect is really in the capital goods sector. Now, one general point one should make is that if industrial investment has been getting used to a growth rate of 8.5% or even 9% and they think that in the short run the economy is going to slow down, which it is and we know that then you expect for a very brief period, you could have zero growth or even negative growth because people are adjusting to the fact that inventories are not being rebuilt. We don’t have enough data to know whether this is what’s going on but it would be quite a normal thing that for a very brief period, you get very low industrial growth, then industrial growth picks up.
Question is when is that going to happen. I think that the revival in investment and especially investments in infrastructure holds the key to get in the growth momentum going. The government is looking at a number of sectoral problems, which have particularly affected the pace of investment in the power sector and the linked coal sector. I think we have a group of ministers looking at it.
There are procedure problems, some of them are with the state governments, many relate to just speeding up decision making by the central government and I am hopeful that as a result of these meetings, we will see a definite improvement in the pace of implementation in many of the infrastructure projects. I think you will see that over the next two-three months.
It’s quite clear that the economy has slowed. A lot of people are talking about FY13 and the growth being lower than 7%. By when do you think we will be back on track?
I think when you are in the middle of what is a process of slowing down, it becomes a little academic and subject to error forecast as to when exactly you will get back to 9%. In the 12th Plan paper, the approach paper, we had set a target of an average of 9% in the five-year period beginning 2012-2013.
Now the approach paper was prepared several months ago, the global situation has been very uncertain and certainly in the last four or five weeks very negative. I think by any standard, the year 2012-2013 is going to be difficult for the global economy. Current projections suggest that the euro zone may actually have a growth rate of only 0% and some people even think it could be marginally negative. Now in that environment, it becomes very difficult to make short-term projections for the next year. But I would hope that we will arrest this slowdown in the growth rate that we are witnessing right now, if not in the third quarter, then perhaps by the fourth quarter of the current year.
So, we have to see what the growth rate for the year as a whole turns out to be, it could be somewhere around 7%, or a little more, that’s possible. The objective for the next year, 2012-2013 should be to get back on to a higher-growth path, I don’t have a growth forecast, but I certainly don’t think 9% in the year 2012-2013 is going to be possible. That was really a five-year forecast and clearly a great deal depends on how the global economy weathers the current storm. If you look at most glob- al forecasts, there are upside forecasts and downside fore- casts, and the difference is this time around the downside fore- casts are very negative.
So, we need to keep our eye on the ball, we need to concentrate on the next three-four months and we need to make sure that growth next year is better than in the current year.
We should keep in mind that if at the end of the year, India grows at say 7%, which is lower than what the finance minis- try’s target figure of between 7.2% and 7.75% is, it will be one of the better-performing countries anywhere, and from there to move up to 8% next year, I think would be actually quite a significant achievement. It depends crucially on whether we can get the momentum of in- vestment back on track and that’s what you should be concentrating on. Nine per cent will come in due course, it’s not an immediate priority to focus on those numbers.
A part of preparing a Five Year Plan for the commission is planning for the kind of electricity outlay in that Plan period. We have hit a roadblock in the progress planned because of what’s happening in terms of gas, fuel supply, that’s becoming a key concern. Is the government doing anything on this?
We agree that power and coal are absolutely crucial. If you look at what’s happening in the power sector, in the last couple of months there’s been a very distinct improvement in the generation of electricity in the country, partly actually because of the much better performance of the hydroelectric sector, but also because the coal-supply situation to the power plants has improved. Now this is a short-term improvement, so we are very aware that ensuring a reasonable supply of coal to the power sector over the next 12 to 18 months is probably the single most important determinant to whether the Indian economy will regain the momentum that we think it is capable of. I think all government efforts should concentrate on addressing these problems. We are looking at them, there are many different problems, either you have to wait for about two or three months to see if it’s having an impact, but I think it’s important to note that in the last couple of months there has been a distinct improvement. If you look at the electricity figures there is a significant improvement and if you look at coal delivery to power stations there has been a significant improvement.
So, do you think we can continue this significant improvement over the next three or four months?
No, I think, I referred to the last two months and there is definitely an improvement, but a two-month improvement is important, but I think if you want an improvement over 18 months you have to go in for deeper improvements in the process of project clearance and project implementation, mainly project implementation. I mean coal supply in the next 18 months is not going to depend upon new coal mines being cleared, but if the pace of production is improved and if the pace of clearing of coal mines is improved then the investment climate will improve and the pace at which people want to go ahead and complete their power plants will improve, bankers’ willingness to lend for power plants will improve and that will lead to a revival of in- vestment in the next 18 months or so.
The other problem is what happens to the fiscal deficit because there is no onetime revenue because of what’s happening with divestment. Last time, we had the sale of spectrum. So, is anything being done to achieve this fiscal deficit target?
Well, I am not aware of special efforts being made on the revenue side. Let me say that if you allow for cyclical variations in the fiscal balance, the fact is if you have a short-term slow- down then there will be a weakness on the revenue front and that is why when people look at the fiscal deficit, really we should not look at the measured fiscal deficit, we should look at the cyclically-adjusted fiscal deficit. Now we know that the budget was formulated at a time when the scale of the glob- al crisis was not known and it was assumed that let’s say the economy, I think, at that time the assumption was that maybe we can grow at 9%. We know that, that’s not happening, government has revised its growth forecast downwards and again, this is not just India. In that environment, it’s clear that revenues will not be forthcoming and I think we have to accept some of that. So, some deterioration in the fiscal deficit is un- avoidable but as long as this is cyclical phenomenon this should not worry us too much.
Let’s talk about foreign direct investment (FDI) in retail, which actually got pulled back. Now the Prime Minister has indicated that a return of FDI in retail is possible, do you see that coming soon?
Well, I am aware of the Prime Minister making that statement and, I think, it’s completely consistent with what the government had said earlier that the measure to bring in FDI in retail was a very well-considered measure. It ran into opposition. Some concerns were expressed by the allies and, I think, what the government said was not that we are rolling this back, but we are suspending its implementation until we can build a better consensus. I personally think that it’s a measure that has a lot of support in the country. I am hopeful that the government will be able to do what the Prime Minister said. I wouldn’t put any dead- lines to it.
What do you make of the November inflation numbers?
We are obviously glad that the inflation numbers that came in for November showed an expected decline, 9.1% on a year-on-year basis. Actually, food prices have continued to decline. I think the prices that came in for the week ending the 2 December; the year-on-year inflation in food prices is down to about 4.35%, on the food front, you are really seeing a base level effect coming into play. We expect that the annual inflation rate will decline further in December. I am not aware that anyone has said it will be 6% in the next two-three months, but I think a lot of us feel that somewhere certainly between 7% and 8% it should reach by March. So, that’s roughly the present forecast. I think inflation would definitely be coming under control, but it may take a little longer to get to 6%, that’s the present assessment.
One criticism has been that, so far, it’s only the Reserve Bank of India (RBI) which is doing its bit and maybe that’s not helping matters too much. Do you think the government and RBI should jointly try to curb inflation?
RBI and the finance ministry work very closely together. The control of inflation is not only a monetary phenomenon. Inflation is affected by a number of supply-side factors, positions regarding the fiscal stance and, of course, monetary policy plays a very important role. So, somewhere between the finance ministry and the Reserve Bank, that coordination does take place.
You actually spoke about infra structure bottlenecks and slowing growth of the Index of Industrial Production (IIP). What is being done, quite clearly there is a bit of a slowdown now?
The decline in the IIP is a matter of concern; it seems to suggest that the slowing of the economy hasn’t actually stopped. I should say that past data indicate that monthly in- formation on the IIP is actually a very subjective error, but there is no doubt that there is a slowdown going on and it has yet to come to a stop. So, that’s certainly a matter of concern. I think one of the very important factors behind that slowdown is a slowing of investment.
This is reflected in the fact that the biggest negative effect is really in the capital goods sector. Now, one general point one should make is that if industrial investment has been getting used to a growth rate of 8.5% or even 9% and they think that in the short run the economy is going to slow down, which it is and we know that then you expect for a very brief period, you could have zero growth or even negative growth because people are adjusting to the fact that inventories are not being rebuilt. We don’t have enough data to know whether this is what’s going on but it would be quite a normal thing that for a very brief period, you get very low industrial growth, then industrial growth picks up.
Question is when is that going to happen. I think that the revival in investment and especially investments in infrastructure holds the key to get in the growth momentum going. The government is looking at a number of sectoral problems, which have particularly affected the pace of investment in the power sector and the linked coal sector. I think we have a group of ministers looking at it.
There are procedure problems, some of them are with the state governments, many relate to just speeding up decision making by the central government and I am hopeful that as a result of these meetings, we will see a definite improvement in the pace of implementation in many of the infrastructure projects. I think you will see that over the next two-three months.
It’s quite clear that the economy has slowed. A lot of people are talking about FY13 and the growth being lower than 7%. By when do you think we will be back on track?
I think when you are in the middle of what is a process of slowing down, it becomes a little academic and subject to error forecast as to when exactly you will get back to 9%. In the 12th Plan paper, the approach paper, we had set a target of an average of 9% in the five-year period beginning 2012-2013.
Now the approach paper was prepared several months ago, the global situation has been very uncertain and certainly in the last four or five weeks very negative. I think by any standard, the year 2012-2013 is going to be difficult for the global economy. Current projections suggest that the euro zone may actually have a growth rate of only 0% and some people even think it could be marginally negative. Now in that environment, it becomes very difficult to make short-term projections for the next year. But I would hope that we will arrest this slowdown in the growth rate that we are witnessing right now, if not in the third quarter, then perhaps by the fourth quarter of the current year.
So, we have to see what the growth rate for the year as a whole turns out to be, it could be somewhere around 7%, or a little more, that’s possible. The objective for the next year, 2012-2013 should be to get back on to a higher-growth path, I don’t have a growth forecast, but I certainly don’t think 9% in the year 2012-2013 is going to be possible. That was really a five-year forecast and clearly a great deal depends on how the global economy weathers the current storm. If you look at most glob- al forecasts, there are upside forecasts and downside fore- casts, and the difference is this time around the downside fore- casts are very negative.
So, we need to keep our eye on the ball, we need to concentrate on the next three-four months and we need to make sure that growth next year is better than in the current year.
We should keep in mind that if at the end of the year, India grows at say 7%, which is lower than what the finance minis- try’s target figure of between 7.2% and 7.75% is, it will be one of the better-performing countries anywhere, and from there to move up to 8% next year, I think would be actually quite a significant achievement. It depends crucially on whether we can get the momentum of in- vestment back on track and that’s what you should be concentrating on. Nine per cent will come in due course, it’s not an immediate priority to focus on those numbers.
A part of preparing a Five Year Plan for the commission is planning for the kind of electricity outlay in that Plan period. We have hit a roadblock in the progress planned because of what’s happening in terms of gas, fuel supply, that’s becoming a key concern. Is the government doing anything on this?
We agree that power and coal are absolutely crucial. If you look at what’s happening in the power sector, in the last couple of months there’s been a very distinct improvement in the generation of electricity in the country, partly actually because of the much better performance of the hydroelectric sector, but also because the coal-supply situation to the power plants has improved. Now this is a short-term improvement, so we are very aware that ensuring a reasonable supply of coal to the power sector over the next 12 to 18 months is probably the single most important determinant to whether the Indian economy will regain the momentum that we think it is capable of. I think all government efforts should concentrate on addressing these problems. We are looking at them, there are many different problems, either you have to wait for about two or three months to see if it’s having an impact, but I think it’s important to note that in the last couple of months there has been a distinct improvement. If you look at the electricity figures there is a significant improvement and if you look at coal delivery to power stations there has been a significant improvement.
So, do you think we can continue this significant improvement over the next three or four months?
No, I think, I referred to the last two months and there is definitely an improvement, but a two-month improvement is important, but I think if you want an improvement over 18 months you have to go in for deeper improvements in the process of project clearance and project implementation, mainly project implementation. I mean coal supply in the next 18 months is not going to depend upon new coal mines being cleared, but if the pace of production is improved and if the pace of clearing of coal mines is improved then the investment climate will improve and the pace at which people want to go ahead and complete their power plants will improve, bankers’ willingness to lend for power plants will improve and that will lead to a revival of in- vestment in the next 18 months or so.
The other problem is what happens to the fiscal deficit because there is no onetime revenue because of what’s happening with divestment. Last time, we had the sale of spectrum. So, is anything being done to achieve this fiscal deficit target?
Well, I am not aware of special efforts being made on the revenue side. Let me say that if you allow for cyclical variations in the fiscal balance, the fact is if you have a short-term slow- down then there will be a weakness on the revenue front and that is why when people look at the fiscal deficit, really we should not look at the measured fiscal deficit, we should look at the cyclically-adjusted fiscal deficit. Now we know that the budget was formulated at a time when the scale of the glob- al crisis was not known and it was assumed that let’s say the economy, I think, at that time the assumption was that maybe we can grow at 9%. We know that, that’s not happening, government has revised its growth forecast downwards and again, this is not just India. In that environment, it’s clear that revenues will not be forthcoming and I think we have to accept some of that. So, some deterioration in the fiscal deficit is un- avoidable but as long as this is cyclical phenomenon this should not worry us too much.
Let’s talk about foreign direct investment (FDI) in retail, which actually got pulled back. Now the Prime Minister has indicated that a return of FDI in retail is possible, do you see that coming soon?
Well, I am aware of the Prime Minister making that statement and, I think, it’s completely consistent with what the government had said earlier that the measure to bring in FDI in retail was a very well-considered measure. It ran into opposition. Some concerns were expressed by the allies and, I think, what the government said was not that we are rolling this back, but we are suspending its implementation until we can build a better consensus. I personally think that it’s a measure that has a lot of support in the country. I am hopeful that the government will be able to do what the Prime Minister said. I wouldn’t put any dead- lines to it.
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