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It's imperative for the govt to reassure investors: Montek Singh Ahluwalia

Interview with Deputy chairman, Planning Commission

Business Standard 

Planning Commission Deputy Chairman Montek Singh Ahluwalia talks about the state of the economy and whether adequate policy corrections are in place, in an interview with Karan Thapar on CNN-IBN’s Devil’s Advocate show. Edited excerpts:

After taking charge of the finance ministry, the prime minister spoke of reviving animal spirits, restoring investor sentiment and reversing the climate of pessimism. Does that mean it is imperative for the government to act decisively and quickly?
Absolutely, and that is exactly what the PM meant.

And, a hint here that it is a serious situation?
For us to blame the world is totally wrong. There are lots of things domestically that needed to be corrected and that’s what we should concentrate on.

First, growth. Last year, it fell to 6.5 per cent, last quarter to 5.3 per cent and, clearly, you need to revive animal spirits if you’re going to get it back up to eight or nine per cent level. How important is it to push through stalled reforms?

When you say animal spirit, what you really mean is the pace of investments must begin (to pick up). To get investment up, lots of things have to happen. One is pending reforms. A lot has to do with better implementation of existing projects which have got stuck. Some of it has to do with the tax-related changes the PM talked about. Taken together, investors need to be reassured that the government is keen to attract and promote investment, keen to support domestic investors.

There are some reforms the government can push through on its own by executive decision. I am talking about FDI (foreign direct investment) in retail and aviation; it’s been talked about. Will it happen?
Certainly, FDI in retail, in civil aviation, should be done. But everything that needs to be done is not a reform. A lot if it is just implementation, bottlenecks being removed.

A second set of reforms are dependent on legislation, the reforms to do with insurance, banking, pension, GST (goods and services tax). Those are stuck in Parliament. Will the government be able to find a way, by negotiation or by reaching out to parties to push those through?
I certainly hope the government will reach out to all stakeholders to build a consensus in Parliament. But, I don’t think the deceleration of growth is because these reforms haven’t been pushed through. Remember, for four years we grew with nine per cent (yearly), with none of these reforms in place. A lot can happen if the implementation bottlenecks in infrastructure which are holding up investment are removed. None of these require legislative changes.

Industrialists note a number of critical projects in the power sector are held up because of the unavailability of coal, the pricing, problems with power transmission. Can that lot of problems be quickly tackled?
Absolutely. The highest priority for getting a quick change of investor mood must lie in overcoming these bottlenecks. The legislative changes are important but they can come over a period of time. We can sort these out in four months or, at least, we can create evidence that these are being sorted, which will change the mood. Do enough that people looking back would say, during this period, a problem solving mechanism was put in place and things are moving.

One factor that has dampened investors’ sentiment, at home and abroad, is the government’s tax avoidance proposal and what is, in common parlance, called the Vodafone hook. Could the government reconsider these?
There are two separate issues. There is the Vodafone tax issue and I don’t want to comment on something involving an individual company. The larger issue is the general tax avoidance rules (GAAR). A number of these were introduced; they have caused a lot of uncertainty among investors. The government recognised that by postponing GAAR’s implementation and said they were going to bring out draft guidelines to reassure people. Most important, the government has often said FIIs (foreign institutional investors) should be reassured that this is not intended to make prejudicial change in their tax situation. That’s the correct thing to do.

The draft GAAR should reassure people. I believe they have just circulated something at the official level, invited feedback; these have taken care of some problems. I think the government should look carefully at informed opinion on whether these rules take care of the problems that are creating difficulties, and address those. It is a very important area and not new. We should carry the steps taken to a logical conclusion.

Vodafone worried investors to the point that George Osborne and Timothy Geithner have raised it. It has also worried other investing companies. Could the government come to a conclusion that because Vodafone was adjudicated by the Supreme Court and then upheld for review, that this company will not be affected by the retrospective amendment in the tax law?
Taxation matters are complex and I don’t want to pronounce on complex matters, particularly when they relate to an individual company. The concern that came up was not just because of Vodafone, though it is possible the high-profile attention complicated everything else. Vodafone is an issue the finance ministry will have to handle.

Might it be sensible for the government to assure investors that the retrospective amendment of tax legislation, something that unsettles investors all over the world, will not happen hereafter?
My view is that a retrospective amendment should be the rarest of things. We are not the only country that occasionally does something retrospective. Other tax jurisdictions have done, but very, very rarely.

Dr Rangarajan said to me three weeks ago that just because others have done it and got away with that is no reason for us to try it. We need to think carefully about doing these things in the future.
I agree.

Let’s come to the second problem we face, the fiscal deficit. Last year, it came at 5.7 per cent (of GDP). If we have to bring it down to (the aim of) 5.1 per cent, is it critical that subsidies be capped at two per cent?
Correct, and that has been the government’s policy, the policy of the previous finance minister. The prime minister has said we need to do it.

If you are really committed to capping subsidy at two per cent, would you accept that diesel and cooking gas (LPG) prices and, perhaps, kerosene need to be raised quickly and substantially?
The view of the Plan panel and any economist on this is that diesel and LPG have to be aligned with global prices. We can keep in mind the need to subsidise really vulnerable individuals, certainly kerosene and, may be, LPG, but otherwise it is not possible to run an economy if you are going to maintain substantial subsidies on these.

If you are really serious about that 5.1 per cent deficit target, remember it is predicted upon a growth assumption of 7.6 per cent, which many believe is unrealistic.
We are not going to get 7.6 per cent. My guess is the best hope we have for the current year, given the slowdown that has occurred, the economy could grow at 6.5-7 per cent, depending on what happens in the next six months. I don’t think 7.5 is possible.

In which case, expenditure has to be cut?
Globally, a rigid fiscal target is not a contemporary practice.

Are you willing to accept a higher fiscal deficit?
A Budget growth assumption. Variations in growth, it is assumed, will impact the fiscal deficit. Most people say, let us determine what is the structural fiscal deficit we want and then, if the growth is less, you should accept the deterioration. That’s what we are doing around the world.

I’m saying we should continue with the 5.1 per cent defined as the structural deficit target and if the growth is less than that, we should accept that the fiscal deficit in the current year might worsen and in the next year’s budget, we’ll have to set a more appropriate target.

The second deficit that worries people is the current account deficit (CAD), an unprecedented 4.2 per cent of GDP. I know the steps you take to improve investment will help balance the CAD and the weakening of oil prices will help you but beyond that, do you have steps?
A very large part of the CAD deterioration in 2011-12 over the previous year was due to a huge import of gold. That is choked off anyway and I think that deterioration is less a development on the current account than a sort of a substitute for the capital outflow. For, when people are uncertain about the exchange rate in other countries, you see a capital outflow; in India, they buy gold.

You’re saying because gold import has been choked off, the CAD next year will on its own come down?
The expectation that the rupee will keep weakening is no longer there. If you remove the gold imports from the accounting, the CAD of the first three quarters of 2011-12 is pretty much the same as it was in 2010. High, but the same.

You’re saying the CAD over a period of time will correct itself?
In 2012-13, it will not be 4.2 per cent.

Are you also saying by that same account, the slide in the rupee will slowly reverse itself?
I don’t like predicting the exchange rate but its weakening has gone a little beyond what underlying fundamentals would suggest.

So, in these two areas, the CAD and the rupee’s slide, the government doesn’t need to do much because those are situations already correcting themselves?
You always need to worry about the CAD but I don’t think it will be 4.2 per cent. If oil prices remain soft, in the current year of 2012-13, we will not have as big a deficit as last year. The key thing is, we’ll still have a deficit, so we need foreign inflows to finance it.

Therefore, you need to ensure the attitude of this government towards investment remains one that attracts investors?
Absolutely, and that is the attitude of the government.

What about inflation, stubbornly stuck above seven per cent?
A year ago, the fear was double-digit. I would be happier if we could say inflation is in the five-six per cent range; it isn’t, at the moment. A lot that needs to be done on the inflation front is keeping the macro (fundamentals) under reasonable control and it is under that control. We will not have the pressure on commodity prices which we had in the previous year. I think that will be a softening effect on oil prices and if we have a reasonable monsoon, given that we have a big food stock, I don’t expect too much pressure on food inflation.

The whole GAAR problem was allowed to develop, when you knew the economy was slowing. Why was that problem allowed to develop in the first place?
In our system, the budgets are secret. As soon as the budget was presented, it was clear that GAAR was going to be a problem. The previous finance minister then postponed it by a year, in clear recognition that what had been put forward was not acceptable. There is a process; when you make changes, you consult. I hope they resolve this uncertainty very quickly.

Was the previous finance minister himself the problem?
You don’t want to be carried away by newspapers. They always try to put one minister against another. The art of taxation is difficult. You have to give credit to the previous finance minister; after all, he postponed the application of GAAR.

Except that within 24 hours of Pranab Mukherjee resigning, course correction has started. The Prime Minister is using a different language; animal spirits are suddenly being worried about.
The India growth story having slowed is not something the previous finance minister was denying.

Previously, they denied there was policy paralysis; now, there is admission that there was.
Using terms like policy paralysis is good TV; it’s not good policy making. When things happen, you take a corrective step. Let’s see how it works out.

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First Published: Mon, July 02 2012. 00:52 IST
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