Diesel deregulation only way to curb fiscal deficit: Montek Singh Ahluwalia

The Union budget will be presented precisely 10 days after the Uttar Pradesh election results and many are wondering that with political compulsion out of the way, will the government be able to take tough decisions needed to revive the economy?

On NDTV’s exclusive show Power of One, Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission and a key economic architect of this government, discusses the same with NDTV’s Sreenivasan Jain.

Commenting on the diesel deregulation issue, Ahluwalia said that diesel deregulation is the only way to curb the fiscal deficit. He also added that the proposal was cleared a year ago.

Below is the complete interview. Watch the accompanying video here.

Given the Finance Minister's own acknowledgement that the fiscal deficit target that he's set in the last budget is unlikely to be met, is that going to be key determinant in this budget and as an economic priority for the government? 
 

Well, I don't want to speculate on the budget. I mean Finance Minister made it, he does intend to get back to the path of fiscal consolidation. I think you must recognise one thing; it's absolutely true that fiscal deficit this year is going to be worse than it's expected. But you know, this is not India phenomenon. Everywhere in the world, 2011 has been exceptionally bad year in the sense that it turned out to be worse than any month because of the Eurozone crisis and that has the downward adjustment in virtually every growth rate. 

Revenues decline and fiscal deficits expand. So everywhere people are saying that fiscal deficits have gone out of control. We have to get back to the path of fiscal consolidation. Elsewhere in the world, people are saying that the solution doesn’t lie in slashing expenditure. Particularly, expenditure is productive but you need to put the fiscal system right so over the time, you'll be able to say that the fiscal deficit is getting back into some sort of sensible rate. Now what that will be, on what it would be, you have to wait for the budget. 

That's true. But when you say that you shouldn't slash expenditure, obviously the one area that you can slash or presumably that’s where the Finance Minister will be looking towards are the subsidies. Now, is that inevitability now?
 

No, for example, my view would be that you should not slash productive expenditure investments in infrastructure, etc. 

Right...

I mean the view of the Planning Commission for the long time has been that subsidies have grown to a level, which makes them actually dysfunctional. Not all subsidies, some subsidies are very critical, let's say, for social welfare and so on.

But fuel subsidy is the big obvious choice?

Yes

That's certainly grown out of control.

But you know even the fuel subsidy size is not that large. What we need to signal is, a clear intention to make a transition to a system, where these would come under control. They are not going to reduce in one or two years but I think people are going to look at internationally whether you are adopting a kind of system for pricing fuel and so on, which shows people that in 2 or 3 years, this subsidy will be brought under control.

But how you are going to be able to do that because fuel subsidy has a great amount of political sensitivity, which is why it took so long to deregulate petrol and which is why it's also been impossible to deregulate diesel despite so many committees having said it. So you have indicated in previous comments and interviews that, it is something that we have to do. But that's not happened?
 

I don't want to prejudge exactly what the Finance Minister is going to be able to say in the budget.

No, this is not necessarily linked to the budget per say. But I am saying generally when one looks at the idea of bringing it in a mechanism.
 

Let's say any adjustment; there are two ways you take it. One is that you do all at one go, the other is politically difficult. So you got to bring it over the period of time. But you have to create an understanding both in the political class and also the public at large that this really is necessary and that's not easy, it's tough. But I think that education, that building of a consensus that we need to do this is something that we have been trying to do and we should even do more of that.

But have you reached a point where you have to now take concretive steps to moving towards diesel deregulation because as you were saying that Rs 68,000 crore that is just one subsidy that can literally sort of bring down or paralyze the entire process; the very fine monetary and fiscal tuning that the government requires.
 

Well, I think that's certainly for us in the twelve plan, we are working towards producing twelfth plan in the next few months. We would certainly say that over the next 5-year period, the twelfth plan is produced; we ought to be able to actually lay out sort of a plan of action. Curtailing subsidies doesn't carry much credibility, if you can lay out a plan of action and this is what we are going to do.

Isn't 5 years a very long period of time given that your fuel subsidy bill is.....

No, I didn't mean that you only do it over 5 years but I mean the plan should say that this is the first year of the twelfth plan and I said 2 or 3 years and I think that's really the frame we should have in mind.

The reason why I am pushing you on this is as I mentioned on the outset that with the UPA elections out of the way at least one big compulsion that may have preempted the government from taking politically unpopular steps like diesel deregulation will be out of the way. Do you think that this is a good window that the elections are over and you have a greater flexibility to move forward on something like that?
 

It is not for me to speculate again when is a good time. The economics of the same are absolutely clear, it was clear a year ago. So in the approach paper, in the 12th plan and in all our policy writings, we have said that this is very important. Now we understand that issues of timing have to be delicately managed and I don't want to speculate when the right time is. 

But you feel we are overdue on that?

I would say yes. I think there is the fiscal deficit issue, which is talked about by analysts in business programs and so on. In those, there is no doubt that fiscal deficit has to be controlled. But I don't think that at the public has quite understood why. It is because we have been having a very good run in the last several years. And most people feel that fiscal deficits have gone up but growth is still pretty good so why are you worried.

So there needs to be an understanding that around the world, if you don't get you fiscal deficit under control, you run the risk of a loss of confidence. You are seeing that in an extreme context for example, the European countries have neglected this aspect for many years. They have to go through very drastic adjustment programmes in order to bring things under control. So you do not wish to face that kind of situation.

You have to take these difficult decisions.

We are reasonably in a good position even today. The reason is that people know that India knows how to grow fast; people know that even though we had a global crisis which does slow down. Still in the current year, the latest official numbers 6.9 per cent GDP growth and this is in an environment, where growth would be 1 per cent. So while everyone at home is saying what crisis?

We have fallen below 7 per cent… 

Wait for the adjusted numbers; I would not be surprised at all when the adjusted numbers are available. I still think that the GDP growth in 2011, 2012 is 7 per cent.

You think it will be about over 7 per cent?

I think the key point though is to be 7 and declining and another is to be 7 and having it hit the bottle; that information we will only know when the third quarter GDP numbers and the fourth quarter GDP numbers come out. If it turns out that these numbers show a kind of stabilization, not a continuing deceleration then we are well set next year. This means that 2012-2013 will go for a bit of a revival in growth. How much I can't say.

Now in that environment, India is one of the countries, which is capable of growing and the fiscal deficit is a big negative at the moment but everybody recognizes that, it's a problem the government as Finance Minister has said. Unfortunately, I don't think the public are not actually aware that if you fail to bring the fiscal deficit under control, many other things happen, which will actually have a negative effect. 

There are concerns on the new food security bill that could again heat up a huge chunk of subsidies. I have heard different figures being tossed around for anywhere from Rs 1-2 lakh crore. I am not sure though.
 

No. Let me comment on the food subsidy because Amartya Sen on one these NDTV programmes, which I also participated in, made a very interesting point. He said that there are so many other dysfunctional subsidies, which are utterly indefensible. The food subsidy is one of the subsidies that is defensible. So, he is very surprised looking at the middle class anger. 

This is not about middle class anger; this is just simply about the government that how they will get the funds to underwrite it. I mean that's the only concern. 
 

Where is the food subsidy, the scale of the fuel subsidy at the moment if you do a full accounting, is much greater than the budget. The subsidy arrangement is fully there, I forget the number is Rs 67,000 crore. 

Somewhere in that ballpark I guess…

Now it will certainly go up as and when the food security bill is put in; it may go up Rs 10, 000 crore or may be Rs 15, 000 crore but there will be a lot of saving if you bring in UID Adhaar, etc. You got to factor in some of the savings. Now in some of the recent work that has been done in the states, where they have tried to read out bogus cards.

Yes....

I mean 10-13 per cent of the cards are bogus so if you get rid of that

You end up saving...

Well I am not saying that you will save net net...

Okay...

But you will have an increase. But that is not a big issue.

So these dysfunctional functions are creating a distortion…

Absolutely!

And that should be the main worry not something like food subsidy…

I think on the food subsidy, we should be is thinking much more about the reform of the public distribution system (PDS) so that the subsidy is delivered in the most efficient way to the person who really needs it. I think the Aadhaar number is going to (do that).

Is it going to help?

There are broader options also, like you could move to a system of cash transfer linked with PDS supplies being available but not at a highly subsidised price.

Which is also supposed to be an Adhaar-linked application, the idea of cash transfers; but I just wanted to ask you when you talked about productive investment, we shouldn’t slow that down, does that mean that the concern that there might be some kind of reduction of funds into government flagships like NREGA or the Aawaaz Yojna or Sarva- Shiksha Abhiyaan.
 

I can’t share numbers with you…

No not numbers…

But since we have completed the annual plan, I am quite satisfied that we are talking about the scale of plan expenditure which is quite decent, so at least I don’t know the rest of the budget and I don’t get involved in that .

Yes...

We have no intensions of scaling down what I would call productive expenditure.

And under productive expenditure,would be all these social sector schemes like NREGA …

Yes…

Education and water ...

Due to the tradition of not talking about the individual numbers, I don’t want to talk about individual programmes. However, I am very satisfied because planning expenditure is not flagging in terms of momentum.

So that is at least the one reassuring news. One piece of good news has been that inflation seems to have stabilized perhaps, even more than what was expected, which has again straightaway led to speculation about interest rates.

Yes, let’s focus on the good news you passed over it very lightly.

Because we all reported it extensively…

We were all heavily criticized and when we were saying that it is going to come down, very few people accepted that. January numbers came in at 6.5 per cent; I would still wish it would come down. In Planning Commission, we tend to regard 5-6 per cent inflation comfortable, probably the reserve bank would say 5-4% per cent. 

But 6.5 per cent is a significant shift…

There is no doubt in my mind that if you look at it fairly, you should accept the fact that the government did say that it’s coming down and it is coming down.

I read 53 per cent decline in vegetable prices, 75 per cent was just the drop in onion prices as a component of that reduction but to come back to the question on interest rates, is this then the right time to consider and expect some relaxations in interest rates?
 

It is not something that I want to second guess. The governor of the Reserve Bank needs to make these decisions.

Of course!

I think the Reserve Bank has already signaled that there will be no further rate hikes. You know again people don’t quite appreciate the importance of these steps. Let’s step back a little the notion that by reducing short term rates you will reduce long term rates. It is simply wrong the interest rates that people are interested in are not the repo rates. Repo is the rate that the RBI charges the banks for lending; the governor has made that point.  

When the fiscal deficit is larger, the government is borrowing a lot form the system and there is a danger of crowding out the rest of the system. Then you have a system internationally where credit available is shrinking so a lot of money that the corporates are borrowing abroad; they are not going to be able to borrow it so easily. Now if you want the long term interest rates to come down, fiscal consolidation and a return of normalcy in international markets is very important.

That could all take a while it is something that may not happen straight away…

Not necessarily. First you have to wait for the budget that’s the importance of the fiscal consolidation signal. Secondly, I am hopeful that the stream uncertainties existed about the Eurozone, where people about two months ago were worried whether the Eurozone itself is going to survive or not. I think that has come down. Because it is clear that the action taken by the European Central Bank of pumping lot of liquidity into the system has reassured the people that at least about the interest rates on the Italian bonds have come down from 7 per cent to 5.6 per cent.

Now if this continues, then this is a global issue that the G20 nations are looking at. But today while people have their doubts on what is going to happen in Greece, I think the general assumption about Europe has become more positive. Now I translate that to what it means that globally the financial situation is actually becoming more and more stable. You may call it optimism. 

You seem to be somewhat be swimming against the current tide of the opinion which suggests that... 

That is a very good question, there is a big change. Let’s make the following point; two months ago people were upset because they didn’t know that the euro can survive. I don’t think anyone is saying that now. They are still not sure whether Greece will be able to stay within the Eurozone or not!

What is negative at the moment probably is that the euro will survive, but they are not sure that Italy will have a very high growth rate. That’s true because you know that Italy does not have an exchange rate; it cannot do a sharp reduction in fiscal deficit without the exchange rate. Basically, the only way they are going to gain competitiveness is through structural reforms. They claim structure reforms they are doing take time. So, in the next two to three years, it is very difficult to see that. 

The current global climate is obviously a factor in what is happening in India. There have been enough concerns raised. Also there is just series of aspects of our own domestic investment climate, which is led to see a slowdown that obviously is a big underlying concern. How much of that is being tackled?
 

It is absolutely true that we should not think that the slowing down in India is purely a mechanical reaction of what is happening globally. There are domestic constraints that have risen as well. As you said, the most important of them is the perception that we are finding it difficult implement projects especially in the energy area now. Remember what is happening here is you got an economy that was growing about 6 per cent, then for several years it grew for 9 per cent.

There is a lot of existing capacity that you can use. Right now, the position is that we need to transit on the infrastructure side to a completely different pace of implementation. Get away from the pace that is 6 per cent and get on to the pace that is relevant for 8 and a half per cent. 

Now you actually got the PMO which is monitoring power projects and trying to ensure that many of us don’t want to be cleared up.
 

Monitoring is a very exaggerated and an ill-used word. Monitoring is watching what’s going wrong. The issue is identifying what need to be done to set things right. Now in the last two months we have also been involved in that our judgment has been and we all share the PMO. Our judgment has been electricity, fuel supply coal linkages; these have got into a bit of our mind, where multiple constraints have prevented the system.

Environmental clearances as well…

Environmental is the core (issue); there have been some internal problems regarding the land acquisition environment. There have been inter-ministerial groups that have looked at it. I am very glad that these issues have now picked up by the PMO and the principle secretary is himself taking an interest; the agenda is very clear. I think the prime minister met with a group of industrialists who work in this area.

All the top power players…

Yes and he assured them that they can certainly take care of some issues may be not all, which have been addressed. This is what in my view we should concentrate on and you will know in a couple of months whether on the ground there is a change. These same people will meet with the principal secretary soon.

What do you make of the view of the SC verdict in the 2G case, the cancellation of 122 licenses was a big setback to the sentiment for the investors, particularly the foreign investments. The companies that have been affected were foreign companies that had invested crore of rupees; they have reacted very strongly to the order…
 

I don’t want to speak on the individual companies. When a company gets a license that is cancelled, they have a problem with that. The international investor’s approach, the reaction to the Supreme Court verdict is not negative. And the reason for that is this has been an area that has generated far too much controversy. Given that there was controversy, the decision of the Supreme Court now sanctifies a particular way of handling.

I think that if we implement the auctioning which the Supreme Court directed and which the government has said it will do. The new licenses that get issued or the new spectrum that gets allocated will be allocated with the complete sanctity of the SC itself. 

So these companies which have invested thousands of crore, stand to lose out surely…

No, but they are free to bid for licenses themselves. It is not as if they are going to lose out, it just means that what they thought they were getting at certain prices at particular decision the court has deemed to be illegal and therefore, the licenses have got to be re-auctioned. My understanding is that they are free to bid for it so it is not like they are being denied the auction. Honestly, they would prefer not to, but globally the action of the SC is also seen as a return to the rule of the law. Most importantly, whatever is done now in the form of a clean auction, will simply not be questioned by anyone and that is important.