Economy Mar 4, 2013
Four days after the budget was presented to a degree of disbelief in the markets, the government still seems to be in denial about the credibility of its numbers.
Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, put up a stout defence of the key numbers dished out by P Chidambaram - even when they looked less than credible.
In an interview to Karan Thapar on CNN-IBN, Ahluwalia was asked if the cut in the fuel subsidy bill from Rs 92,000 crore to Rs 65,000 crore was credible, and also whether he would have to cut plan outlays again if the subsidy bill surged.
Ahluwalia said correctives had been applied, including the decision to hike diesel prices in wee monthly doses. But when Thapar pointed out that even 2012-13's fiscal correction may have been enabled by pushing the year's subsidies to next year, Ahluwalia claimed it wasn't such a big deal. Reason: the previous year's subsidies were rolled over to this year too. "It is quite possible that some of the subsidy payments due in the current year would be paid next year, but some of the subsidies due the previous year were paid in the current year. So I don't think that makes a difference by itself."
In other words, last year's fudge cancels this year's fudge.
Ahluwalia claimed 6.5 percent growth was achievable in 2013-14 even though 2012-13 may show less than 5 percent growth. "The key thing is...if you have taken the corrective steps to get rid of impediments to growth, projecting 6.5 percent growth in unrealistic."
Ahluwalia also claimed that since diesel prices were being corrected 45-50 paise at a time, the fuel subsidy on diesel would vanish in 16 months. When Thapar pointed out that raising diesel prices would take 22 months at the current rate of monthly increase of 45 paise, and given a Rs 10 subsidy right now, Ahluwalia stuck to his guns. "The total (diesel) subsidy, when all this started, was Rs 91,000 crore. If you are eliminating that in 18 months or even 19 months, the key point is that they are doing 45 paise (and) they may take it to 50 paise."
Missing in all the talk is this reality: monthly diesel prices have been raised only twice so far since January, and meanwhile the loss per litre as on 1 March has moved up to Rs 11.26 from Rs 10. Ahluwalia will need a miracle in oil prices to ensure that the subsidy target is met. Or the 6.5 percent GDP growth number for 2013-14.
But he told Thapar he wouldn't need a miracle. Even if growth falls to 4.8 percent, he expects a 1.7 percent leap next year.
In babudom, it helps to stay in denial.
Meanwhile, defending himself on budget allocation, he blamed the central ministries for not spending the allocated money last year and making his position weak in front of the finance minister, in a fiscally-constraint year.
"In the past, people used to delay preparing their schemes, then rush to prepare their schemes, try and get some money in the last month. But there are rules that say you can only spend a certain proportion of what you are going to spend in the year as whole in the last three months. Using that, basically what has happened is that the slow expenditure, the first nine months of the year, has led to lower expenditure," he told Thapar.
About the doubts that lesser Plan expenditure would hurt growth prospects, he suggested that economic growth will not depend only on government spending and by "the restraint on government expenditure has to be offset by big increase in private investment and public sector investment which is not in the budget. If that happens, the growth will take place."
Here is the full transcript of the interview:
Karan Thapar: How transparent was Chidambaram's budget? Or did it obscure more than it revealed? That is the key issue I will discuss today with the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia. Mr Ahluwalia, the Finance Minister began his Budget speech by saying the Indian economy is challenged. Why do you think his Budget is the right response to that challenge?
Montek Singh Ahluwalia: I think he made that very clear that the biggest challenge right now is a huge macro-imbalance, very large fiscal deficit, which is mirrored in the balance of payments by a large current account deficit. Now we want to get in balance, not run the risk of running out of foreign inflows, so it is important to reduce the fiscal deficit. And that big message the Budget 2013-14 does have.
Karan Thapar: The Finance Minister said in his afternoon press conference that the main message to the world is that the fiscal deficit will be contained. But has he actually and genuinely reduced last year's deficit to 5.2 per cent or has he merely deferred subsidy payments and tax refunds beyond April 1? That's what some people called sleight of hand.
Montek Singh Ahluwalia: Unless you go for accrual system of budgeting, there is always some slip-over. By the same token, a lot of subsidies of the previous year got paid this year. I don't believe that the budget is, in any sense, distorted. It is quite possible that some of the subsidy payments due in the current year would be paid next year but some of the subsidies due previous year were paid in the current year. So, I don't think that makes a difference by itself.
Karan Thapar: He has achieved his 5.2 per cent target on the basis of savage expenditure cuts amounting to Rs 92,000 crore of planned expenditure or almost 18 per cent. Now that is almost clearly going to affect growth. And with the third-quarter coming in at 5 per cent, many people feel that this could push fourth-quarter down close to 4 per cent. That is self-inflicted and self-created problem.
Montek Singh Ahluwalia: Lot of people have been raising this with me. And as Deputy Chairman (of Planning Commission) I should clarify the position. It is not correct to say that the expenditures are actually cut, in the sense that we took a conscious decision to reduce expenditure. What he has done is, that he has applied the existing rules very strictly in order to avoid a bunching of expenditure. In the past, people used to delay preparing their schemes, then rush to prepare their schemes, try and get some money in the last month. But there are rules that say you can only spend a certain proportion of what you are going to spend in the year as whole in the last three months. Using that, basically what has happened is that the slow expenditure, the first nine months of the year, has led to lower expenditure.
Karan Thapar: That explanation would be credible if the amount that has not been spent was less. In this instance, we are talking about almost 18 per cent of planned expenditure amounting to Rs 92,000 crore. Surely, your budget calculation cannot account for such a whopping figure.
Montek Singh Ahluwalia: Some of the strictness, compared to a little bit of laxness earlier, does amount to slight change of rules. But the important thing is that in the current year's budget there is a big increase because we wanted to give a good start to the 12th plan. The fact is that the Ministry has took too long to get the act together.
Karan Thapar: Let us move beyond the manner with which he has removed last year's fiscal deficit to 5.2 per cent to suspicions about his target for next year, where he says the fiscal deficit will be 4.8 per cent. Now, he is projecting economic growth of about 6.4 per cent, which people think is unlikely. He is hoping that the revenues, the tax revenues, will increase by almost 19 per cent, which people think is unrealistic. And he is projecting an increase in planned expenditure of almost 30 per cent, which is whopping. Can you put all together and then achieve a fiscal deficit target of 4.8 per cent?
Montek Singh Ahluwalia: As far as the planned expenditure is concerned, we want that increase, compared to what happened last year and the budget as a whole, the revenues and the planned expenditure, add up to give you a deficit of 4.8 per cent. So the real question is the revenue.
Karan Thapar: But, actually do they? There are two reasons why I want to question you on this. One is that the revenue on which this figure is based looks unrealistic to begin with. Another is that he is anticipating a 33 per cent increase in non-tax revenue, amounting to some Rs 43,000 crore. And then he is expecting a 125 per cent increase in disinvestments, including, sales of other shares. Those are huge targets, which many people think he is not going to meet. And if he doesn't meet them, 4.8 per cent goes straight out of the window.
Montek Singh Ahluwalia: First let us take a look at the revenue side. 6.5 per cent roughly in the real time growth, is that unreasonable? In my view, the current year's growth rate is an absolute low. The CSO had projected it at about 5 per cent. It could be a little bit higher by the time the numbers come.
Karan Thapar: Or it could be a little bit lower because third-quarter is 4.5 per cent and your expenditure cuts, which you are not calling cuts you are just calling them forgone expenditure, affects growth, then fourth-quarter could come in close to 4 per cent, which means your overall for the year could slip below 5 per cent, or maybe 4.8 per cent or 4.7 per cent.
Montek Singh Ahluwalia: Not really. A lot of this expenditure that gets bunched towards the end of the year doesn't actually get spent. It simply gets transferred to state governments and sits around in bank accounts, so that is not really true. The key thing is, I don't believe, that starting at the low point, if you have taken the corrective steps taken to get rid of impediments to growth, projecting 6.5 per cent next year is unrealistic. Ten-year record is 7.3 or 7.4 per cent.
Karan Thapar: You are hoping that the 10-year track record continues and on the basis of that hope, you are, therefore, saying that the revenue expectations, will match up and allow and permit a 4.8 per cent fiscal deficit. But let me point out another set of problems that question 4.8 per cent. This budget is only assuming Rs 65,000 crore as the petroleum subsidy whereas last year's RE was Rs 97,000 crore, which results in a drop of Rs 32,000 crore, amounting to 32 per cent. If on the basis of that you are going to achieve 4.8 per cent fiscal deficit, you are either hoping for a sharp fall in oil prices, which is unlikely, or you are going to savagely cut expenditure once against next year, as you did this year.
Montek Singh Ahluwalia: No, not at all. On the petroleum subsidy, the most important thing is that the government introduced a gradual adjustment in diesel prices, which was 50 paise per litre per month. Now if this adjustment is carried through, and obviously, the budget assumes that it will be carried through and it should be carried through, the entire petroleum subsidy on diesel will disappear within 16 months. This year is going to show a lot of that.
Karan Thapar: No, in fact, it is not 16 months because you are only increasing diesel prices by 45 paise a month. There is roughly some Rs 10 subsidy on diesel at the moment and that rate of decrease is going to take you 22 months. Now you cannot, therefore, assume that you are going to make up Rs 32,000 crore worth of diesel subsidy in one year.
Montek Singh Ahluwalia: Let me put it this way. The total subsidy, when all this started, was Rs 91,000 crore. If you are eliminating that in 18 months, or even 19 months, the key point is that they are doing 45 paise, they may take it to 50 paise. The saving, and getting rid of diesel is big, and I think that is a very important initiative that the government has taken. And if we stay with it, that will reflect itself.
Karan Thapar: So the conclusion you are coming is that if you stay within the diesel saving that you are anticipating, and which you are saying you are committed to, then this diminishment of the oil subsidy, Rs 92,000 crore down to Rs 65,000, is understandable, and therefore the fiscal deficit of 4.8 per cent can be achieved.
Montek Singh Ahluwalia: On this side, that is correct. I should add that not all the diesel subsidy is actually being paid out of the budget. Part of that under recovery was borne by the companies themselves. So the impact on the budget could be very substantial.
Karan Thapar: So the bottom-line is that the 4.8 per cent target, despite all the questions thrown at you, despite all the doubt in the market, is a credible figure next year.
Montek Singh Ahluwalia: It is an achievable figure. The numbers can change and you can adjust accordingly.
Karan Thapar: Let me now move on to another point that makes me say that is in fact not achievable and that is growth. Third-quarter brought in growth at 4.5 per cent, I am suggesting to you, and many in the market believe, that fourth-quarter could come in below that. Therefore the annual growth may not be 5 per cent as the CSO said but just 4.8 per cent. Now, to go from that to 6.5 per cent next year, which is what this budget assumes is a jump of almost 2 per cent. Is it credible?
Montek Singh Ahluwalia: It is credible in one year. We have, in the past, had a year to year, of that magnitude.
Karan Thapar: It was miraculous when that happened. Are you hoping for a second miracle?
Montek Singh Ahluwalia: No it wasn't miraculous. It was the impact of cumulative changes that were being made in policy.
Karan Thapar: Can I tell you why this time around it may not be possible to achieve another 2 per cent jump in growth? Because if you end up, as many people suspect and I know you don't agree, having to achieve 4.8 per cent fiscal deficit through savage forgoing, if not cutting expenditure, then that it will impact growth because once again, there will be question marks on achieving 6 per cent, leave aside 6.7 per cent.
Montek Singh Ahluwalia: We must be clear about one thing. Is the growth strategy dependent on government spending money? In that case what you are really saying is that the fiscal deficit reduction strategy is fundamentally inconsistent with growth. That is worthwhile thing to argue and I don't happen to agree on it. The reason why I don't agree on it is that the restraint on government expenditure has to be offset by a big increase in private investment and public sector investment, which is not in the budget. And if that happens, growth will take place.
Karan Thapar: And that is another reason why people are concerned and questioning the 6.4 per cent figure because as you said, repeatedly in interviews with me, that obstacle to growth, is not the absence of government expenditure, but the fact that so many projects are stalled because of shortage in clearance. Now the problem is that the analysts say that the quantum of projects stalled amount of some Rs 7,00,000 lakh crore. But the Finance Minister has done or suggested very little to speed up that clearance and boost growth. So, the private sector investment that could replace government spending is not going to happen.
Montek Singh Ahluwalia: That is a very distorted presentation. It is true that in the budget speech he didn't announce anything specific, but what he did say was that this is something we have been worried about since the past three months. We already took the steps necessary in the form of setting up a Cabinet committee on investments.
Karan Thapar: Three months ago, and that Cabinet committee has not delivered anything till date.
Montek Singh Ahluwalia: That is not correct. It was announced three months ago, but it was notified in January. It has met twice.
Karan Thapar: But it has still done nothing.
Montek Singh Ahluwalia: No that is also not true. And you will see from his speech that it has met, it has taken some steps. Some issues have been referred for resolution to particular groups to come back. I am very confident, let us say in a month from now, one will be able to say that as a result of these efforts, these are the projects that got cleared.
Karan Thapar: I will tell you why I question your confidence because when I interviewed you, virtually on the same date last year, after last year's budget, you said to me that within four or five months, stalled projects in coal, power, and steel would be pushed through because those infrastructural bottlenecks that you had recognised, would be removed. A year later, we are still talking about removing them and the bottlenecks are there.
Montek Singh Ahluwalia: I agree with you that a year ago, it was my expectation and I think the government's also that when you identify the problems, the system ought to be able to move things forward. Unfortunately, the system was clogged up, which is why you needed a Cabinet committee on investments, which is empowered to take these decisions. We didn't have that then.
Karan Thapar: At least you are being honest in saying that your perception, of once you identify the problem, the system will clear it up, was based on a confidence that was not realised and now you need to actually push the system and the CCI will push it.
Montek Singh Ahluwalia: I sincerely hope so.
Karan Thapar: So you mean that there is still doubt in your mind?
Montek Singh Ahluwalia: When you are looking forward, you should express your hope on how it will work. I am very confident that they will succeed and that is what I meant. We now have the instrument.
Karan Thapar: Let me put it like this. Many industrialists look at the Indian manufacturing scene, which is clearly in the doll rooms, and they say something was needed decisively to be said or done that would lift sentiments and boost animal spirits. And beyond giving them an investment allowance of 15 per cent, they cannot see very much and they are disappointed. This was the moment to fire them with hope and confidence for the future and he hasn't done so.
Montek Singh Ahluwalia: I don't agree with that. The investment allowance is quite a major step. It incentivises people. It is there for two years. It incentivises them to do something. It is mistake according to me that when animal spirits are down, you need a tax incentive. You need to know why animal spirits aren't moving. If they are not moving because projects and clearances are not moving or because of global financial constraints, or because money isn't flowing, you have to address that issue directly.
Karan Thapar: And what you are going to do in terms of bottlenecks in projects is going to do that for you.
Montek Singh Ahluwalia: That plus what we are trying to do on the financial side, and opening up avenues where money can come in. And reduction in fiscal deficit, if it achieved, will release a lot of money in the system. Now we will put more money in to these projects.
Karan Thapar: The Finance Minister said that foreign investment is imperative he frankly revealed that India need $75 billion a year for two years to finance our current account deficit. Has he done or said enough to encourage that quantum of foreign investment to come in?
Montek Singh Ahluwalia: I think so. There are a lot of things that he has done. First, there was a lot of uncertainties in the minds of foreign investors as a result of last year's budget.
Karan Thapar: You mean GAAR in particular?
Montek Singh Ahluwalia: GAAR and all that concern. I think he has, quite categorically, put that aside. GAAR is only going to come in April 1, 2016. There will be enough time, now and then, to clarify things, he has already done some clarification. So those who fear this was anti-foreign investment or anti-legitimate foreign investment, they should be satisfied.
Karan Thapar: I fully accept that when it comes to GAAR, he has actually removed doubts or pushed them three years down the line, which is so far away that people don't worry about them today. But, those weren't the only doubts that were clouding foreign investment. There were concerns about retrospective tax amendments centered around Vodafone, but it affects other companies as well and those are still unresolved despite the fact that the Parthasarathi Shome Committee gave its report 3-4 months ago and now many people believe, after hearing the budget speech, that the Finance Minister has created more doubts and uncertainties about the Mauritius route of investment, which after all brings in 40 per cent investments. So far from removing and clarifying doubts, he might have ended up muddying the water still.
Montek Singh Ahluwalia: I don't think so. Nothing that he said about Mauritius should be a matter of concern for any legitimate, FII investments, which come via Mauritius. As long as they get tax residency certificate, nobody is going to question if they are indeed coming from Mauritius. And I think that $40 billion is all that.
Karan Thapar: He has actually raised a different point. The tax residency will only establish where they are residents of; they need to have another certificate that proves that they are the rightful beneficiaries and that the tax residency certificate is not sufficient for that. You know and I know, that many of them use Mauritius as a post office account. That might put them off.
Montek Singh Ahluwalia: I think this is the kind of technical issue that takes me beyond my competence so if there is any doubt in anyone's mind that a bonafide FII, obviously bringing in money from investors abroad, investing through the Mauritius route is going to benefit from the treaty, they should raise that issue. And I sincerely hope, the Finance Minister will clarify them.
Karan Thapar: You are very reassuring when you say that, and no doubt foreign investors hearing this interview will be reassured with what you said. On the other hand, others in the Cabinet like the Law Minister Ashwini Kumar, in an interview on Thursday immediately after the budget, said, "No, that is a clear and unambiguous message to foreign investors." Now if that is the line that the Law Minister takes, then he sounds to many that he is not even ready to accept that there are doubts created that need to be addressed.
Montek Singh Ahluwalia: I am glad he said that because it must be the case that the "clear message" he is referring to was a message of welcome. In tax matters, some account can always find some little something there, which raises doubts in their minds and I think the Finance Minister will clarify those doubts in their minds when the Finance Bill is tabled.
Karan Thapar: No doubt the Finance Minister has indicated that the DC bill will be introduced in Parliament before the end of the Budget Session but he said that without any roadmap to GST. He didn't say a word about pension insurance, which has been stuck in Parliament for years, not a word on land acquisitions for which the industry is eagerly waiting. Are those reforms now pushed to the backburner?
Montek Singh Ahluwalia: On the GST, I thought he made a very strong statement. He more or less invited the opposition parties, in state governments, to come forth and help the government to make GST a reality. I believe that the way those discussions have gone, there is an understanding, on the part of the opposition, that GST is in India's interest. Now this is also politics, this is a constitutional amendment and nobody can force the pace. I read his statement, and the fact that nobody has refuted that issue, the GST is going to happen. It may not become operative in the year 2013, that is a profound disappointment to me, but, if you are looking at India ahead, if an analyst were to come to a conclusion, it looks like GST is going to be in. A year later, I think they are going to give positive marks.
Karan Thapar: So you are saying that the markets should look the glass full and not glass empty.
Montek Singh Ahluwalia: It may be three fourths full in this case actually.
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