Mr Ahluwalia, let's start with the state of the economy. In September the industrial growth fell to just 1.9 per cent, it's lowest in two years. Inflation is at 9.73 per cent, its 10th month above nine per cent and last year FDI was 25 per cent below what it was the year before. Would you accept this is a worrying situation?
Montek Singh Ahluwalia: Well, look this is the worrying year for the whole world. And I think one of the problems when we discuss economic issues in India, we seems to be discussing them purely from an Indian prospective. So let's get the facts right. 2011 is a bad year for the world economy; it was not expected to be all that good but with the explosion of the Eurozone crisis in the middle of the year, everybody's growth rate has been disrupted, capital flows have got disrupted and whenever you look economies are growing much slower than that hoped and that's true for India also.
Karan Thapar: But if you focus on Indian economy and you look at what has happened to industrial product in the first six months of this year, it just grown by 5 per cent compared to 8.2 per cent last year. That suggests this is a well established downward trend.
Montek Singh Ahluwalia: Well, for the current year it certainly establishes a slowdown. You know, we have not denied that, let me say that in start of the year the budget was calibrated on the assumptions that perhaps the economy would grow at 9 per cent. Since then we lower the forecast, when the approach paper was discussed a couple of months ago, we thought it would grow around 8 per cent now we are talking about 7.5 per cent. So it is a slowdown.
Karan Thapar: Deutche Bank is talking about the growth of just 7 per cent.
Montek Singh Ahluwalia: I think there is a range between 7 and 7.5; and I, its very difficult to tell what would be right. Let me say when the economy slows down, there is a tendency to think, you know this slowdown might be continue may be for another three months before it turns up. So it is extremely difficult to know when the turn around will come up.
Karan Thapar: In which case what is you best estimate or may be I should say guesstimate for what GDP growth of this year will be? Clearly 8 per cent is out many people think even 7.5 per cent is difficult.
Montek Singh Ahluwalia: I would say that between 7 and 7.5 you can take your pick. Let me say from my point of view, I don't put much store, and I mean its not our job to do short term forecasting, and I don't put much store whether 7.5 or 7.25 is going to turn out to be correct.
To me the most important thing is, this is a short term cyclical slowdown. We have to do something to reverse it, its not something that will get reversed automatically.
Karan Thapar: I will come to 'What we do', but let's go through some of the other factors that are affecting the Indian economy. The second important concern is the inflation, it's stubbornly above 9.5 per cent and clearly The Reserve Bank strategy for tackling it is not working. Would you except the government doesn't have a clear idea what to do about inflation?
Montek Singh Ahluwalia: No, no I wouldn't accept that. The government is certainly worried about inflation. It's true that inflationary pressure is higher than what we had thought it would be. The RBI has taken a number of steps; it's too early to say that it's not having an impact. You know all the research shows that monetary tightening takes at least three to six months.
Karan Thapar: Except that you have been tightening over nineteen months, you have done it thirteen times.
Montek Singh Ahluwalia: Absolutely.
Karan Thapar: You have increased it by 375 points and inflation has shot up every month.
Montek Singh Ahluwalia: No, no but the point is that we were tightening from a position which was very, very low. Again we were started the tightening at the time, there were lot of global inflationary pressure. That now has eased a bit.
Karan Thapar: Except.
Montek Singh Ahluwalia: So I think the current assessment, Rangarajan has quoted for example in the newspapers today and I agree with that assessment that maybe by the end of the fiscal year which is really March 2012, you will see inflation coming down.
Karan Thapar: The problem with these prediction, you go to the Dr Rangarajan predictions, The RBI governor made a similar prediction, you and Kaushik Basu are making such predictions for a year-and-a-half yourself. The problem with these predictions is that they never come true. I put it to you that these predictions alone have damaged the government credibility.
Montek Singh Ahluwalia: No, its absolutely true that we have been hoping this would happened earlier and to that extend our credibility becomes a question. I mean, we should recognise the short term forecasting is subject to era. But let me say I do not think that we will have the same problem this time around for two-three reasons. First there has been lot of monetary tightening; two global inflationary pressures are now not there. Nobody thinks that you will get another increase in oil prices, metal prices are already coming down. I don't think this is going to be pressure on food prices. Finally lot of the supply side, what is happening on agriculture is actually quit good. So I expect that from January onwards you should begin to see a slowing down of inflation and hopefully when the figures for March come, it could be 7 and 7.5 per cent.
Karan Thapar: You know people listening to you, will take confidence, but they will still say to themselves that they've heard this prediction from you or Kaushik Basu or Dr Rangarajan so often, that if the government won't admit that it hasn't got the clear strategy, then they feel this government is hoping against hope. And chances of it, to be turning out to be correct are fifty-fifty at best.
Montek Singh Ahluwalia: No, I mean I can't blame people for saying, we have heard that before because we have said it before. I do think the test of this is do the show again in February, and if by the February you will have the January data and if it turns out that inflation is not coming down by then, then we really don't know what we were doing.
Karan Thapar: Alright, if inflation hasn't begun coming down by February than government really doesn't know what it is doing, your exact words.
Montek Singh Ahluwalia: I would , I regret to say , I would have to admit that.
Karan Thapar: You would have to eat your pugree at that time wouldn't you?
Montek Singh Ahluwalia: Absolutely, let me say that either we are watching this very closely. My internal assessment is that when the data of December becomes available, which would became available in January; they will show significance beginning of a decline.
Karan Thapar: And if not?
Montek Singh Ahluwalia: Though in January we will know whether it is working.
Karan Thapar: And if not, then the government is in serious trouble?
Montek Singh Ahluwalia: If not, the government should be doing something else.
Karan Thapar: Alright, let's then come to the third problem that affects the economy and that's the fiscal deficit target. With growth slowing down, with tax collection less than the year, before with oil prices higher than the year before and with your disinvestment target unlikely to be met, do you really believe Pranab Mukharjee can make it 4.6 fiscal deficit target?
Montek Singh Ahluwalia: I wouldn't actually expect government to meet 4.6 per cent fiscal deficient target and I know the finance minister has been very careful, he has said I can't say now. But I will go little further and I think some of his officials have done that. The truth is that when you set a target, it's what you called a "Structural Fiscal Deficit Target". Which means if everything goes as planned the fiscal deficit would be 4.6 per cent, if there is a growth slow down then actually to retain the same fiscal stance you do see some deterioration in the fiscal deficit. How much deterioration this only the finance minister can tell that.
Karan Thapar: Or let me put this to you, analysis are predicting that the deterioration could be as much of 5.5 per cent. A whole per cent above the target.
Montek Singh Ahluwalia: One per cent more?
Karan Thapar: That's right.
Montek Singh Ahluwalia: That is not impossible in my view and quite frankly I am sure the finance ministry has more information. Part of the problem with that projection by the way, is that it assumes that all the expenditure that is planned in the budget will take place. But then there are some unexpected increases in subsidies and so on.
Karan Thapar: Huge increase in subsidies.
Montek Singh Ahluwalia: It may not end up, I don't know what the budget will show but I would certainly say that, given what we know has happened oil prices increases and etc etc.
Deterioration of up to one percentage point of GDP, if all these things are reflected in the budget, cannot be ruled out and it's quite possible.
Karan Thapar: So you wouldn't be surprise if the fiscal deficit comes in 5.5 per cent.
Montek Singh Ahluwalia: Well that depends what happens on expenditure.
Karan Thapar: Suppose it goes higher than that?
Montek Singh Ahluwalia: I doubt that, that will happen.
Karan Thapar: So somewhere around 5.5 is your expectation.
Montek Singh Ahluwalia: Could be less because we don't know, you know one of the things that happens I must explain this, is that the budget builds in certain about of expenditure, there are very often reasons why that expenditure cannot take place. So what happens is that supplementary demands are placed in Parliament so that other expenditures can take place. Now if the finance ministry wants to avoid and increase the fiscal deficit target, they can just whole back on these.
Karan Thapar: Absolutely.
Montek Singh Ahluwalia: And why don't know.
Karan Thapar: What you are actually hoping, is that the government won't spend as much as its budgeted to spend so that the fiscal deficit isn't as bad as it could become? That's really what you're hoping for? But the thing is that cutbacks are the only things that control the fiscal deficit, nothing else.
Montek Singh Ahluwalia: I think that's substantially true when you are running, going through a shortfall.
Karan Thapar: Let me come to the fourth problem that faces you, the continuing Eurozone crisis and the economic uncertainty in America has meant that export growth has slumped to just about 10 per cent, as a result your trade deficit is hitting 93.7 billion, some papers say it's the highest its been in 17 years and the projections are it could cross 150 billion by the end of the year. That's another worrying situation, isn't it?
Montek Singh Ahluwalia: Well , its certainly true that export growth in the last couples of months has slowed down. I think the trade deficit figure is a subject to a, I believe that there are some data problem, there always are data problem. We have looked at the picture and it may not be as bad as what you say it is.
Karan Thapar: But it still could be, you're not sure?
Montek Singh Ahluwalia: But it is our expectations, it is my expectations that the trade deficit this year will be higher. But I do think that the external financing that we have would be able to handle it.
Karan Thapar: Except for the fact that the trade deficit is going to keep your Rupee weak and a weak Rupee is going to add pressure to the inflation. So it has a cascading effect to all the things you want to correct.
Montek Singh Ahluwalia: No, I mean , if you are running a market determine flexible exchange rate that's one of the signals that you get to see in the markets. How much weak that depends on whether market over react. So I would not judge too much on that scope.
Karan Thapar: The problem with the market is that Moody's has just down graded the outlook on Indian banking to negative and with government yields on debt hitting 9 per cent. Websites in America are asking whether India might be going down the Italy or the Greece way. Now that's unlikely but what it shows is that confidence in India is dented.
Montek Singh Ahluwalia: Well, it's not just unlikely, its absurd. I think both the rating agencies are doing, is they were caught, in my view very seriously wrong by completely failing to spot the sovereign debt crisis in Europe. They have spotted it very, very late; they're covering up so that they can downgrade. They downgraded the United States, so quite frankly downgrading the Indian Banking System is just a part of the needed response.
Karan Thapar: You don't think this is loss of confidence or a denting of confidence in India.
Montek Singh Ahluwalia: No its sending up a warning signal because they don't want to be caught not having been sent the warning signal.
Karan Thapar: Is it a warning signal?
Montek Singh Ahluwalia:Let me say, the warning signal, our economic position, as is the case with all countries, has weaken because of the Eurozone. We face new challenges and there is erosion in the confidence not just in India but in the global system. Animal spirits are down, investors are choosing to be liquid rather than putting money in to the project. So everybody faces this problem. We do have a problem but I would not read too much on the downgrading of banking system.
Karan Thapar: Mr Ahluwalia if there is a silver lining on the dark and gloomy horizon that is infront of us, it must be the fact that the government is beginning to talk about reforms and people believe it might be ready to bite the bullet of second generation reforms. The real talk is about the possibility of FDI in retail and permission for foreign airlines to invest in domestic carriers. But is that for real or is it just talk?
Montek Singh Ahluwalia: Well in the case of FDI for retail, as every newspaper points out, the ministry concerned is bringing a note before the Cabinet so hopefully we will know what the decision is.
Karan Thapar:Do you really believe this is for real because in May Kaushik Basu headed a committee that came down in favour, in July the Committee of Secretaries was in favour, in August Anant Sharma said he was in favour, and then you had newspaper headlines saying it wasn't going to happen. Now, they are talking about it again.
Montek Singh Ahluwalia: I think in all our efforts of reform we have tried to bring about the maximum amount of consensus as possible. So while there's been a lot of consensus in my view of the government, there's been less of a consensus in the political class. And, therefore, it's not surprising that they have a few more consultations and take a little bit more time. You know, if as a consequence of doing more consultations you get something done where nobody says they weren't consulted and it takes a few months longer, there's no big deal.
Karan Thapar: But what's your hunch? Do you think we will see FDI in retail before the end of this calendar year?
Montek Singh Ahluwalia: Well look I've been in favour of it for the last six months and I hope that it will happen. But you know what you're asking me is will the Cabinet support this proposal. And it's not proper for me to pre-judge. My view is it should happen, there's no question there.
Karan Thapar: So you're hopeful?
Montek Singh Ahluwalia: Well I'm always hopeful when things I think are good things are going to happen.
Karan Thapar: What about permitting foreign airlines to invest in domestic airlines. Is that likely?
Montek Singh Ahluwalia: I think that's a good idea but I'm not aware if that's actually currently under consideration. And you know, given the status of the airlines, not just in India but elsewhere, I'm not so sure that if you will be able to induct a lot of capital. But I see no reason why we shouldn't open up airlines to some foreign investor.
Karan Thapar:Let me put it like this, suddenly there seems to be on the table three-four measures that have been talked about for months, if not years, and the focus of attention seems to suggest that it could be happening now. We've got clearance for FDI in pensions, the new manufacturing policy has been agreed by the Cabinet, you're talking that there's a serious hope of FDI in retail. What message would all of this, if it does happen, send out to the world about India, its government and the economy?
Montek Singh Ahluwalia: Well I hope it sends out the message that some of the negative messages of, you know, government doesn't want to do reform were not well founded. Let me say that in a way this whole focus, as if we don't want to do reforms, is somewhat sort of an exaggeration. I mean when the economy goes down, people immediately look to reforms as if doing some reforms will speed it up. Remember last year, 2010-2011, people said that 'well, we're a bit slow' and the economy grew at 8.5 per cent.
Karan Thapar: But this year's economy is not growing at 8.5 per cent and the reason why people are sceptical, if not totally doubting, about this government and reform is because critical things like GST and DTC, pension aside, banking and insurance – either stalled or stuck. We now know that GST won't happen in April, there's now talk that DTC may not in April. So are these irretrievably stuck in Parliament or can they be expedited?
Montek Singh Ahluwalia: Well, let me respond to that important question. You know, when you say irretrievably stuck, major legislation which changes major systems can take a bit longer than people think.
Karan Thapar: GST has been delayed by two years
.
Montek Singh Ahluwalia:No, but you know, we set targets hoping that it can be done quickly. As far as DTC is concerned, you know it's more like encompassing what is the actual law into a new legislation; I mean the tax system is pretty much there, the direct tax system which is there will just get enshrined in better legislation. GST is a very important thing and I think it involves a constitutional amendment. By the way, they haven't said it can't happen in April doesn't mean it won't happen during the year. It might take six months longer.
Karan Thapar: I hear your assurance but the problem is critical people who are your major investors and industrialists like Mukesh Ambani, Azim Premji, Deepak Pare, Jamshed Godrej, have all come out at various times in the last couple of weeks saying, 'there is a complete absence of decision making'. They are complaining about policy paralysis. They don't accept your explanation, why should the world outside?
Montek Singh Ahluwalia: Well maybe after a few of these measures they may change their minds. But let me say that I think in this field it has been focussed a lot more on decisions that are holding up infrastructure not these reform issues, I mean they are also important. It is something the government is very keen on and a lot work is being done in the government is how to unclog projects in the energy sector which have got stuck through one or the other implementation sort of thing.
Karan Thapar: But many of those are in environmental clearances that are holding up the projects and the change in minister doesn't seem to have made a difference.
Montek Singh Ahluwalia: No that's not actually fair because we have an empowered GoM presided over by the finance minister.
Karan Thapar: Look at the process Lavasa had to go through to get its clearance.
Montek Singh Ahluwalia: If you're saying that they are not moving as fast as they should, you're absolutely right. In many of these projects, let me say, what has happened is projects have moved ahead without getting the clearance they should have got and it's been difficult to determine how to sort of find a solution. That's certainly true in all the environmental clearances.
Karan Thapar: What you're suggesting is that there isn't a proper process and procedure for clearances. Seven years after the UPA government came into being, if that is still the state of affairs, then it's a very sad testament on that government.
Montek Singh Ahluwalia: When you say that there isn't a proper process, there is a process but I think that process was not always followed. And very often, promoters of projects didn't rigidly follow the process thinking that it will be taken care off later. And what seems to have happened, quite honestly, is that the public wants a much more transparent adherence to rules and so if rules have been framed, even if they are not good rules, we follow them or change them, and that comes with a cost. I'm not saying that we haven't borne a cost but we are aware of the problem and we are taking corrective steps.
Karan Thapar: Right. You say you're aware of the problem and you're taking corrective steps. My last question talking today about the possibility of reforms, you're hopeful that FDI in retail could happen, but what if it doesn't happen? What if the year ends without these reforms happening and the hope of today is quashed? What message then goes out?
Montek Singh Ahluwalia: I think, let me step back, a lot of the focus on reforms is not so much that the economy can't grow 8.5 per cent without reforms and FDI retail.
Karan Thapar: It's not 8.5 per cent.
Montek Singh Ahluwalia: It isn't, but it was last year and there were no reforms.
Karan Thapar:But we need reforms to go back to that rate of growth.
Montek Singh Ahluwalia: I don't want to underestimate this. In my view the most important thing we should do, is to take care of bottlenecks in the implementation of investment projects. The second thing, quite honestly, is that investment spirits are down across the world.
Karan Thapar:Revive them?
Montek Singh Ahluwalia:Yes. But when you say revive them do whatever you can to make India look.
Reviving them is going to be a global event, we can't counter all that.
Karan Thapar: Do what you can to make India look good.
Montek Singh Ahluwalia: Absolutely.
Karan Thapar: On that a pleasure talking to you.
Montek Singh Ahluwalia: Thanks Karan.
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