The Hindu Business Line : Firing from twin engines

The key to reviving the growth impulse is to continue with the effort to accelerate agricultural production, since this will give a boost to our agricultural income and rural demand and simultaneously stimulate a counter-cyclical expansion in investment in infrastructure.

MR MONTEK SINGH AHLUWALIA, PLANNING COMMISSION DEPUTY CHAIRMAN.

G. Srinivasan

With the UPA Government having cleared the confidence vote, the Finance Minister, Mr. P. Chidamabaram, has asserted that the time for implementing the unfinished financial sector reform agenda has come. How far and fast the present coalition could complete the reform agenda in a bipartisan manner when the political opposition has widened after the trust vote is to be seen. Against the backdrop of the myriad unresolved economic issues that plague the nation, Business Line spoke to the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia. Mr Ahluwalia, who shaped the contour and contents of the Eleventh Plan, says the Plan document was based on extensive consultations outside the government involving private sector and civil society bodies even as the composition of the Commission itself was a spectrum drawn from different views and perspectives. “We even had a group of feminist economists to advise us on gender-related issues.”

Mr Ahluwalia asserts that the Eleventh Plan reflects more than any other Plan that the role of the government has changed — “we have now sophisticated private sector with most production-related activities taking place in the private sector in a well-regulated market economy.” Again, the Plan shows that the role of Government has not shrunk but broadened.

“The gross budgetary support (GBS) percentage of the gross domestic product (GDP) has increased and the character of the government role has changed — we are now into education, social sector, agriculture and infrastructure through a combination of public investment where private can also come and public-private partnership (PPP) elsewhere.” According to Mr Ahluwalia, PPP is “a very big part of the programme. We will be very innovative in the Centre and the States have actually taken very bold steps to promote PPP.”

Excerpts from the interview at the Yojana Bhawan office:

With the economy showing distinct signs of slowdown based on tepid industrial growth rate data released recently, what is your view on how to revive growth impulses in manufacturing activity?

It is very likely that growth in the current year would be slower than in the previous two years, but this is a slowdown from a very high growth rate of 9 per cent. Even if the economy slows down to, say, around 8 per cent, it would still be a very robust performance in a year when the whole world seems to be slowing down.

Infrastructure investment is typically oriented to longer time horizon and investors who have entered the pipeline can be persuaded to accelerate the pace of investment even though there is cyclical slowdown in the economy which might discourage other types of investment. I think we can do this by identifying procedural bottlenecks that affect infrastructure investment and eliminating them more rapidly than would otherwise be the case.

While even a capitalist citadel and market economy such as the US has been advocating a reflationary package to effect a rebound in demand, why should not India adopt a similar package to stem slowdown in activity?

The main difference between the US and India as far as the business cycle is concerned is that the US is facing a number of constraints that are reflected in much slower growth rates, which some have feared may actually lead to a recession. In our case, however, the growth rate is actually quite robust but inflation has increased significantly as in all developing countries.

The urgency of bringing inflation under control is greater in our case but I do agree that care must be given to ensure that economic growth does not suffer. That is why I have emphasised action on investment in infrastructure since this will operate as a counter-cyclical measure in the short run, while also contributing to our ability to expand output in the longer run.

Traditionally, private sector investment in India follows the public sector investment. What is your take on the authorities rooting for a massive dose of reflation to revive demand and address the concerns of aam admi?

The term ‘massive dose of reflation’ is not really appropriate in our situation. We are not suffering from a collapse of growth but only a slowdown. Hence the objective of our policy right now should be to control inflation while protecting the growth. We will be more effective in getting back to faster growth once we bring inflation under control. I have already mentioned the need to continue the agricultural revival, which has gone very well so far. The average growth rate of agriculture in the past three years is 4.6 per cent per year, which is more than double the rate achieved earlier. We should also counter the temporary slowdown in investment by an expansion of investment in infrastructure. Certainly, there is need for expanding public investment in infrastructure and the Eleventh Plan places a great deal of emphasis on this.

However, we also need to accelerate flow of finances to viable infrastructure projects being implemented in the PPP mode. We need to explore innovative methods of financing both public sector projects and the PPP projects. A focus on agriculture plus infrastructure would not only contribute to growth but would also make the growth more inclusive.

Is there any trade-off between growth and inflation? What is an ideal exchange rate for the rupee?

There is always some trade-off in the short run since inflationary policies typically involve some moderation of aggregate demand and this can lead to slowing down of growth for a quarter or two. However, ignoring inflation will also hurt growth.

If an inflationary situation is allowed to set in, it affects expectations and expectations of high inflation invariably lead to very high interest rates, which, in turn, choke off investment with negative effects on growth. Some short-term moderation in growth to contain inflation in order to quickly restore macro balances is actually a pro-growth policy in the medium term. As for the exchange rate, I do not think we can pronounce simple rules for exchange rate management in the present situation. It is true that the oil import bill will put pressure on the current account deficit, but there are many other factors that are also relevant. Until recently, capital inflows into the economy were actually more than were needed to finance the current account deficit and this led to a rise in reserves.

If capital flows continue at that level we should not have any difficulty in financing a higher current account deficit because of higher oil prices. Of course, the economy has to pay for higher oil prices, and that burden can fall either on the consumer in the form of higher prices or on the government budget and that presents some difficult choices.

But the foreign exchange needed to finance the higher oil payments is not a problem. There may be a short-term slowing down in capital inflows but I do not expect that to continue and our foreign exchange reserves are more than ample to deal with any short-term problems. Taking a longer view, India is likely to remain a potentially attractive destination for foreign investors so we expect significant capital inflows over the entire Eleventh Plan period. Of course, economic policy has to give a clear signal that we welcome investment and will create an investor-friendly environment and this signal is loud and clear.

Is not the time ripe for making use of the abundant foreign exchange reserves for some productive use in the economy, an idea you advocated at the very inception of the UPA Government?

I have, in the past, advocated using foreign exchange reserves to finance investment in the infrastructure. The changed foreign exchange situation right now makes the suggestion much more feasible. As you know, the Finance Ministry has set up a mechanism, the India Infrastructure Financing Company Ltd, which can borrow abroad and can also borrow from the Reserve Bank of India and channel these funds back into infrastructure investment in India.

This window can be used to improve the flow of funds to investors in infrastructure, and since we expect to have higher current account deficit, it would be easy for the economy to absorb these flows.