New Delhi: Budget 2010 is judiciously balanced, says Montek Singh Ahluwalia , deputy chairman of the Planning Commission. On the increase in excise duty on petroleum products, Ahluwalia said in an interview that the government cannot continue to subsidize petroleum products. “The excise hike was the right thing to do. I don’t think the hike will stoke inflation,” he said. Edited excerpts:
Various people have termed the Budget middle-of-the-road, no-damage, no-shock Budget. To your mind, what’s the biggest highlight of the Budget?
Addressing concerns: Planning Commission deputy chairman Montek Singh Ahluwalia says the hike in fuel prices will not stoke inflation. Rajkumar / Mint
I don’t think those names are at all correct. I would call it a very judiciously balanced Budget and a Budget that very clearly gives a signal that the government is getting ready to expect a growth rate above 8%. It is also working towards it and has put in place a policy environment that would be investor-friendly and make all this possible. I think it’s a very good Budget with lots of good things in it.
The government has articulated the road map towards fiscal consolidation—with cuts in the fiscal deficit to 5.5% of gross domestic product (GDP), 4.8% and then 4.1%. The worry is how realistic these targets are because, to quote some economists, you are basing them on very narrow adjusters. Would you think these are legitimate apprehensions?
Targets are meant to be optimistic. The central message that you have to take from this is that the finance ministry and the government are quite committed to bring the fiscal deficit down significantly. Whether it is 4% or 4.2% or even 4.3% is much less important. Are we agreed on a fiscal trajectory that brings the deficit down and brings the debt to GDP ratio down? He (finance minister) has clearly signalled that. Obviously, what the deficit is going to be two-three years from now nobody can tell right now.
I would say that there are very critical assumptions in these deficits. One of them is growth. The whole government is working overtime to make sure that growth is more than 8% in the coming year.
Are you worried about the figure that got released as far as the third quarter GDP growth numbers are concerned, coming in at 6%?
No, not really. The third quarter numbers were not a surprise at all as this is when the negative effect of the drought was going to be felt. In the first two quarters, there was no negative effect...I have looked at it and my people assure me that the 6% growth is kind of consistent with 7.2% for the year as a whole. Certainly the more recent information that you are getting on the bounce of industry suggests that the fourth quarter should be reasonably good, especially since the Rabi crop is not affected at all.
What is the expectation in terms of the fourth quarter number? It is 6% now, in order to make it to 7% you will have to be in excess of 7%.
It will have to be closer to 8%. It is not so surprising because 8% above the first quarter of 2009 is not such a difficult thing to achieve. So, the real question you have to ask yourself is, if you do 7.2% this year, can you do better than 8% next year? A lot will depend on the strength of the agricultural rebound. The 7.2% assumes a negative 0.2% (growth) this year for agriculture. Agriculture could very easily grow at 6% or 7% next year with a normal monsoon because we have been growing at about 3.5% per year. So, it makes up for what it lost this year and puts in 7% next year, and with the weight on agriculture, that alone will add a percentage point to GDP.
I am quite confident that more than 8% is a reasonable target. For that, there are things that have to be done. You have got to get infrastructure fixed, make sure electricity flows, etc., but it’s certainly not an unreasonable target. If you get that growth, then going from there to 9%, especially with the world becoming a little bit more normal, is not impossible.
The Economic Survey has talked about the possibility of a double-dip recession in the US. How worried are you about the fragility of the global economic recovery at this point of time and how much of that could change this picture dramatically?
It would certainly change the picture because the old-fashioned idea that we are not affected by whatever happens in the world is wrong. There is uncertainty. I think around the world nobody is predicting that we have high degrees of certainty about the robustness of the recovery in 2010.
I think everybody believes that there is going to be a recovery simply because 2009 was negative, so they are going to see positive growth. But the question is whether this is a positive growth fuelled by a lot of stimulus. They are talking about withdrawing stimulus and they have not decided at what pace to do it, so there are a lot of downside uncertainties to the projections.
If you take a balanced view, it could be a little better or it could be worse. I think growth for industrialized countries in the coming year will certainly be positive. It won’t be as high as it was before the crisis, but it will be a lot better than 2009. From our point of view, whatever we have to do next year is going to be done in a global economy which is better than what it was in 2009.
The targets we set for ourselves are quite reasonable. If the world goes into some sort of economic collapse, we will have to redo our sums but I do not think that is going to happen.
One of the most controversial sort of parts of the speech was what we did in terms of petrol and diesel and that got passed on in terms of a price hike which came into effect from midnight. There were two signals from this. One perhaps is that the government feels it cannot go ahead and implement the recommendations of the Kirit Parikh committee report and hence this change as far as petrol and diesel is concerned. The other signal could be to let the country get used to a deregulated pricing system. The finance minister seems to be batting on the second one. But where does the government stand as far as this issue is concerned. I know it’s not a hike; it’s a restoration as far as the excise duty is concerned. But if you were going to implement the Kirit Parikh report, then why go ahead with the change at this point in time?
The simple reason being there are two separate things that have to be done. The first is whether you implement the Kirit Parikh committee report or not. Many people in the government are quite clear that is the only way to go. In the Planning Commission, we have been recommending it for the last 18 months.
It’s difficult and you need to get public opinion. We are aware that we cannot continue to subsidize petroleum products across the board. You can have a subsidy for the poor but there is no justification whatsoever for under-pricing an imported commodity.
What the finance minister can do in the Budget is link it only to excise duty. He did the right thing. One of the things he had done was to reduce duties earlier. He just restored them. I think it does have the consequence that people feel a rise in the price of a product. There is nothing wrong with that either. What the relationship is between that and Kirit Parikh’s report being implemented is speculation.
After the hike that’s already now come into place, are there concerns that it is going to be even harder for the government to actually bite the bullet as far as the Kirit Parikh report is concerned?
I would hope not. There are two distinct and separate issues. If it turns out that they decide to do the Kirit Parikh report and they decide therefore to moderate taxation as a package, that’s a different issue all together.
But given the need to signal now via the Budget, I think he did the right thing. When you say it’s controversial, I know that some honourable members walked out. I do not know what to say as Parliament has its own rules. They have to make a judgement on how they conduct proceedings. But I wouldn’t say that’s necessarily controversial.
It is legitimate and consistent with what you are doing as far as rolling back the stimulus is concerned. But since you do have this report ready, since you have spoken about the need to actually move towards that, would it not have made sense to actually look at the recommendations, implement those, and make this a part of that?
Not necessarily, because there is sanctity to taxation issues. Having just done a Budget, it’s very easy to lower a tax because Parliament votes a tax. You can lower the tax without going back to Parliament. But by raising the tax during the Budget is actually seeking Parliamentary approval for it. So, it’s been the tradition that if you are going to raise something then you do it in Parliament. He had to do it now, when the Budget was presented.