‘You’ll see inflation coming down in three-four months’

'You'll see inflation coming down in three-four months'

It is a busy couple of weeks for Montek Singh Ahluwalia, deputy chairman of the Planning Commission. On Monday, the commission will discuss a key report on agriculture from a sub-committee of the National Development Council (NDC). Later in the month, the council will also meet to discuss agriculture, especially the specific strategies that ought to go into the 11th Plan which is under way. At issue is the 4% agriculture growth target, one that Ahluwalia, who has assumed a key position in the think tank driving economic policy under the ruling United Progressive Alliance, says is not something that ought to be lowered. A seasoned Delhi economic policy insider, Ahluwalia sat down with Mint to discuss a range of economic and policy issues ahead of the key agriculture meeting. Edited excerpts:

Though agriculture credit has increased and so has government expenditure on agriculture, why is it still difficult to achieve 4% growth in agriculture?

First, let me point out that agriculture growth in the last couple of years has edged up. Before this government came into power, the growth rate was less than 2%. In the last three years, the growth has been well above 2%; though we are not at 4% yet. As for credit, this is only one part of the corrective policy needed for agriculture.

To really get a breakthrough, we need to operate on several fronts. We need to improve the quality of management of irrigation and to optimize the use of water in the areas where irrigation is not possible. We need to improve the extension service, which transfers knowledge to farmers so that they can close the yield gap—between the yields that are actually being achieved at the farm and the potential. Our studies show that you can double yields in many areas and certainly increase them by 40-60% with existing technologies. To get agricultural growth going, we need to devise an agro-climatic specific strategy, which in the short run—the next two-three years—should be able to close the gap between actual and potential yields.

What will improve the situation then?

We need better inputs and a more intelligent use of inputs, more investment, better availability of credit and seeds.Agriculture also involves animal husbandry and fisheries and these segments are growing. They have issues of their own, in many cases development of a marketing capability is required.

For instance, you need a cold chain when dealing with perishable commodities like vegetables, flowers, milk and milk products, and fish to prevent spoilage and loss of value. This is why the linkage between the farmer and the consumer has to involve the corporate sector. To cater to different markets such as the Indian table market, or processed food market or exports, you need different qualities. The role of contract farming becomes important in this context. Some are worried that contract farming might lead to a loss of control on the part of farmers. But we believe that it is possible to have a well-regulated system of contract farming that protects the interests of the small farmers.

Are these issues on the agenda of the Planning Commission meeting on agriculture scheduled for 14 May?

The meeting will review the report of the NDC sub-committee on agriculture. The Planning Commission and ministry of agriculture will give a presentation of major policy issues. A lot of work has been done over the last two or three years. We have the National Commission on Farmers headed by M.S. Swaminathan, which has submitted five reports. The Planning Commission itself, for the 11th Plan, has set up several working groups. Recently, we appointed a steering committee under Prof. Hanumantha Rao, which included other eminent academics to review all these available reports and identify the key messages coming out in order to get to 4% growth.

And what is proposed for the council meeting at the end of the month? Do you think there is a case for revising growth targets for agriculture?

The meeting is for consideration of the NDC sub-committee report, which is an input for the 11th Plan. We will also discuss agri strategy for the 11th Plan. I think the 4% growth target in agriculture is a good one. We are not proposing to lower it. It’s not easy to do, but we are determined to achieve it by the close ofthe Plan.

What is your take on enhancing public investment in agriculture and larger role for private partnership?

In our view, one of the reasons why agricultural growth has been slow is that there has not been enough public investment in critical areas. The government did not build enough roads, especially rural roads, but that is happening now. Besides, there was not enough investment in irrigation, watershed development and ground water development. We are definitely going to do a lot more of that. Of course there’s a lot of private investment coming too, especially in areas of on-farm investments, cold chains and other key areas.

Even inflation is largely due to supply constraints from agriculture. Why then do you believe that the problem of inflation will go away soon?

It is not just agricultural products that are causing inflation, but there is no doubt that what people are most worried about is the rise in price of primary goods. People tend to be most worried about that because it’s food and affects the aam aadmi (common man). It is certainly true that supply constraints are a very important factor here.

How do we take care of the problem? You can take care of it by importing more so that prices don’t rise and the government is doing this, and could do more if needed. You take care of it in the short run by doing whatever you can to increase production—that is also something we are working on.

However, inflation is also a macroeconomic problem, the prices of non-agricultural products have also gone up. The Reserve Bank of India has taken a number of steps that, I feel, are in the right direction to cool the macroeconomic imbalance to the extent that it exist.

The latest inflation numbers have gone below 6%. The impact of the anti-inflationary policy operates with a lag. It will slowly bring inflation down. I am very confident that you will see inflation coming down in the next three-four months, gradually, to lower and lower levels.

It seems that states are increasingly dependent on Plan funds. Do you think India needs to adopt a different model which gives states greater independence?

We have really two choices; we can either give the money to the states in the form of normal central assistance and have general discussions on what they should do and hope that in that interaction there is some impact that translates into action. Or, we can put the money into schemes announced by the central government that focus on particular aspects that we want the government to focus on. We are actually doing both.

Would you say that China’s astounding growth has been because it followed the exact opposite model of governance, where the provinces have much more independence?

The provinces in China are much stronger and fiscally more self-sufficient. The Centre-state relationship there is not as crucial as in India since Chinese provinces have considerable independence. If you want to achieve the per capita income of China, which is twice as much as in India, we have to grow at 9% per year for 10 years. At the end of those 10 years, we will reach where China is now.

But don’t you agree that some central assistance schemes like the accelerated irrigation benefit programme have just become a source of income for states? No wonder then projects are being delayed indefinitely.

That’s not a totally correct presentation. We must remember that 90% of the irrigation expenditure is actually done by states. All that the central government does is put 10% to finish a project here or there. The real problem is that most state governments have taken on a huge number of projects. Given the available level of financing, it will take them 40 years to complete these projects. So, whether the central government gives a little more or not does not alter the basic problems. That is a real issue.

How tough is it to create and support an investor-friendly atmosphere despite some strong anti-globalization rhetoric in India?

Any worthwhile reform is tough, but the good news is that the economy is reforming and is performing well. However, our job is to look at those things that are not happening, and focus on closing the gaps. But it is wrong to assume that nothing (good) is happening. The economy is growing at the rate it should, poverty is also going down, more younger people are getting opportunities. We are concerned about the gaps. Not all young people are getting opportunities, but that does not mean there are none. There is buoyancy in the economy, but it is not spread as widely as it should have. That’s a matter of concern.

Are we looking at 10% growth during the 11th Plan period? Besides agriculture, what are other critical areas that will concern you inthe future?

We are projecting growth at 9%. For the last couple of years it has been 9%, but may be this is because the demand pressures have extracted more growth from the system than the underlying sustainable supply. That’s why there has been a little bit of overheating and we are correcting that. The underlying growth rate at present is somewhere around 8% plus, rather than 9%. We want an average of 9% for the Plan period. We need to accelerate in order to end the period above 9%. In the approach document we had said we should go from 8% to 10% at the end of the Plan. We will redo the numbers, but we certainly want to close the 11th Plan well above 9%.

Other critical areas include infrastructure development, which should be able to support a 9-10% growth rate. Besides, there are the health and education sectors, which have not been growing at desirable levels.

What is a priority for India today—to promote financial inclusion or to lower interest rates for rural credit, for instance?

Most important is to make credit available. There are far too many people who don’t get credit. The present rate of interest is 7%, but the trouble is that a large number of farmers don’t get credit at this rate. Therefore, they have to go to the moneylenders who charge between 60% and 80%.

Many people think that interest rates should be lowered from 7%, but I think that is a mistake. In my view, it is much more important to increase the number of farmers who get interest at 7% rather than lower the interest rate below this.

Some states have already managed to lower rates to 4-5%.

They have managed it in the sense that they are giving a subsidy. The basic cause of farmers’ distress is not because they cannot repay the 7% interest but that they are not getting access to credit at that rate, which is forcing them to moneylenders, who are charging very high rates.

The problem is, if you lower the interest rate you end up squeezing the credit flow. It is wrong to think that by delivering a policy credit will be available at 4%. Systems don’t work that way. The lower rates will have to be subsidized through the Budget, which means that money that can go into investment in agriculture will be used to subsidize credit instead. Lowering the interest rate is likely to discourage banks from lending and what they lend will go only to richer farmers and not poor farmers.

The most important thing is to revive the cooperative credit system. Populist policies have led to the collapse of credit co-operatives and pushed people to informal sector lenders. To revive the cooperative sector, we need to recapitalize it which requires public funds. The proposal is that states should adopt a form of cooperatives that depoliticizes the system. If they are willing to do that, the government/finance ministry is willing to give money to them. That’s a much better way to spend the money rather than subsidizing the interest rates below 7%.

But I must confess it is not easy to persuade politicians of the wisdom of this action.

Do you agree the lower incidence of poverty as seen in the latest National Sample Survey Organization (NSSO) numbers is a result of redefinition of poverty?

No, it isn’t. The NSSO changed the definition in 1999-2000, when they tried to improve it. As a result, the 1993-94 data was not comparable with the 1999-2000 data. We now have data for 2004-05 which gives two different estimates, one comparable with 1999-2000 and one with 1993-94. Both show a decline in poverty. The problem really is that the decline in poverty has not been as much as we had hoped for. That is why we need to do much better.