This is an extraordinary situation and yet the response from the government was not just conventional but ordinary. Was the interim Budget constrained by constitutional proprieties or was it a huge opportunity irresponsibly wasted by the government? Montek Singh Ahluwalia, deputy chairman of the planning commission, speaks to CNBC-TV18's Karan Thapar on the show India Tonight.
Announcing sops in the interim Budget was not an established parliamentary practice Ahluwalia said. ''It is necessary to have a vote in Parliament on the budget otherwise we cannot spend any money beginning of April and it is not plausible that you expect Parliament in those circumstances to vote a Budget in a very short space of time of a week or so,'' he said.
He said the government had taken enough steps since October to tackle the economic crisis. ''The crisis has been there since the middle of September and the government has been reacting to that crisis through multiple channels and since September up to the second stimulus, a lot of action has been taken and been fed into the Budget,'' he said.
''The government has already taken a lot of actions; the name of the game now is to implement what it has said it will do.''
Were you constrained by constitutional proprieties or have you in fact wasted an opportunity to address those areas of the economy that are under distress?
The finance minister explicitly said that the issue of - I don't know if he wanted to call it constitutional propriety - it is certainly an established parliamentary practice. You have got a government in the last few weeks before a general election. It is necessary to have a vote in Parliament on the budget otherwise we cannot spend any money beginning of April and it is not plausible that you expect Parliament in those circumstances to vote a Budget in a very short space of time of a week or so. So I think it was unavoidable that this would be a vote-on-account (VoA).
Would you say it was unavoidable because you say parliamentary practice might not be permitted some other type of budget but the truth is this is an extraordinary situation which hasn't been faced before and yet the response from the government was not just conventional but ordinary. What stopped you from going to the Bhartiya Janta Party (BJP) and other opposition parties and explaining to them that there was a crisis that required their understanding and cooperation? Undoubtedly they would have agreed, after all former US President George Bush did that with US President Barack Obama, why could you have not done something similar?
I don't think it was necessary. The crisis is not something that happened day before yesterday. The crisis has been there since the middle of September and the government has been reacting to that crisis through multiple channels and since September up to the second stimulus, a lot of action has been taken and been fed into the Budget. Now since the VoA is at a level, which reflects this much higher level of expenditure, the judgement is that for the first four months of the new financial year, the VoA gives the government all the flexibility it needs, it can then have the new government comes in at the time of the regular budget to put in any extra effort.
It is not the case by the way that the government has been prevented from doing what is necessary to deal with the crisis. It has already taken a lot of actions; the name of the game now is to implement what it has said it will do.
Three days before the interim Budget, Lalu Prasad Yadav presented the Railway Budget, he announced 43 new lines if that wasn't considered improper or unconventional then why is it improper and unconventional for the Finance Minister to address genuine concerns with economy which many people thought this was an opportunity to tackle?
Technically, the Railway Budget is very different from the General Budget.
But parliamentary practices must be the same?
Not necessarily. In railways, he makes changes in rates not in taxes.
43 new trains?
Yes, but you can announce new lines, these are things that have been approved by the cabinet before - it is merely an announcement. All the necessary approvals for this have already been done. In the same way the finance minister announced for example the measures taken in regard to the India Infrastructure Finance Company Ltd (IIFCL), this refinancing mechanism - Rs 10,000 crore worth of projects will be supported. This is already something that has been announced, he just put it in the budget speech.
You said that it wasn't necessary to announce at this stage new measures to tackle the crisis. The truth is that unemployment is rising, export growth is declining, manufacturing and industrial output is shrinking what do you think will be the situation six months down the road because if it is necessary or not necessary to act now depends critically on what the situation will be six months down the road?
It is absolutely necessary to act now and what I am saying is that with the action already taken, which includes a number of measures on the tax side affecting exports and on the credit side plus the scope that exists in what has been voted n terms of expenditure, the government has the wherewithal and the means to essentially implement fiscal stimulus measures up to the time of the full budget.
Except that the measures already taken haven't begun as yet to percolate through the economy and produce the results you want which is why your December figures are so worrying and if you are now knowing that things haven't worked, how do you know they will work and if they don't work you haven't covered yourself for the interim?
But that is a normal lag in government policy. Between announcing an expenditure policy and somebody actually finding that orders have been placed on the ground, there is inevitably a lag of three-four months. Instead of distracting attention by announcing new schemes, real focus should be on making sure that what has already been done gets properly implemented and built into the next four months.
The debate is a little different; it is between doing too much which you are reluctant to do and you are believed that you have done enough. The problem with your belief that you have done enough is that you don't know you have done enough because it hasn't worked through, it hasn't produced the results and the few indications from December are in fact that more is needed and yet you are reluctant to do more because you think excessive action would be wasteful?
But December is not at all relevant because the first stimulus package as I recall was done sometime around October. You didn't expect the impact of that - nothing that you do on the fiscal side can have an impact for the first three-four months.
You discovered that it is not sufficient, it is too late to do anything so rather than run that risk
That is precisely why the second stimulus was done late in December. You will never know the result of it, you have to make a judgement whether the additional Rs 40,000 crore plus what you are doing on the IIFCL is going to impart a sufficient stimulus. Now the issue is not it doesn't make sense to do something, fine it doesn't work, it doesn't show up in a month and then do something else. The important thing is to improve its implementation which is what they are doing.
The argument I am doing is because between now and June-July when a new government presents the government you cannot do anything at all and so if you discover come the next six-eight weeks that in fact what you have done in October and November and January hasn't worked through effectively, you have let yourself uncovered because you cannot do more. If you had acted now, you may have taken more action that was necessary but you would have been covered.
I completely disagree with your judgement that what we have done if properly implemented - and that is where we should concentrate - will inject a huge amount of expenditure into the system.
Do you think it is sufficient and if it is not should you not have done more now to cover yourself because then in the next four months you cannot act at all?
My judgement is that the first two stimulus packages which are continuing in terms of expenditure commitments into the next three-four months do constitute an adequate effort combined with the effort to get banks to stop lending. It is a complete fallacy to think that when you have got a major global slowdown, you can solve the problem simply by announcing new expenditure.
You have said to me repeatedly that what you have done so far is in fact a sufficient effort. Many people not just in the opposition whose job it is to be critical but many commentators in the press, many people in industry believe that in fact what you have done is not sufficient, why do you think your confidence is right and their belief that what you have done is not sufficient is wrong?
Let me give you one number which is relevant. This year i.e. 2008-2009 we started off with the fiscal deficit which we thought should be 2.5 per cent and then another half a percent for the pay commission to be 3 per cent, the budget shows that the number is going to be 6 per cent as a fiscal deficit and this does not include about 1.7 per cent which is the bonds etc which are not counted.
Your total deficit is nearly 7.8 per cent.
Exactly and there are a lot of people saying that is too large. The point is if you think to say the government should have spent more money is to say that government should have had a fiscal deficit more than 7.8 per cent. I am not aware of anyone who is saying that.
Absolutely but now in fact the explanation you are giving me for not having taken more substantive action yesterday has got nothing to do with constitutional proprieties or whatever phrase the Finance Minister used, now you are actually saying something that makes sense but that wasn't said yesterday that in fact we cannot do more because we already have a ballooning deficit of 6 per cent, actually 7.8 per cent, to have kicked it even higher by doing more would have been to take the country into a position of near bankruptcy?
The 7.8 per cent is not for the next year, it is for current year. What I am trying to say is that you are telling me that we should have done something in the current year, what I am telling you is we have done a lot. I don't believe it is dangerous, I believe it will be difficult to make sure that the expenditures we have announced actually take place and therefore we should concentrate on making sure that it happens.
Secondly and importantly it is a complete fallacy to think that when you are faced with a major global downturn which affects key sectors like apparel exports and software etc that you counter that impact only through government expenditure, therefore do a lot of other things and we have done that.
But government expenditure is the first best and immediate way. Paul Krugman is recommending all the time and he keeps saying to Obama, it is better to err on the side of doing more than less because actually no one knows how much you need to do
You are 100 per cent right but my point is judge the government's action by how far it has allowed the fiscal deficit in the current year to go beyond what was budgeted.
Q: What you are really saying is that the reason why you couldn't contemplate more at this stage is because the fiscal deficit for the current year has already hit 6 per cent, had you done more yesterday, it would have gone beyond 6 per cent and the truth is it is 7.8 per cent and it could have hit 9 per cent and did you add to that the state deficit you would have been in a very precarious situation?
That is not entirely correct. I also believe that there are capacity limits to undertaking expenditure. As it happens, I think 7.8 per cent if you include the bonds which I think you should is on the higher side and you want to a people thinking that you are on an utterly irresponsible fiscal power.
And if you add to that the state deficit then you are hitting 11-12 per cent?
You probably will get to around 11 per cent if you add the state deficit but that has always been a factor.
So you are saying that there are two reasons, the deficit is already too high and secondly the capacity to absorb is limited and therefore to have spent more money at this stage would have risked a higher deficit without any guarantee of absorption?
I think dominantly if we had tried in the current year to provide for even more expenditure, it is very unlikely that we would be able to spend that money. Look at the next year, we have built on a very high level of expenditure for the purpose of the VoA. The Finance Minister has very categorically said that in his view for contra-cyclical policy the next year, we will need to do more. He has indicated that we need to expand plan expenditure between half a percent and 1 per cent of gross domestic product (GDP) - in my view it should be 1 per cent of GDP, I have been arguing that. In the planning commission we are working on what should be the sectoral distribution of that 1 per cent, how much should go to state, how much should go to the Central scheme, there is enough time to announce that when the full budget comes up.
I understand what you are saying, I understand that constraints that are count are not in fact those of practical politics or constitutional proprieties although that is what the Finance Minister said, the real constraints are to do with the fact that you have already a deficit touching 7.8 per cent and there are limitations to the absorptive capacity of the economy when you have already spent so much. The problem is that in image terms - not in real substantial terms yesterday the Finance Minister looked like a doctor who recognizes that the patient is seriously ill, who has diagnosed the disease, is well aware of what treatment is necessary and yet has opted out of administering the medicine because he prefers to some other doctor four months down the road to do it, that is the image problem, how do you lay that?
I think the image has to be explained partly by us and partly by the press. The important thing is the Finance Minister categorically said that we have actually reacted already, we are planning more and the time to get parliamentary approval for that will be the full budget which would come towards the end of June. The critical issue is this.
I do not believe that the government has denied itself any opportunity to act which would be relevant in these four-five months. Incidentally there is too much of a tendency in industry circles faced with the downturn to make the fallacious argument that if only the government did something, somehow the problems would disappear. This is not true and in terms of government action, the Finance Minister's announcement that we are going to finance a major expansion in infrastructure PPP through the IIIFCL. That is not a budget expenditure but it is a supporting projects of 100,000 crore. How much more do we need?
You are saying to those who are critical of the government and point out that the government's failure to take more decisive action yesterday amongst irresponsibility, your reply is no there is time in hand for further medicine, we know the medicine that is needed and there is nothing lost in waiting three months and in fact there is something to be gained because you don't have a larger than necessary deficit and you have also taken care of the absorptive problem of the economy, so time is on our side in a sense we can afford to wait three-four months till the final budget of the year?
Yes that is substantially correct.
The Business Standard reveals that if you look at the figures in the budget, you are estimating that the GDP next year will grow by roughly 7 per cent, the International Monetary Fund (IMF) and the World Bank have just a couple of days ago said that they don't believe the Indian economy is going to do much better than 5 per cent or maybe 5.5 per cent, so there is a significant difference between the two, how confident are you of your budget figures?
First of all the IMF figures are for calendar year 2009 whereas our figures are for fiscal year 2009 i.e. one quarter difference. Secondly, I think for the last four years if you look at what the IMF has forecasted for India and what India has achieved, they have been systematically understating, maybe they are cautious, maybe they don't appreciate the resilience of the economy but yes we haven't actually indicated what the real growth rate is I think the budget talks about phenomenal growth figure 11 per cent or something.
Of which 4 per cent is put aside for inflation which leaves you with 7 per cent?
I don't think they specifically say 4 per cent but you can make an assumption but let us say somewhere between 4 and 5 per cent and if that were the case then the answer would come to somewhere between 6-7 per cent - let us say it is a mid point of that 6.5 per cent. Actually in the current year we have got an average of 7.1 per cent but in the first half it was around 7.7 per cent and in the second half it was something like 6.7 per cent-6.6 per cent.
I think it would be reasonable to assume that our objective should be to ensure that there is no further slowing down from what we saw in the second half of the current year. That would take the growth rate little below 7 per cent.
But, if we can have a strong stimulus at the time of the full budget, if many of our credit and other monetary measures begin to work better, if the world economy does better than the pessimist think then you could get to something like 7 per cent -between 6.5 per cent and 7 per cent in my view is a reasonable target, is much higher than the IMF.
You said between 6.5 per cent and 7 per cent is a reasonable target but the truth is if you look closely at your budget figures and again the Business Standard has done it this morning, you are only estimating an increase in custom and excise revenue of 2 per cent and service tax of just about 6 per cent. Does that really indicate that the economy as a whole can achieve 6.5 per cent and 7 per cent?
The customs revenues and all are function of what is happening to import, so it is quite possible that if the economy grows at 6.5 per cent, several of the import items will be low, after all the prices are lower.
Service tax it depends on how much of that is coming from what sectors. I don't know what the details are to go into that calculation but there is bound to be uncertainty about revenues.
So you are not saying that this contradicts the expectation of 6.5 per cent to 7 per cent growth?
I don't think they do. My guess is that the finance ministry - this is done in the revenue department and it tends to be cautious in projecting revenue.
Do you think the Finance Minister has been less than cautious in projecting by implication a GDP growth of 6.5 per cent and 7 per cent, wouldn't it has been safer to scale it down to 5.5 per cent?
There is a lot of uncertainty - nowadays internationally if you look at the IMF of the world, they don't have a single forecast, they have a pretty big range and if we wanted to bring that out we should have shown a range.
That would have been better?
We have never done that so it would have been a departure from past practice but in a period of uncertainty, you shouldn't put too much weight on a point forecast.
In part one of this interview you have indicated that your personal preference is that the government should spend an additional 1 per cent GDP in the new budget to boost the economy. The problem is the absorptive capacity and the capacity in the government to spend what it allocates. If I have got my figures correct by the end of last year you had allocated a total of 30,000 crore for the National Rural Employment Guarantee Assurance (NREGA) scheme but only 18,000 has been spent; you allocated something like 31,000 crore for highways only 20,000 got spent and these were areas where if you wanted to you could have spent even more because there is a need to spend on, there are people who want that money to spent on them, roads certainly need to be built. So if you cannot spend the allocated funds in these two areas, how are you going to be able to spend not just the amount that you have already put in but the additional 1 per cent you want to put in when the budget happens?
A lot of these numbers are - for example the NREGA, the figures probably relate to what has been spent up to the end of December. In many of these cases, the expenditures take place in the state government level and it is when they certify that they have spent it that it comes out of the budget.
So there is a time lag.
I don't believe in the case of the NREGA that for the year 2008-2009, I don't believe that you will have such a big short fall when the numbers are finally out.
So why doesn't the finance minster - when he presents these figures in the budget - indicate that in fact they are only true up to December and that by the time full figures come in, the actual level spent will be higher so that the misconception that you cannot spend what you allocate is at least modulated if not removed?
I am not sure which particular number has this discrepancy but in general the revised estimate number is an estimate and I think if you are referring to what happened last year i.e. 2007-2008 that is a very different ballgame.
You are confident that when that additional 1 per cent is spent assuming that your advice is taken and it happens, the economy will be able to absorb it and more importantly the government will be able to implement its intention and it won't just remain paper allocation?
Absolutely, we should be working now and we are working now on making sure that the allocations if they are made at the time of the full budget are made in areas where the constraints on spending have been addressed where there is enough warning given to the states that this extra money is coming so that they can get themselves ready to spend.
Are you talking about creating new procedures to remove those constraints?
I think there is a case for - and we are looking at that introducing greater flexibility in fact I wrote to all the Chief Ministers in December saying that in view of the importance of expenditure this year, we really want to make sure that whatever is allocated is spent. I have invited them to make suggestions what changes in terms of flexibility in the guidelines of centrally sponsored schemes would they want in order to make sure that they can absorb funds and they have started replying.
And you are confident that you have been able to square the circle?
You should never be confident that you have been able to square a circle but I think we are making a very serious effort to overcome the kind of constraints that exist in the system and given time - and you do need four-five months to get this done - if it is done at the time of the full budget, one can be sure that it will actually get spent.