New Delhi: Deputy Chairman of the Planning Commission Montek Singh Ahluwalia commenting on the current rift between the Trinamool Congress and the Congress on the Budget 2012 said that nobody quite says that they are going to agree something unless they agree or until they are ready. Speaking to Karan Thapar on Devil's Advocate, Ahluwalia said that we should wait for the reforms to show their results.
Karan Thapar:Hello and Welcome to Devil's Advocate, and a special interview on Friday's budget with the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia.
Mr Ahluwalia, let me quote to you some of the things that have been said about the budget. It's been called a missed opportunity', they say it has no vision', and it has little things that don't add to very much'. And then on Saturday, it has been called the second worst budget in India's history. How do you respond to that sort of criticism?
Montek Singh AhluwaliaI think it is very important to realise, we spend too much energy focusing on the budget. I think we are in a difficult situation and somehow there is an expectation that a budget could somehow tackle all of the problems. I think this is wrong. You do need the budget to do some important things right but most of the things that need to be done is actually outside the budget. So a lot of the feelings that the budget hasn't done this, budget hasn't done that, I think misread what it is meant for.
Karan Thapar:So in other words we expect too much from the Budget?
Montek Singh AhluwaliaI think so.
Karan Thapar:Ok, let me ask you a simple question about this budget. What would you say are the three important measures announced by the budget? Or are there none at all?
Montek Singh AhluwaliaNo, it's a good question so let me give you just three. Number one - it quite clearly acknowledges that the fiscal deficit went out of line. And I think the Finance Minister deserves a lot of credit for sort of coming out with what it is like and then laying out a sort of roadmap for the next three years.
Karan Thapar:You mean there was a real possibility, he might be not upfront about it?
Montek Singh AhluwaliaWell, you know I won't put it that way. For the last six months, people have been speculating that the fiscal deficit is obviously going to exceed. And that is true everywhere because growth is slowed down. I think he came upfront and put together fiscal deficit number and a fiscal deficit target, not only for the coming year but for the next two, which is more realistic than what was there earlier.
Karan Thapar:What are the other two?
Montek Singh AhluwaliaSecond, I think he has given a very strong signal but it's not as if it does every thing. A very strong signal on the infrastructure sector, which needs support and investment and also we have to do lot of things in the infrastructure sector which will happen. I think that's an important step.
Karan Thapar:And here the important step, is to increase the 60 thousand crore of tax free bonds in particular and as well as permission to borrow from abroad.
Montek Singh AhluwaliaYes those are budget related plus the fact that the infrastructure debt fund which was an initiative worked on over the last year, is now done and the first of them have taken off. So that was important.
Karan Thapar:And the third?
Montek Singh AhluwaliaI think the third is the very very important signal in my view, which is related to tax reforms. He brought in a concept of negative list on the service tax; I mean the GST would have done something like that any way. And the Finance Minister has given a signal that look on the things we control, i.e., service tax, which is central tax at the moment, We are willing to take the steps necessary to go ahead.
Karan Thapar:So it's small but an important step forward?
Montek Singh AhluwaliaWell, I would not call it small. I think the GST is big and the service tax, If you see that as a credible guide to the fact that GST will happen, that would be a big step.
Karan Thapar:Ok, lets for a moment concentrate on the manner in which the Finance Minister has tackled the fiscal deficit. You have given him credit for being upfront and admitting boldly just how bad it is. In fact it turned out to be much worse than most people's expectations, when he announced the 5.9 per cent. Which is why the first question people ask, Is he can really reduce it to 5.1? Given that he was so wrong last year, He was out by 1.3 per cent, Can he correct this because he has no control over oil and oil prices given the situation in Iran could easily climb to 150 dollars barrel?
Montek Singh AhluwaliaWell, I think any budget is always made on the bases of some assumptions about things beyond one's control. And I would agree with you that if you see a huge change in oil prices, not just in India but everywhere Budgets would have to be reformed. I am hoping that this fear that there will be a crisis etc, will abate and oil prices will stay roughly where they are now. I think that what you mentioned earlier and what is there in his speech, he said I am going to cap the subsidies at 2 per cent and this is very important step also.
Karan Thapar:It is no doubt but I will come to that in a moments time. Let me first point out, there is not just the uncertainty of the oil price that raises question marks about the way he can meet his fiscal target of 5.1 per cent. Another set of doubt come from the fact that his gross borrowing requirement is 5.7 lakh crore this year, almost 60000 more than the last year. His expenditure has gone up by 22 per cent and if he cannot achieve the 7.6 per cent GDP growth that he has predicated the Budget on then he is not going to achieve the 5.1 per cent on the fiscal deficit. And given the external situation and the sort of disappointing response internally, people question whether the 7.6 per cent growth is possible?
Montek Singh Ahluwalia No that's a very reasonable issue. The budget is always based on a projection of growth target. So the key question is, is going from this present year's 6.9- I think we will get revised to 7 per cent when the full data come out- So let's just ask will the 7 per cent go to 7.6 per cent? I think it is tough but can be done assuming that you don't have some kind of huge explosion externally which disrupts every thing. And why do I think it can be done. I believe that one of the most important things that's holding back investments in the country is that in the energy, power, coal, gas area big projects are stalled. Now these are not the things that we can sort out in a budget but efforts have been made separately to take care of it.
Karan Thapar:And you are assuming those efforts will be successful?
Montek Singh AhluwaliaI believe they are already. The evidence of progress is there and I think you need to give it another three to four month to see whether what we now know are steps being taken will actually led to a successful outcome.
Karan Thapar:Alright. I can see why you have reason to be hopeful and confident. Let's come to the issue you mentioned which gives you a second reason of confidence that the 5.1 per cent on the fiscal deficit can be met. The fact that he put a cap of 2 per cent on subsidies. The problem is, no doubt he put a cap but he has no road map to indicate, how that will happen. And many people say this is a hope and ambition not a realistic target.
Montek Singh AhluwaliaWell again this is a reason why one cannot do everything in the budget. What you need in order for that cap to be strictly observed, depending on what happen to prices, both in case of fertilisers and in case of petroleum prices, some adjustments take place. Now he has not said when it is going to be done and it is not actually in his control, it's a government's decision. The Prime Minister, I think, on television said that this is a bullet we must bite and that is laying out very clearly that the rational of the government policy requires some action to be taken.
Karan Thapar:Well infact this is the third reason why people are doubtful, that the 5.1 per cent can be met because no doubt PM on television said, we must bite the bullet but people fear biting that bullet could end up breaking your teeth! And the reason is this... You are talking about very steep if not draconian increases in petrol prices and perhaps even in urea. Are you prepared to face up to Mamata's wrath when those steep prices increase happen?
Montek Singh AhluwaliaWell I think the Finance Minister addressed that issue and it is a difficult issue. I mean this is a coalition government, so it's not something where they can take some tough decisions without holding the coalition together. They will have to consult, discuss and persuade people and the public in general and indeed the Opposition.
Karan Thapar:Let me tell you why I think this is a particularly difficult point. I am going to numbers to prove my point. The budget is based on the assumption the price of oil will be some where between 110 and 115 a barrel. It's already over a 120. Secondly the Finance Minister only set aside 43,000 crore as the oil subsidy, which is 36 per cent less then the last year's figure of 68 thousand crore. So he is either assuming that Indians will use a lot less of petroleum products or they will be prepared to pay a lot more.
Montek Singh AhluwaliaIt has to be the case that the underlying assumption is that the difference between the global prices, which is the price we pay and the domestic price, they will be narrowed. Now unless global price falls and that's very unlikely because as you said right now they are above level that we are calibrating. It does mean the domestic prices have to be adjusted.
Karan Thapar:And sharply, that's the point. And Mamata will be howling?
Montek Singh AhluwaliaWell my point is. If you subject the government to scepticism on the grounds that there is no way that any sensible policies can be passed through with a consensus then not just the budget but ever thing else also falls.
Karan Thapar:But practically every thing else that Mamata objected to the government had to give in. She objected to FDI in retail and the government give in. She objected to oil prices increase in the November and the government give in. She doesn't like the pension bill, its stalled; she doesn't like the Lokpal that's stalled. Every time she objects the government gives in. That's why I say, When you push up petroleum prices to the draconian levels that are required, she will object and the government will fail.
Montek Singh AhluwaliaThe only thing I can say is this is a bullet they have to bite and they have to do the consensus gathering that is necessary.
Karan Thapar:Actually what they need when they bite this bullet is another pair of dentures because the first time round they will break their teeth!
Montek Singh AhluwaliaIt's always looks difficult in a politically difficult situation. Nobody quite says that they are going to agree something unless they agree or until they are ready. So the real question is will these consultations be useful or not. I hope they will be able to get an agreement, That's all I can say.
Karan Thapar:What you are saying is the uncertainty will linger and perhaps get worst until the actual bullet is bitten.
Montek Singh AhluwaliaI think that actually is correct.
Karan Thapar:Let me give you second reason why people are doubtful of this two per cent cap on subsidies. Where in this cap does the Food Security Bill, which could cost a lakh crore it self, fit in. People say either the Food Security Bill is not on the anvil for this year at all or the two per cent subsidy cap is not sacrosanct?
Montek Singh Ahluwalia No I think the Finance Minister made that very plain. He said the food subsidy will be fully funded. Now exactly when the bill will be passed, when it is made operational, this is something I can't guess about...
Karan Thapar:But if it is fully funded and you still stick with the two per cent cap, then the money left for petroleum and urea is reduced to so little that the increases will be so steep that Mamata will...
Montek Singh Ahluwalia That's substantially correct. The more we do by way of commitment on food subsidy, the less will be available within the cap for the other subsidy. But I do think that a Finance Minister who makes a commitment means it, look I want to cap subsidies to 2 per cent and within that food security is my top priority and leave it me how I adjust the rest. I think that, taking the debate a little bit further, I mean for example in Parliament it's not the Finance Minister who can do it. You need a political consensus. If there is a political consensus that 2 per cent is a reasonable limit, then he has some sort of method to get it done. People say don't make it 2 per cent make it 2.2 per cent, that is ok too, but I think this is the right way to go. Let's agree on what the cap is, let's agree that food is the most important, and that's what Amratya Sen constantly says, and let the rest take the hit.
Karan Thapar:Absolutely. But now you are depending upon a consensus that is at the moment elusive. It may come about in next four or six months or one year who knows but what you are saying is we need that consensus to give the Finance Minister the spine to stand by 2 per cent?
Montek Singh AhluwaliaWell not the spine he has the spine. To give the Finance Minister an environment in which he can do what he wants to do.
Karan Thapar:Let me very quickly point out another reason why your 5.1 per cent fiscal deficit figure might be questionable. The increases in indirect taxation which is going to bring about additional 45 thousand cores revenue, are going to kick up inflation. Surely what ever happens on the petroleum front and perhaps on the urea front, will further kick up inflation. Therefore it makes it very difficult for RBI to reduce interest rate as a result of which growth will be stifled. And so your revenue projection could go wrong. Once again 5.1 per cent may be in doubt?
Montek Singh AhluwaliaI don't by the way accept that logic. I know that very often people say if you raise indirect taxes inflation will go up. It may be true that the individual price on which a tax is born in a short run goes up. But please remember what he is doing is two things, he is raising indirect taxes and reducing the fiscal deficit. Now the reduction in the fiscal deficit has lot of other impact which tends to moderate inflation.
Karan Thapar:But the reduction in the fiscal deficit depends upon 7.6 and the 7.6 is stifled because inflation is high and interest rates remain high.
Montek Singh AhluwaliaNo it is a very good point. Let's take that up. I think the news on inflation if any thing is good.
Karan Thapar:But it could get worst?
Montek Singh Ahluwalia It can, anything can always happen.
Karan Thapar:It will because of the excise duty and service tax and because of the petroleum prices.
Montek Singh Ahluwalia No because I think the increase in the excise duty in an environment where the fiscal deficit is being brought down, will raise some prices but need not lead to over all increase.
Karan Thapar:So this is an exaggerated fear?
Montek Singh Ahluwalia I would say it is a fear caused by far to many taking head on televisions screens, making intense comments within a tense environment and not keeping macro economics in mind.
Karan Thapar:Let me stop you there, that little dig with a smile on you face, is a hint to me to take a break. Time to stop this particular conversation and stop panicking people with exaggerated fears as you call them. But I will point out that there are many who say it's not exaggerated. Lets take a break and come back and put to you what many consider to be the worst part of the budget, the decision to retrospectively amend the 1962 Income Tax Act, 50 years after it passed to over turn the Supreme Court judgment on Vodafone.
Karan Thapar: Mr Ahluwalia let's come to what many consider to be the most controversial part of the Budget. The announcement in the budget papers not in the budget speech that the government intends to retrospectively amend the 1962 Income Tax Act, Fifty years after it was passed to ensure that the Supreme Court judgment on Vodafone is overturned thus making it possible to tax overseas transfer of share in Indian companies by Indian authorities. I put it to you this is unfair, possibly immoral?
Montek Singh Ahluwalia Well, I don't want to comment on the impact on any particular company but I think what they have done is, dominantly, to change the law. And I think objectively that particular change is not only an appropriate one, it is something they have signalled in the DTC.
Karan Thapar:But why you are doing it retrospectively?
Montek Singh Ahluwalia Now this is the issue which you are raising. I have not gone into the detail but I have seen a little bit. It does say it will be effective retroactively what that will do in any individual case I really don't know. I mean as a general rule I agree with you one should avoid retrospective amendment.
Karan Thapar:You said some thing very important, generally one should avoid retrospective amendment.
Montek Singh AhluwaliaYeah, I think that is fair and right.
Karan Thapar:Many people wish that was advice the Finance Minister would heed.
Montek Singh Ahluwalia Let me say, this is not something where nobody had any idea and you go and amend something retroactively. This is an issue that's been discussed in the courts, the government won at the High Court.
Karan Thapar: But the government lost at the Supreme Court.
Montek Singh Ahluwalia Yes we lost at the Supreme Court but what's more the Supreme Court said, I don't know enough about it and in a way I shouldn't be commenting...
Karan Thapar: The Supreme Court said that the government should clarify but not retrospectively but prospectively.
Montek Singh Ahluwalia I think this is an issue that is on going, the matter is being considered, these are issues no doubt that the court will take up.
Karan Thapar: Let me put to you by way of illustration why people think this is hugely unfair. Coincidentally on Friday Sachin Tendulkar scored his hundredth century. But in the afternoon when he was still poised at 99 if the ICC had announced a change in cricketing rules thus declaring that he was only standing at 82 centuries not 99, there would have been hawls of protest. That in effect is what the government is doing to Vodafone.
Montek Singh Ahluwalia No, it is a very clever way of putting the government's case as if it is equivalent to denying Sachin his hundredth century which by the way Finance Minister himself congratulated Sachin on...
Karan Thapar: But it is equivalent to denying fairness and fair play.
Montek Singh Ahluwalia You know it is a complex detailed legal issue I really don't want to comment on.
Karan Thapar: Ok don't go into legalities, don't go into complexities but comment on this: Deepak Parekh, a leading businessman who is very close to your government has gone on record to say that this totally retrograde, he said the impact on India's credibility and reputation will be extreme.
Montek Singh Ahluwalia I am aware that there has been a very negative reaction. I am sure the Finance Minister is also aware of it. I do not know what action the ministry intends to take in this particular case. I don't know what the court is going to pronounce on it. So as I said, most people tend to regard retroactive amendment as undesirable.
Karan Thapar: Can I put two quick questions to you? What impact do you think this retroactive amendment will have on foreign investment? Won't it put them off?
Montek Singh Ahluwalia I think, this is important. Clearly whenever you have a retroactive amendment that affect an individual that individual will certainly feel that he has been treated unfairly but I think the foreign investors should have absolutely no doubt in their mind that the government of India does not intend retroactively to change some of the basic conditions.
Karan Thapar: But you need to give that as an assurance rather than just a comment in an interview.
Montek Singh Ahluwalia Well I am not in a position to give that assurance but I don't think, let me put it this way, in this particular, all tax matters are always very complex and I think foreigners would look at the total experience they have with the Indian tax...
Karan Thapar: You hope that they look at the total experience rather than focus on this.
Montek Singh Ahluwalia No no, I am sure they will.
Karan Thapar: Can I put one last suggestion before we end the interview? Would it not help the situation if the Finance Ministry were to announce that although this is a retrospective amendment they will not reopen the Vodafone case on the basis of amending the law? That would give people a lot of assurance.
Montek Singh Ahluwalia I am sure it would.
Karan Thapar: You agree it would?
Montek Singh Ahluwalia I am sure it would. But the point is, I don't know what the thinking of the ministry is. let me say there is an implication in what you are saying that they should not use it not only for Vodafone but for any other thing. I have no doubt, by the way, that it is very important that prospectively this change is quite sensible.
Karan Thapar: But retrospectively?
Montek Singh Ahluwalia Well as a general rule, I am personally uncomfortable with retrospective things. Now you know when ministries do that they usually have some very good reason and I just don't know enough what the reasoning is.
Karan Thapar: But as you said, personally you are uncomfortable with retrospective changes in the law. A hint from the Deputy Chairman of the planning Commission is enough for a wise man. Let me end this interview there. Montek Ahliwalia, a pleasure talking to you.
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