Finance minister Pranab Mukherjee was clear the government was not being defensive when it met Ramdev; ?Issues like de-monetisation were never on. We would have had to print currency notes abroad,? he said. The government was only trying to communicate better with all sections, he said about the meeting of the controversial godman with the former CBDT chief. On the overall issue of policy stagnation and anti-inflation measures, Mukherjee said talks are going on to allow FDI in retail while food inflation has decelerated to 8% now from 22% in February. Excerpts from a select media briefing:
On inflation outlook…
No doubt inflation is doggedly pursuing us. But, looking forward, we expect headline WPI inflation to come down to 6-7% by March 2012. The rates will remain relatively ?sticky? and there could be a spurt between August-December 2011, but they will start to fall thereafter. However, global commodity prices remain high and will pressure imported inflation. Given that context, we expect that the inflation should moderate to 6-7% by March 2012. From a high of 22% in February this year, the fact remains it has come down to 8%. This too is unacceptably high, but that it has come down is also true.
Overall, our track record is satisfactory. Over the last decade, inflation has averaged around 5.5%. More importantly, this was achieved in an environment of high growth and financial stability. We expect to return to this path.
We believe that rising and high global commodity prices in significant part emanate from the consequences of very large and sustained monetary policy easing in advanced economies. We hope that international commodity prices will moderate.
Do higher administered prices for agricultural crops make inflation worse?
Some amount of inflation hardening will be there in the economy. Farmers will have no incentive to produce more if the MSP is not raised. At the same time, there is a mismatch between demand and supply for agricultural commodities. Last year, pulses were in the news but we have had a silent revolution in the commodity, and our production is 18 million tonnes this year, equal to our demand. We will be thoroughly self-sufficient in pulses in a few years.
Also, if we did not pass on some of the price increases, then the effect would show up in the larger fiscal deficit that would cause higher general inflation, which is a worse outcome. Our preferred approach is to increase prices only gradually as you have seen during the past, while protecting the poor through direct income-raising support, such as MGNREGA and more targeted subsidies.
Is there a slowdown in demand and investment?
There is a wrong impression that we (UPA-II) have given up. But look at the number of Bills cleared by the group of ministers, like the MMDR, the Food Security Bill which has more or less gotten a final shape, or the Bills on insurance, pension and banking regulations that are already with the standing committees in Parliament. If some of these reports come in the first week of the session, I think we can hope to pass some of these Bills this time. The Direct Taxes Code is on course. In the financial sector, many laws are being reworked so there is plenty happening.
But I do realise that (foreign) investors look at an economy in comparison with its competitors and especially at how much of an investment-conducive environment it is offering. To say that ours is worse than some of the Asian tigers is not valid. We started late and are catching up with them, with the second highest GDP growth rate in the world. We are pushing for more market reforms that you will soon see. So, we have cleared a large number of projects stuck in the ?go no-go? mess. At the same time, you must accept that we have the compulsions of coalition politics but there is no room for pessimism.
I find there is a reasonably good performance of companies happening in the first quarter. On the demand side, private consumption and exports are strong but, yes, there has been a demand depression in some quarters. Here again, the signals are mixed and, given that demand numbers are subject to considerable revisions, any generalisations need to be made with caution.
After the appointment of Sushil Modi, how far on track does the GST plan look like?
To implement it, we have set aside about R50,000 crore as compensation for the states. The states have to decide on how fast it can happen, though next year looks difficult. Modi is a good choice, I feel, as he has been with the empowered committee for a long time. He has rarely missed any meeting of the committee so his leadership will provide the direction the committee needs.
Is the government defensive in its role with the civil society?
As I see it, every organ of the state has to play its assigned role. Otherwise, there is a distortion. The problem is if the legislature does not do its duty of passing Bills and resorts to obstructionism, then the common man will seek other remedies. The government does not just administer land or resources but the aspirations of 1.2 billion people. So, it has not been remiss in its role in trying to address the various concerns, including those of the civil society. The agitations are a sign of life in a democratic society, which are welcome. We sent out emissaries to Ramdev to typically clear some very wrong ideas like de-monetisation of high value notes. That was highly impractical, but we have simultaneously gone after black money vigorously. But there has to be a legal process to it, like in Switzerland, where there is direct democracy for the validation of any law.
What are the chances of the government sticking to the growth and deficit numbers this year?
There is uncertainty in the global economy. It does not help us to project lower growth numbers now. As of now, I am sticking to the 9% growth numbers we projected in the Budget this year. We will review them after the first quarter results in the mid-term review. As of date, there is no hard data on real GDP or its components available for the current year. The first quarter estimate is scheduled to be released on August 31, 2011. Therefore, the outlook for the current fiscal at this juncture has to be inferred from movements of past data as well as from some higher frequency proxy economic indicators.
On fiscal deficit, in 2009-10 we had expanded massively. This has had an impact on the money supply in the economy.
But now we are on course to control it. In fact, I am a fiscal conservative. My revenue numbers continue to be buoyant. The disinvestment of R40,000 crore slotted for this year should also happen, though I would not like to put out a list of companies and their time of disinvestment. Instead, it is best to surprise the markets as that will give me a better valuation.
As most observers say, including OECD in its latest survey expects, India is capable of faster, sustained growth approaching 10% annually or more, based on our demographics, related high savings, low dependency rates, continued high investment and capital deepening, and productivity gains.
Insofar as the largest component of investment, namely private sector investment, is concerned, there is a slowdown in the corporate component. With a pickup in FDI happening, there is every reason to maintain an investment-to-GDP ratio that is stable or higher than the 2009-10 levels.
On the external sector front, there has been a surge in demand for exports from emerging markets and developed countries of late. This reflects the diversification of the destinations and the composition of our export basket. But the pace of growth, I agree, may not be sustained on account of Euro-Asia and the slowdown in global trade volumes and also the effects of commodity prices.
Therefore, the crucial question for us on the demand side is the expected rate of investment in 2011-12. The outlook for the current fiscal is neutral and it is difficult to envisage a sharp change from the present levels of investment rates of 34-55% of GDP. In the medium term, once global recovery is stronger, the revival of capital flows, together with revival of the profit cycle, would help improve the investment rate above 35-36%, delivering a faster growth rate of 9% annually.
