‘The question is how Subbarao judges fiscal policy next year’

The Indian economy is likely to grow over 6.5% next financial year riding on steps taken by the government, Planning Commission deputy chairman Montek Singh Ahluwalia said in an interview.
He is also confident international ratings agencies will not cut India’s sovereign ratings to junk status. “If they didn’t downgrade us say three to four months ago, to downgrade us now has to imply that you think something has not been done which you expected. It is possible that they say yes, you have done something, but since we warned you, we thought you will do even more. My own feeling is that we’ve done quite a bit,” Ahluwalia said. Edited excerpts:

Think-tanks expect growth this year to be lower at around 5.5%. Fair assessment?
I have been saying the economy has bottomed out and that means it is not going to go lower. My hope really is that you see a bit of turnaround. But you can’t judge how strong that turnaround would be. There is some indication from the Purchase Managers’ Index that there is an upturn — what they call the green shoots of recovery.

When do we actually see it reviving?
We will know the data for the third quarter probably in a couple of weeks or so. That’s a good time to make a judgement.

RBI governor D Subbarao has been saying that inflation is still high. Do you think those concerns are still there?
I have consistently refused to speculate on what the governor will do. That’s his job and he should be allowed to do it. I am not second-guessing how the RBI will read the situation basically.

Don’t you think growth has to be given a helping hand?
Most people think if you really want the monetary policy to become loose, the fiscal policy must become tight. So the real question is what will the governor judge about fiscal policy next year. They won’t know that until the Budget is presented because that is when the government will give its indication. Normally what people say is if your fiscal deficit is too high —and we are saying it is too high — then the monetary authorities would typically say you should bring the fiscal deficit down credibly before we do some relaxing. Most people would actually say you anticipate rather than wait until it is actually reduced. That is the judgement the RBI has to make.

But finance ministry has given a roadmap for fiscal consolidation. Won’t that be enough for the RBI to act?
I don’t want to speculate on what the (RBI will do).

Do you foresee a sharp increase in GDP growth next year?
I certainly think GDP growth next year should be a lot better than this year because of all the things we are supposedly doing on removing constraints.

What do you mean by lot better?
I would like to see it go back to 7%. Internationally, most people think it will be 6.5%. But I think we will do better than that. How much better we will see after the Budget.

Even at 7% growth do you think there will be a gap between potential and actual growth?
We have done some analysis. There is a paper by Pranjul Bhandari, who used to be in Planning Commission. She has done a long-term assessment of underlying growth using statistical filters to remove cyclical effects. According to that, the underlying growth is about 7-7.2%. So you might say that is the momentum of the Indian economy. Anything below that is sub-par, anything above that is better than par. And if you use that kind of calculation, I think getting back to 7% sounds quite good.

Next year?
Yes, Next year.

We are only nine months into the 12th Plan and the government has already cut the forecast two times? Do you think the 8% forecast is realistic?
You know these things should be done professionally in the sense that every year on a fixed date the Planning Commission should do a renewed study of pros, cons and revise the forecast for the remaining period of the plan. We don’t do that. May be we should. The Plan expenditure of the government in the current year is running much below Budget projections.

Well, it normally is at this time. There is nothing unusual about that. Actually what happens is that we release one tranche and we don’t release the second tranche until the state government indicates that 60% of the outstanding amount given to them has been spent. Then we release the second tranche. The states never certify the money has been spent. So money tends to get released very late. That doesn’t actually mean that money is not being spent. Very often they are late in sending us the utilization certificates. And until those come, money doesn’t get released from here.

Is there a possibility that plan spending becomes a casualty of fiscal consolidation?
You mean next year?

Next year and going forward?
I hope not. We have not been given any indication. We are still in the middle of negotiating, and this is a difficult year for the finance ministry. Plan spending is really about five-year perspective. So if this year you get little less and next year you get little less and they promise to give little more the year after that, I think the system can work. If you ask me, you shouldn’t get too hung up on expenditure. Most of the plan schemes are really releases made to state governments for schemes implemented by them. I think the efficiency of those schemes is what we should focus on. I mean, in a constructive way.