95% Of Government’s Attention Should Be Focused On Fixing Domestic Issues, Says Ahluwalia

Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, in conversation with Govindraj Ethiraj at The Growth Net. Govind: So, we are entering a new phase. It’s not an unusual phase but it’s a new phase, the Government might change. What is the situation, as you see it today? Is there a tailwind or some headwind? Where are things headed, and where are they likely to land? Montek: Globally you mean?

Govind: India Montek:  India is a large and complex country. So, there are always tailwinds that help you and headwinds that hold you back. I think the new Government has to address these issues. I think you should stop getting too worried about hundreds of constraints. You know, we are still a poor country. So, there are hundreds of concerns. I think what we need to look at is what are the three or four critical things which are holding back growth  at 5%, which is the sort of average of the last two years,  to I think between 7% and 8%,  which I think India is perfectly capable of achieving. And that does not require hundreds of things. In fact, many of those hundreds of things are really minor things that require progress on 7 or 8 really big things. Once you start building on the longer term ones, these things get done very quickly.

Govind: So, how many of those things are underway? Montek: Well, you know, because we have such an extensive debating tradition in the country, everything is underway.  Nothing that I have said isn’t found somewhere in the plan but you know I would say that we probably have to get the macro into better shape. The good news is that it is getting better but it is certainly not in a situation that one would say is comfortable.  So, that has to have priority. Once the macro gets out of shape, many other things just won’t happen.  That is point number one. Point number two is that we need to revive the thrust on infrastructure development;  good infrastructure brings in private investment from anywhere in the country. Whichever state that offers good infrastructure, all Indian investors from every other state will want to go there.

Govind: Is that a reference to states like Gujarat? Montek:  We recently did a study of several states in order to get a sense of ease of doing business. We divided the states into the top third, the middle third and the last third. Now, certainly Gujarat is one among the top third. So, are Maharashtra, Karnataka and Andhra Pradesh.  There are a lot of states that are doing well, some states are middling and there are some that are not doing well at all.

Govind: Which is India’s best state for doing business? Montek:  It’s difficult to identify the best state because we have avoided giving numbers. We have got the top 30% because numbers become controversial during election campaigns. If the middle group of states were to simply decide to compete with the top third, you would see a huge improvement in infrastructure. I don’t just mean hard infrastructure. There are a lot of problems related to ease of doing business, and it is surprising to see that many states have introduced innovative ways of making life easier for businessmen.

Govind: You are also in some way disaggregating the problem. So, it’s really not a federal problem of growth looking ahead but more about how much the middling states or the other states make sum of the parts. Montek: No, I’m not trying to give the impression that the federal Government is trying to do everything and it is the states that are at fault, no. What I meant was, you know in the ease of doing business, there are several parameters that people think about, and 2/3

rd of those are in the hands of the states and 1/3^rd is in the hands of the centre. However, I do think the centre has to do a lot, for example railways. In any long-term projection for India, if we want to manage our energy deficit issue, moving traffic from road to rail is absolutely crucial. There is no way you can achieve long-term solution if you don’t do that. That is entirely in the hands of the central Government. In my view, we have a big job to do on the transport side whether its airports, national highways, railways and it’s a central Government issue. But you know, roads are not just national highways. There are a lot of other roads that connect to the national highways that place you on the network. Many states have done a good job in that respect. I think it’s not generally realised that the effort at pushing infrastructure has led to remarkable improvements to many parts of the country. I have travelled myself on some of these highways in rather remote parts of the country. They are very different than what they were 20 years ago. So, that is something that is clearly good but it needs to continue. For example, the North East is an important part of the country but we need to improve connectivity. We have laid out a very tough plan for improving connectivity; it will take two plan periods to get it all done.

Govind: Okay, if I were to ask you to look back at what are the 3 things where you feel the last five years has seen progress and sufficient progress that will give you the tailwind for the next 5 years, whoever is in power. And three areas where you feel things have not happened the way they should have. Montek: The first three are relatively easier. I feel the strategy of relying on public-private partnership in order to build infrastructure was a very critical part of both UPA-I and UPA-II. I mean it’s based on the recognition that we need a lot of infrastructure, we don’t have the public resources and what resources we have, have to go in things such as health and education. Therefore, we must make an all-out effort to expand the scope for public-private partnership. Now, you can say that there are problems but I would say that, on the whole, it has demonstrated the scope. 10 years ago, people would have said that there is no scope for private sector to come forward. The fact is that a lot of private sector came forward and PPP projects were started. Some problems have risen - how rigidly do you apply the terms and conditions? Is there some flexibility? Those are issues we now need to resolve…

Govind: So, you are saying that the overall report card for PPP still looks positive. Montek: I’d certainly say that a lot of progress has been made but there are problems and I think we should now address those problems. Those who say PPP doesn’t work, I think they should say that we are going to have half the infrastructure we want. I mean, I’m not aware that there is any solution other than PPP. But then there are others who say you really want PPP, you have to fine-tune your policy. So that’s one. Second, I think, on energy, we’ve made a goodish start. In a world where energy has become expensive, we need to economise on energy a lot. We need to stimulate domestic production of energy; we need to stimulate renewable energy, which are also expensive. All this means that energy prices have to rise. Nobody wants to hear that. Everybody thinks that it will hurt the economy, and, you know, in one sense they are even right. I mean, they are right in the sense if you are comparing a world where energy was plentiful and therefore cheap as opposed to a world where energy is not plentiful and therefore expensive. The first world is certainly better. But if you’re comparing the world where energy is not plentiful and you keep it cheap, that is a disaster. And I think we did not fully succeed in convincing people but I think we made a lot of progress. For example, deregulating petrol; people now know that petrol prices move up and down. Moving diesel gradually to international prices, personally, I think would have been better off if we had done it a year ago. Given the political sensitivity, the progress made there is in the right direction. We need to do similar thing in LPG and other areas as well. The third thing that most people don’t focus on, I think, we’ve made surprisingly good progress on agriculture. The agriculture performance of the economy in the last eight or nine years, is much better than what it was in the previous six or seven years. Growth rates have picked up, agriculture has diversified, and productivity has gone up. But you know here, there are some critical missing links which we need to be addressed. Two of the most important of those missing links are - one; how do you create a rational use of water? I think that is not just an agricultural issue. That’s an economy-wide issue. The reason for that is 80% of our water is currently used for agriculture, 20% for the rest. If the rest of the economy is going to expand, it’s going to need water. Total water is fixed. The good news is that we could improve water usage efficiency in agriculture by almost a 100%.

Govind: By stopping free power, for instance… Montek: Well, that’s a good point. I mean, first thing is, many people would say that stopping free power is one point, but not even charging for water, actually water is scarce. I don’t mind if you don’t want to charge for it, but then you should ration it across the command areas. That’s very tough to do. So I think that on agriculture it is a success story, but there are lots of things that remain to be done. One of the most important is marketing support. I mean we are just not anymore in a world where agriculture consists of non-perishable products where you can store them and sell them and so on. These are perishable products where the quality of the produce and the revenue it can realise can shrink very sharply if you’re not using modern methods of logistics, methods of transporting, which means modernising marketing. Now, I mean, for a variety of reasons, less has happened there than I would have wanted. But you know still there is modern, domestic modern marketing, its happening.  Foreign modern marketing took a long time, maybe it’s about to come in, no harm if it does. I’m not interested if it is domestic or foreign. There should be enough capacity to get it done. But there are a lot of regulatory things that the states have to do. For example, the Agricultural Produce Marketing Committee (APMC) Act. In the Planning Commission, we’ve been saying it for the past 10 years, it has not been dismantled.  We have said that it should be dismantled. Many states have made some changes in the laws. But actually if you go into those changes, they don’t effectively achieve that objective. Now, let me give you a simple example: one of the key things about the APMC Act is that you know private guys should be allowed to buy and sell. Some state Governments have allowed that but they give them a one-year licence. Now nobody is going to invest in infrastructure if you don’t know that the licence is going to be renewed or not. I mean, in industry, when you get a licence, you get a licence. I mean it’s there. So, I think, in many of the states, there are tiny little things put into the amendment so that when you ask them, have you amended the law, they say yes, but if you go into the amendment, it’s just not good enough. I think we need to fix that.

Govind: So, if I were to use the tailwind/headwind analogy, yes there are some tailwinds in agriculture but these are some of the issues that we need to look at. Montek: Yes, I would say so Govind: More on the regulatory as well as on the pricing and so on.. Montek: Yes, I would say so Govind: You have to give me three points where things have not really held up. Montek: Well, that’s always more difficult, I mean. I think one area which we’ve not been very successful in and I think we should really get it done, I think it’s close to being done, is the implementation of the goods and services tax. I mean it’s a no brainer. In the sense that, everybody says, some people say that if you do it, it will add one percentage point to the growth rate. I do think it’s politically difficult because it involves multiple states. I thought at one time that the different political parties had got together, I think when you talk to them, they are all in favour of GST, but somehow it hasn’t happened. Let’s just hope that at the end of this particular election, when the new Government is in power, it just gets done. I think if it gets done it will be a terrific achievement. So that’s one. Second, I don’t think we’ve done enough to seriously address the issue of the ease of doing business. I mean the truth is that successful industrialisation does not depend on a few big companies doing well. I mean big companies make their own infrastructure, they declare themselves an SEZ, and they are large enough to deploy all sorts of resources and so on. Successful industrialisation depends on a whole lot of small guys becoming middle and middle guys becoming bigger. And that process, very definitely requires a massive look at the ease of doing business. Now we’ve been doing some work with people, I think perhaps the new Government, we’re in a position now where the new Government could actually say look, this is the agenda, this is what the centre has to do, this is what the states have to do. And if the centre can demonstrate seriously that it is going to do it, then you can put a lot of pressure on the states. But all states don’t have to do it; I think competition will force the states. Even if two or three states do it, I think it will get done. I think an area, at least I think and many economists think is very important, particularly if you want to create employment, is flexibility in labour laws. I think we’ve made no progress in that at all. The reason we haven’t is again political. I don’t mean political in the sense of opposition. Every political party has a trade union associated with it, and there doesn’t seem to be an agreement amongst the trade unions. Now the Government took the view that flexibility in labour laws is important, but we’re going to do it after we build a consensus. I hope that the new Government will put this upfront, because you know, new Governments always have a six-month honeymoon or something when whatever they do will not be subjected to undue questioning. I would really think that it’s a good idea that whatever Government comes to power, they pick it up in the first six months and get it done. I mean there are lots of areas where much more needs to be done. But they are all areas where progress is being made, but we need to do better. That’s true for education, that’s true for health and so on.

Govind: Are there any areas that you feel that needs urgent attention, regardless of who comes back because they hadn’t been addressed in the last six months to one year of relative Government inaction. Montek: You know, I’ll tell you one issue which is quite important; of course, GST is the most urgent, because frankly, it has a huge impact. I think there is a lot of concern that in this, in the concern about improving governance, and controlling corruption, which is a very genuine feeling around the country, any sensible Government should try to respond to that. I think some of the present provisions, in the Prevention of Corruption Act, need to be also reviewed, because they put officials into a virtually impossible position. The act itself must be very clear, what is it that we call a corrupt act and what is not a corrupt act. And many officials tell me that this needs reform. Now you know, the Government had intended to amend the Act but for whatever reason, it didn’t get done.

Govind: And this, you feel, is one of those things that is causing a slowdown in decision making? Montek: No, I wouldn’t like to say that, let’s face it, all these things were true when the economy was growing at 8-9%. I think, frankly, with all its faults, and weaknesses, economies go through ups and downs. When things are going well, everybody’s happy, everybody forgets about these things. When things are not going well, everybody focuses on them. So, I’m merely saying that now that we’ve slowed down, we have an opportunity to identify what are we going to get done right and I just think we need to be strategic about that. Because if we simply take the view ‘let’s correct everything’, I can give you a list of 1,000 things and you could choose a hundred of them and they could not be the most important. I think we need to find out what is the corrective action which has the largest bang for the buck and take some of those.

Govind: And you know, when I asked you about tailwinds and headwinds, you asked me if it was global, So, let me ask you the last question and put all this in the context of the global economy. So, to what extent are we likely to benefit from global tailwinds? US and to some extent Europe, which is out of recession, at least in theory, some other economies, versus some of our own challenges that we are facing.

Montek: You know my feeling is that you can’t do anything about the global headwinds or tailwinds. The best thing about them is take the tailwinds as they come and do the best you can to contain the headwinds, don’t worry too much about it. I don’t think global governance is at a level where if we worry about them, somebody will do the right thing. I mean, those are mainly talk-shops. Our own problems we genuinely can fix. Quite honestly, in my view, 95% of the Government’s attention should be focused on fixing the domestic. You know, Raghuram Rajan, when asked this question, in New York said that the slowdown in India is not just because of global slowdown. I mean that’s a position we’ve been taking in Government, also domestic factors, what he did is that he added a percentage to it. He said one-third of the slowdown is due to global factors and two-thirds is due to domestic factors.

Govind: I would have thought that the Government would have liked to believe that it was the other way around. Montek: I know a lot of people tend to, want to criticise the Government that you’re blaming everything on the global scenario, but actually the Government has been surprisingly frank. I mean, certainly the Finance Minister, the Prime Minister, certainly me, we’ve always been saying that look, global is one thing, but the domestic problems that have arisen, of course, when domestic problems have arisen, I mean you can have two views, I mean one is that they have arisen because of your fault, but I think what has happened is that they’ve arisen because we grew rapidly and these constraints were not anticipated, they came into play once growth became rapid, but now that they’re there, we’d better fix them. And that’s what we should be doing.

Montek: And now we have the time and perhaps energy to perhaps in the coming months. Montek: Well, in the coming months, we have the time to reflect. I think the Government has already taken a number of steps. Like the Cabinet Committee on Investment, the project monitoring group of the cabinet secretariat. You know, these have identified why projects are getting stuck. I think we need a much more proactive Government processing system, probably organisationally, too many things are subjected to multiple oversight and regulatory control and each regulator operates like a silo. There’s nothing wrong, I mean it has to meet multiple controls. But the way it is organised, it should be one in which you take a holistic view and basically strike a balance and say this is what you’re going to do. We haven’t been doing that. But I think if we can do that, if the new Government can do that, I think it would make a big difference.

Govind: Last question absolutely. So, would you look back at your last 5 year tenure with satisfaction and happiness? Montek: Look, I think we did the best we could. For me, personally I think, lots of interesting things came up, nobody can look back at 2 years of 5% and say that I’m very happy that we grew at 5%, I’m actually sad, but I think you know in any long-term burst of growth, you’re going to have some good years and then you’re going to have some bad years. The test of those bad years is have you diagnosed what has gone wrong? And are you ready to correct them. I think we have diagnosed what went wrong. I think the system is capable of correcting them. Only thing is that the correction will have to be done by the new Government. So the notion that, if you look at the two two-year terms of the UPA Government together, I’ve done a calculation, on many different performance character indicators and frankly the only one on which maybe it doesn’t come out so well compared to the previous period is inflation. On every other, whether it is growth, agricultural growth, reduction in poverty

Govind: Inflation is what could lose the election Montek: Well, you know, you got to remember that the previous period was a period where the global crisis was very low. This period was a period where global inflation was much higher. I think it’s a relevant issue that you know, when you have a global inflation, do you sort of try to keep domestic inflation low artificially? Or do you let it get reflected in some of the domestic prices? I mean agricultural price is a key variable from this point of view, and amongst economists, there has been a debate. I mean in the previous period, minimum support prices were hardly raised at all, in this period, minimum support prices were raised. Now if you’re concerned about the kisan, if you’re concerned about agricultural prosperity, I mean, it’s a good thing to raise minimum support prices and even to see prices of vegetables and so on going up. So it’s bound to get reflected and plus energy prices, I mean energy prices have given a big upward thrust, but I don’t think that holding those down would have solved the problem. I mean you could say that if we had had more growth in the rest of the economy, then maybe some other prices wouldn’t have risen as much, but you know, those are the areas where performance could have been better.