Finance Minister Pranab Mukherjee yesterday tabled the economic survey for the fiscal year 2011-2012 in Parliament.
The survey is optimistic on growth with a forecast of 8.75 per cent to 9.25 per cent growth in FY12. The survey projects the FY11 fiscal deficit at 4.8 per cent on a higher GDP base. However, inflation continues to be the key concern for the nation. The survey warned inflation to be at elevated levels due to the West Asia crisis and demand pressures.
In an interview with CNBC-TV18’s Shereen Bhan,Commerce Secretary Rahul Khullar, Godrej Industries Chairman Adi Godrej and Deloitte's Principal Economist Shanto Ghosh, speak about the economic survey and their expectations from the budget.
Below is a verbatim transcript of the exclusive interview on CNBC-TV18.
CNBC-TV18: Do you think this budget is now going to be an anti inflation budget or a pro-growth budget?
Godrej: I think the economic survey indicates that the budget will be pro-growth. I think inflation is naturally waning. If you look at the numbers over the last few weeks, it is coming down regularly. I expect inflation should be around 7 per cent by March and perhaps go lower in the months to come. So, I don’t think inflation is going to be as much of an issue.
Ofcourse, the fly in the ointment there is what happens in West Asia and North Africa. If that rebellion spreads and particularly to Saudi Arabia then ofcourse it could be a serious problem in terms of inflation. But then I am sure the government won’t raise prices, but subsidise oil prices through the fiscal mechanism and that would ofcourse lead to higher fiscal deficit.
CNBC-TV18: Since you do believe that this is likely to be a pro-growth budget, what the survey also talks about is that the government should implement a gradual exit from the stimulus measures adopted. Now, this should be music to industry’s ears because this has been the number one demand by all industry chambers, that the stimulus measures whatever is left with them should not be withdrawn, atleast not at one shot.
Godrej: I think the stimulus has worked so well that despite the stimulus, revenues have gone up very considerably. The fiscal deficit this year is much less than expected, when the budget was announced. So, clearly lower rates of taxes are leading to good growth and that’s leading to strong collections. So, to try and reverse that would be fool hardy.
Ofcourse, the most important reform, which helps solve almost all our problems, is the introduction of the GST. So, I am looking forward to some strong announcements. They have said they want to introduce the constitutional amendment in the budget session. But the GST really solves all our problems because it will lead to lower prices, consumer product prices across the board 5-7 per cent which helps fight inflation.
It will lead to stronger collection because excise duty evasion will more or less disappear. That would lead to a very strong improvement in the fiscal deficit. The fiscal deficit will go down very considerably. It will lead to GDP growth other things being equal.
It is expected that GDP growth would increase by 1.5-2 per cent points almost immediately the GST is introduced. So, really that is the reform that can solve all our problems. I hope the political parties don’t bicker and make it a political issue.
CNBC-TV18: I want to bring up one of the things that the economic survey talks about and that says we should avoid mushrooming of foreign trade agreements or FTAs. I know you are perhaps not in agreement with that view. But do you atleast understand the apprehensions that have been raised by the CA in the economic survey with regards to the mushrooming of FTAs because this is something that Prime Minister Manmohan Singh has also spoken about a few times in the past?
Khullar: Where is the mushrooming of FTAs? How many FTAs have we signed? And since when does that constitute mushrooming? Second, the economies traditional argument is that you want flat reduction in general duties rather than preferential duties. What’s happened to flat duties reductions over the last couple of years? On the contrary, whenever we have signed, there are not so many of these trade agreements, trade has expanded by 40-50 per cent. So, what exactly is the problem?
CNBC-TV18: So you don’t agree with what the economic survey says in terms of mushrooming of FTAs. I wonder if you then disagree with what the economic survey has had to say about financing the current deficit as well.
Khullar: I don’t know what they have said, but I will tell you what I have said. I have always maintained that our current account deficit should be in the range of 1.5-2.5 per cent of GDP. At the limit, it should go to 3 per cent, but higher than that you have a problem. I have always maintained that you should finance it by durable flows which means that FDI and other capital flows and not by volatile capital. Now, if the economic survey is saying something different, tell me.
CNBC-TV18: One of the issues that the survey does acknowledge is that foreign direct investment has declined. We have seen a considerable decline year-on-year. The survey says that the sluggish bureaucracy is impeding FDI inflows. How hopeful are you that this time around in the budget we are possibly going to see policy directives that will perhaps put out the red carpet in terms of bringing in foreign direct investment into the country, whether it is for sectors like infrastructure or what have you?
Godrej: They have already mentioned in the economic survey that they would like to liberalise FDI in multi-brand retail. I think Reliance deal with BP, if approved very quickly, could bring in foreign direct investment even in this financial year. So, there are several, POSCO deal has been more or less cleared. So, the large deals which were hanging far, if cleared, could mean that FDI increases dramatically. It could be even in this financial year, but certainly in the first quarter of next financial year.
CNBC-TV18: Let me get you to react to the comment that the sluggish bureaucracy is actually impeding the flow of FDI inflows. This has been a cause of concern even as far as your ministry is concerned. Do you atleast agree with this point that the economic survey has had to make?
Khullar: You are asking me to agree that I am part of a sluggish bureaucracy. I disagree.
CNBC-TV18: But even your ministry has been writing to the Ministry of Environment, for instance, to speed up the process of approvals and clearances because that clearly is impacting FDI flows, is it not?
Khullar: Yes, but that is not a sluggish bureaucracy in the Ministry of Commerce.
CNBC-TV18: So what would you like the government to actually do to stem the decline that we have seen in foreign direct investment?
Khullar: FDI flows are down this year. The reason for that are not sluggish bureaucracy or because somebody in India screwed things up. ‘Wake up smell the coffee,’ people are stock piling cash in Europe and in the US, corporations are sitting on piles and piles of cash and not investing it, neither in their own economies nor overseas. There is a pure precautionary motive to hold that cash, you know that and I know that.
The global economic environment is as fragile as it was last year. Things are not looking good. So that’s why capital flows have in a sense slowed down. Yes, there is a problem on our side at the receiving end in the sense that certain policy decisions have to be taken. Those policy decisions will be taken in due course. But I think to attribute the slowdown of foreign direct investment to that is plain silly.
CNBC-TV18: Let me get your reaction to what you have heard the chief economic advisor say in the economic survey. A fairly aggressive growth target of between 8.75-9.25 per cent, speaking about fiscal consolidation, also speaking about taming the inflation monster, but the opinion is that how do you actually align that kind of growth rate with the fact that you are battling high inflation and you are also trying to get back on the path of fiscal consolidation?
Ghosh: I think it is important to recognise that when we are talking about high growth, we have to allow for a slightly higher level of inflation. So, I think if we are going to have anywhere from 8.75-9.25 per cent growth, we cannot imagine that we are going to be living in the days of 3.5 per cent inflation.
That being said, I do also believe that there are serious steps that one should be taking to control the inflation and making sure that it doesn’t become generalised. I think the government is on top of things. They are doing the right kind of moves. Honestly, I would agree with what Mr Godrej was saying that inflation problem is going to go away very soon. We already have seen a decline in the general level of inflation and I expect that decline to continue in the months to come.
So, while we have to deal with perhaps in the medium-term an inflation level of around 5 per cent, I don’t see that to be a serious problem, if we can maintain the growth rate at 9 per cent.
CNBC-TV18: Give us a quick word on fiscal consolidation because the survey talks about that, it is a pegged fiscal deficit for FY11 at 4.8 per cent better than the government projections. But a lot of questions on whether this is a camouflage number and what this is going to mean in terms of absolute government borrowings?
Ghosh: I think that is a very important point because when we talk about the fiscal deficit, we have to look at the big picture. So, you have the Central Government deficit, which is at 4.8%, you have the state deficit, which is at 2.5 per cent and then you have the deficit coming from the soft balance sheet items. So, cumulatively we are talking about a deficit of around 10 per cent.
In addition to that, the government this year, you have to recognise, has realised this windfall gain from the auctioning of the 3G spectrum, from the Broadband Wireless Access (BWA) auctioning. And that has added to an unprecedented inflow that would have added to the lowering of the fiscal deficit. Now, we are not going to have that next year.
In addition to that, we are going to see an increase in the outlay for a lot of these the NREGA, we are going to see an increase on the subsidy bill. So, I still don’t know, we have to wait for the budget and see what the Finance Minister reveals in terms of the fiscal map, how we are going to get to the 13th finance commission targets. But I see a gap, I don’t know how this fiscal deficit is going to be managed in the years to come.
The only thing I can predict is that there is going to be a huge focus on tax administration. They are going to focus on increase in the tax revenues and that is going to again go to the climate of making the tax climate very uncertain. I must tell you that I do believe that one of the reasons for the fall in FDI is one, bureaucracy. Secondly, uncertain tax climate.
CNBC-TV18: What to your mind was the highlight as far as the survey was concerned? Several positive prescriptions on agriculture, retail reforms so on and so forth, a lot of those pending demands from industry, but outside of that what was the big highlight for you?Do you think this is now going to be more aligned to what the budget is going to put out?
Godrej: I was very favourably impressed with the GDP growth figures indicated for ’11-’12. I think they clearly feel that GDP growth will be higher. That means clearly their planning in terms of the budget and other policies is for more rapid economic growth, which I think was the main positive factor taken out from the economic survey. And I think the most important thing I am hoping for is a very strong statement on GST implementation. Ofcourse I understand it is not part of the budget.
The other thing I think one can do and which can be very helpful is to make an announcement that all surcharges on direct taxes as well as indirect taxes, we still have surcharges on import duty etc should be done away with. I think that will create the stimulus for faster growth. I personally feel could end up collecting even more taxes.
CNBC-TV18: You also think that the survey is getting carried away with the kind of growth projections that have been made between 8.75 per cent and 9.25 per cent, given the kind of external environment that we are faced with.
Khullar: I would have preferred a slightly more conservative lower bound. I am not so gang-ho about 8.75 per cent. That said, let me say why. I think that it is not that the external environment is what is holding up a problem. Understand, domestically we will have some amount of problems arising, both from inflation and interest rate risk, which you in Mumbai know better about than I do.
Second, the base growth in the range of 7-8 per cent is reasonably guaranteed provided we get a good agriculture and primarily because of the engine of domestic demand. So, I think that is the basis for still be optimistic about the growth rate and saying, it will be above 8%. Once you cross 8%, you are in a very tricky territory, where you land up I cannot say.
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