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In an exclusive interview with India Today, former Deputy Chairman of the Planning Commission Montek Singh Ahluwalia discussed the fuel price hikes, current economic crisis and the need for structural reforms.
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00:04I want you to begin by responding on a day when we've seen the fourth fuel price hike in 14
00:11days.
00:11There are those who are saying that these fuel hikes are inevitable.
00:14That's what the government says.
00:16Do you agree that these hikes were inevitable, particularly the slow drip manner in which they are coming at the
00:23moment?
00:23Every few days, the prices hiked marginally.
00:28I think the passing on the price hike was essential.
00:33In fact, failing to do so would have given the impression that we don't know how to manage the situation.
00:39Whether these things are done in a slow manner, in the past also we've done things gradually.
00:45So if it's easier to do it in two or three stages, I have no problem with that.
00:50I think we need to look further ahead because actually we don't really know how deep this crisis is going
00:56to be.
00:57Everybody emphasizes that there are people who say the state of Hormuz might become open in another week.
01:04Others say it might take two or three months.
01:06So quite frankly, I think the country should be ready that if the price increases, oil prices increase further, then
01:16those increases would also have to be faster.
01:20To some extent, the government can cushion that if it takes the hit on its own revenues.
01:26But that really worsens its own fiscal deficit, which means it has to do something else, to cut other expenditures.
01:33But this was essential.
01:36I mean, there's no way of avoiding it.
01:38There was no way of avoiding it.
01:39But the fact is that when oil prices were low a few years ago, the benefit was never passed on
01:46to the consumer.
01:47Instead, the government is the one which made the revenues by raising excise and duties.
01:52So do you believe that the government needs to ensure that it can't pass on the burden to the consumer
02:00when prices are high?
02:02But when the prices are low, the burden is not passed on to the consumer.
02:06That's used then for the government to cushion up its revenues.
02:10Well, I think that's a very valid point.
02:12And that is exactly what happened.
02:14Mind you, that's why initially the government took the hit by lowering exile duties on petroleum.
02:21I think we, you know, many years ago, we produced this theorem 20 years ago that we had dismantled the
02:30administered price mechanism.
02:32But actually, we never did.
02:34It's still effectively a government fixed price.
02:37And I think we should make it transparent.
02:40People should know what exactly is happening.
02:43What is the cost that we have to bear?
02:45It is true that the tax burden in India has been higher than in many other countries.
02:52But, you know, many people also say that if you want to get away from petroleum to, let's say, electric
02:59vehicles,
03:00keeping a high price for petroleum products, diesel and petrol, is a good thing.
03:05So I think it's a little complicated how you handled it.
03:08But whichever way you're saying it, you say you need to be transparent.
03:12You cannot claim that you're doing away with the administered price mechanism and then seek to control petroleum prices as
03:20they are.
03:21I want to turn, Dr. Aluwalia, to what the finance minister says today.
03:25She is saying the naysayers, those who are questioning the government, criticizing the government,
03:30talking down the economy, are fear-mongering.
03:33That the economy is in good shape and those who say that the economy is doing badly forget that this
03:42is because of external factors.
03:43How would you respond? Are you a fear-monger?
03:46No, no, I'm not a fear-monger, but let's face it, look, politics is about differing views.
03:52So you would expect the opposition, whatever it says, it will be raising the negatives.
03:57I think it's the responsibility of the government to put across a consistent picture of why it thinks the economy
04:05is in good shape.
04:06Now, there are some strengths to the economy, but there have also been weaknesses.
04:10We've known for some time.
04:12I mean, it's not just the oil price hike.
04:15I mean, for example, private investment has been low for several years.
04:19Exports have not done well for several years.
04:22So I think there are problems in moving towards the exit barrier.
04:26I think even the government's own position was, it's not as if we are there, rather we need to do
04:33more reforms.
04:34I mean, the prime minister himself has said, reform, perform, transform.
04:39So I think that implies the need to spell out what is our reform agenda.
04:45And in my view, internationally, there's a lot of nervousness around the world.
04:50I mean, money is, people with money don't quite know where to put it.
04:54So we have to give a very clear message on our major policies.
04:58And this is the time to make those messages totally clear.
05:02That's what we should do.
05:03So what's gone wrong?
05:05Well, is it only a problem of messaging or is there something structurally that has gone wrong?
05:10When you say private investment has declined, there have been FII outflows, the rupee, of course, has depreciated substantially.
05:18There are pressures both on the current and the capital account deficit.
05:21What's gone wrong?
05:22Is it messaging or is there something beyond that?
05:25MSMEs are also reportedly struggling.
05:28Yeah, I think you need to separate a few of these things out.
05:31I mean, number one, there's no question that the oil price increase had to be passed on.
05:37Weakening of the rupee was also pretty much unavoidable.
05:41Because for a long time, we were running a current account deficit, which was easily managed with the capital inflows
05:48we had.
05:49Those capital inflows dried up over the last two years or so.
05:53So unless you intend to make up the gap by simply running down reserves, which is not a good idea,
05:59you would expect that the current account, that the exchange rate would take a little bit of a hit.
06:04I mean, it helps exports in the medium term.
06:07I don't think, by the way, allowing the rupee to slip was a wrong decision.
06:13I mean, the whole idea that the currency will reflect market conditions implies that when market conditions turn adverse, you
06:23will allow the exchange rate to depreciate a bit.
06:26And I think that decision was a good decision.
06:28But I think we need to do a lot more.
06:31I mean, for example, in the last year, we have signed FTAs with, let's say, UK and with the EU.
06:40Very good idea.
06:41But, you know, the most important area in the world, which accounts for the bulk of world trade expansion, is
06:48Asia.
06:49And I've been of the view, and many others have also been of the view, that we should signal our
06:54determination to make the best use possible of international trade by signing up, for example, on the CPTPP,
07:03which is the new kind of pre-trade arrangement which includes most of East Asia.
07:09We could have done that with the RCEP, but we decided not to, whatever the reason.
07:15Maybe it was because China, our industry is not really ready to take on competition with China.
07:21But the CPTPP does not include China.
07:24And I think we should do that.
07:26I think it's also the case, by the way, that investment, the investment protection side of our overall policy has
07:35been made very uncertain.
07:37Because we used to have bilateral investment treaties which were wound up, the BITs were wound up in 2015.
07:47You know, when everything is going well, and the economy is booming, people may not mind very much.
07:54But, you know, when things become tough, people add up, all kinds of things.
07:58And the fact that we don't have BITs in place for all the major countries, I mean, we haven't negotiated
08:05an investment protection agreement with the UK or with the EU, makes investors wonder.
08:11I mean, what is our intention?
08:14And I think it's also true, by the way, that if you look at the past record of disputes that
08:19India has had on investment agreements, it's not a good record.
08:24The general impression is that the government simply does not, and I'm not referring to this government, this has been
08:31there for a long time.
08:32We simply appeal everything up to the furthest, to the highest possible level.
08:37That doesn't create confidence amongst the investors that if things are problematic, that they will be resolved.
08:44And I think we need to put in place an investment protection agreement which matches, let us say that, of
08:53the most progressive emerging market economies, maybe 10 of them.
08:57And that should be done in a very expert manner.
09:00Indeed, we should put it out for discussion.
09:02I think at the moment, there is some talk that we are working on a BIT, but we don't know
09:09what it is.
09:10So, in a sense, what you are saying is the seeming crisis that we are in.
09:14And I presume you are saying we are in a crisis.
09:17You are saying it's not okay, you can't ignore some of the headwinds that we are facing at the moment.
09:26Am I correct?
09:26That these global headwinds are here at the moment.
09:29We can't pretend that all is well.
09:30The director general of the International Energy Agency has said that the Hormuz crisis is the most serious energy crisis
09:41the world has faced since 1970.
09:44So, it's very unlikely.
09:45I mean, we are highly dependent on imported oil.
09:4880% of our oil is imported.
09:51So, if the world is in an energy crisis relating to the availability of oil, how can we say that
09:57we are not part of that crisis?
09:59I'm not saying, by the way, that we can't handle it.
10:01But I think we should recognize this is a problem.
10:04It's not business as usual.
10:05That's why I think if we were to, if we made that clear, and I think the country should know
10:11that keeping oil prices low at this point, petroleum, doesn't make sense.
10:17I mean, if there is an increase in global prices, a shortage in supply, that will have to be taken
10:23care of.
10:24Now, it's not just oil.
10:25It also affects fertilizers.
10:27Because fertilizer prices are going to shoot up.
10:30It raises, I mean, we are caught in policies which, quite frankly, never made sense for many, many years.
10:37I mean, we are currently pricing fertilizers at 10% of the import cost.
10:43And as a result, as people like Ashraf Gulati and others have said, it all leaks out to Nepal, Bangladesh,
10:51what have you.
10:52Now, this is not sustainable.
10:54But at the same time, it's very difficult to persuade people about the need for change.
11:00So, I think we need more transparency and more discussion.
11:05So, in a sense, Dr. Aluwalia, what you are saying is that the crisis, if we can call it that,
11:12also provides an opportunity for reform.
11:14I can take you back to 1991 when you were part of that stellar team, including PV Narsimha Rao, Montek
11:20Singh, Aluwalia, Manmohan Singh, others.
11:23All of you were together and actually pushed for, used the balance of payments crisis to push for liberalization.
11:30Do you believe this is also an opportunity to re-look at subsidies, re-look at reform, including, as you
11:36just mentioned, fertilizer pricing?
11:37All of this, this is a moment actually to be doing more, not doing less.
11:42Yes, absolutely.
11:43And what is more, I don't think it can be just done with the ministries doing some work quietly themselves.
11:51I think, whether it's Niti I.O. where you set up some high-level committee, I think we need to
11:57have a much broader discussion of some of these things so that people understand the need for change.
12:03And, I mean, for example, take the ease of doing business.
12:05I was very pleased with the news report, which said that we have set up a committee under Rajiv Gaoba,
12:13former cabinet secretary, to deal with the problem of quantitative control orders, you know, quality control orders, which are a
12:23form of import licensing.
12:25Now, they recommended, according to the newspapers, that there were about 600-plus QCOs which should be got rid of.
12:33I think about 200 have been got rid of.
12:37Personally, I think all of them should have been got rid of.
12:40So what I mean is if you have such a high-level team making a recommendation after much consideration with
12:47a lot of people who are otherwise well thought of and linked to industry, and they all say that for
12:53ease of doing business, we should get rid of 600 QCOs, then I cannot see why we've only got rid
13:01of 200.
13:02I mean, I think all 600 of them should go.
13:05So why is that?
13:06Is that because the bureaucracy is resistant?
13:08Is it because the government, Modi government, is winning every election?
13:11So there's an element of complacency, as Dr. Surjit Bhalla seems to believe.
13:15Why is it that you believe that the reform process has not pushed ahead much faster?
13:21Well, I don't know, and I don't think the time is over.
13:25What I mean is that what I hope doesn't happen, we don't make the mistake of thinking that we must
13:31wait until the next budget.
13:33This is very urgent.
13:35We should get it done now.
13:37You can use the budget to explain why you've done it.
13:39You know, I think the 1991 budget speech, which is much talked about, the interesting thing about the speech was
13:46that all the important things had been done before the budget.
13:50The speech actually explained why they were done at great length.
13:54And you need to do that.
13:56I mean, for example, there's a lot of debate in the newspapers on, you know, whether the exchange rate will
14:01hit 100 or not hit 100.
14:03I mean, I think these numbers are not very meaningful.
14:06It's good that it's been allowed to depreciate.
14:09Whether it hits 100 or goes a little above it, I personally don't bother very much.
14:14In due course, it's when the market says that the rupee is over depreciated, the markets themselves will bring the
14:24rupee back.
14:25And I think that's the approach we need to adopt.
14:28In conclusion, therefore, what do you believe is the strength of this government?
14:32They've been in power for 12 years.
14:34You've observed them closely.
14:36You've seen the reform process of the years.
14:38Do you want to compare it to previous governments?
14:41What do you think that they've done right and what have they not done right?
14:44I think a lot.
14:45I mean, I don't want to compare.
14:46I mean, comparing over 10, 20 years research project.
14:49Maybe I should undertake that.
14:51It would be quite fun.
14:52But, you know, I think let's be clear.
14:54During the term of this government, some important reforms have been implemented.
15:02I mean, for example, Aadhaar, which was started by the previous government, strengthened by the present government, built up into
15:11a pretty major sort of digital infrastructure.
15:14That's very good.
15:16Similarly, the GST.
15:18The government opposed it when the previous government tried to push it.
15:22But, I mean, they decided to do it.
15:24I think there are questions about whether it's been done as well as it could be.
15:29I mean, for example, everybody says that we ought to have one GST rate with a little sin rate for
15:37higher commodities.
15:39When are we going to do this?
15:41I mean, I personally think that you should, rather than rely on this GST council, which just meets and then
15:48comes out with something, this is the time for the finance ministry to present its view of what should be
15:55the GST reform over the next three years and send it to the GST council.
16:00Most of the states are controlled by the BJP.
16:03So they're in a beautiful position to get it all done.
16:07You know, all reforms involve some hard decisions.
16:11And if we merely talk about reforms but hold back, that's not going to work.
16:16I mean, for example, on privatization, Air India privatization, a very good move.
16:23I mean, it took a long time, but it's been done.
16:26But there are other privatizations that have been talked about which don't seem to be moving further.
16:30You can make a list of things.
16:32I would certainly say that right now, in the short run, good that the oil prices have been raised.
16:39Good that the rupee has been allowed to flow.
16:41We haven't done enough to look at why foreign direct investors seem to be not very happy with us.
16:49I think we need to address their concerns.
16:52Private investment in the private corporate sector is also not doing well.
16:59So we need to examine why that is so.
17:01Maybe there are some problems.
17:03Set up a committee with top private guys who can maybe tell us what needs to be done.
17:08I don't think we should be relying on the ministries to do this.
17:13And quite frankly, the important thing about the 1991 reform was fresh ideas outside the normal ministerial process,
17:23brought in with lots of consultation with other expert committees, this, that, and the other.
17:29And this has become a much more complicated world.
17:31I mean, the world is much more complicated than it was in 1991.
17:351991 was, in a way, a no-brainer.
17:39I appreciate, Dr. Aluwalia, you joining me and speaking so plainly from all the experience that you've had over the
17:45years.
17:46Thank you very much for joining me here on the show tonight.
17:49Thank you, Rajeev.
17:50Thank you for having me.
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