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Budget must indicate corrective steps underway: Montek
January, 30th 2012

After cutting the cash reserve ratio by 50 basis points, the governor of the Reserve Bank of India said that it was now the government's turn to take a step towards fiscal consolidations. Speaking exclusively to CNBC-TV18 for the first time since the RBI policy announcement on January 24, deputy chairman of Planning Commission Montek Singh Ahluwalia says that the government will signal fiscal consolidation in the Budget, but it will not take massive contractionary steps.
"The broad focus will be on cutting down the fiscal deficit and containing subsidies, but it will not be an easy task," he said, adding that the government will make its move gradually. He further goes on to say that reducing subsidies will have no impact on inflation whatsoever. "Food inflation is likely to cool off and stabilize at 5-6%," he said.

Another key concern on the government's mind the past few months has been its disinvestment target, to which Ahluwalia says that it is alright if the government does not meet its target. "Disinvestment will be decided by market conditions, so if market conditions are not normal, it's sensible for the government to hold back," he explained.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: In cutting CRR, the RBI said that it needs to see fiscal discipline before it can actually go ahead and cut interest rates. How much elbow room do you think the government has going into the Budget to show some signs of fiscal discipline to the RBI and to global investors?

A: This is a signal you should actually wait for the Budget to give because normally we don't speculate on the budget. But the finance minister on several occasions has said that he does intent to get back onto the fiscal consolidation path. Now exactly how much is something that only the Budget will tell us, but I don't think there is any doubt that the government intends to return to the consolidation path beginning next year. We need to know from the Budget exactly how much can be done and over what time period.

I would only emphasis by the way that right now what most people around the world are interested in knowing is what our medium term fiscal trajectory is. I don't think anyone expects to see massive contraction on these steps, but people do recognize that fiscal deficits all over the world have expanded a little too much and they want to be reassured that the corrective process is underway and I hope the Budget will give that signal.

Q: Without speculating on what this Budget may or may not contain, what are your thoughts on where discipline might be got in? Is it on the subsidies front or do you think taxes can actually be taken higher when growth is sluggish, because that's the dichotomy that we might be dealing with here?

A: That goes into Budget risk. I mean obviously in many of these things you act on every front. There are lots of questions about what growth is likely to be in India next year. I have earlier said that we'll probably end this year somewhere around 7% and if you look at it purely from a domestic point of view, I think the circumstances are there to try and accelerate that. I had suggested that we should have a target of around 8% for the next fiscal year.
Of course this has to be moderated by the fact that global economic projections don't look particularly optimistic right now. Most people knew that 2011 was going to be a bad year and they thought that the global economy would recover in 2012. But the way the eurozone crisis has prolonged and uncertainty has continued, I think most people think that 2012 globally will not be a much better than 2011 and actually could even be a little bit worse.

So the question is can India accelerate its growth rate above 7% this year in a global environment where global growth may be somewhat slower. Personally I think it can because there will be some negative effects from the global side, but we can get rid of a lot of domestic supply constraints which actually are major source of slower growth in India. I think the government has identified a number of steps, particularly in coal, power, energy related sectors, where we can get rid of impediments to implementation of ongoing projects. If people see that happening, then you will see a bit of a recovery in the investor sentiment and we could get higher growth then we have in the current fiscal year.

But this is a matter of weighing a lot of pros and some cons and I don't know what the finance ministry's final conclusion would be. I think it would be sensible to have in mind a high end outcome and a low end outcome. All of that is consistent with basically trying to convey an impression that we are acting on all fronts and certainly containment of subsidies is very important. We have consistently said in the Planning Commission that we cannot achieve the planned targets for investments, including expenditure in critical social sectors, if we are not able to contain subsidies. Now that's not easy to do and it can't be done in one year. But we need to give a signal that that side of the equation is going to be brought under control.

Q: What are your key recommendations on the subsidy front and how soon do you expect to see the government or the finance minister take a stand on it; if not in the Budget how soon do you expect any action on that front?
A: In the Planning Commission we are trying to identify long term constraints. Issues of timing are very difficult to determine, least of all when you are in the middle of an election in very important parts of the country. So we are not in fact engaged in determining issues on timing. I am talking about a longer term assessment that some signal of this kind at a certain stage has to be given and I hope that we will be able to address these issues.

The most urgent thing in my view is to make sure that impediments to project implementation are actually taken care of. I believe quite an extensive exercise is now underway to identify these impediments and deal with the different ministries in a manner where problems can be resolved quickly. So I would say that in the next three months, that's the single most important thing to focus on.

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