The Economic Survey tabled in Parliament on Friday, pegged the economic growth at 8.75-9.25 per cent for fiscal year 2012. Chief economic advisor to finance ministry Kaushik Basu says India can achieve 10 per cent growth in GDP over the next three years.
However, according to Basu, the biggest threat to GDP is the rapid rise in crude oil prices. "Crude shock is the biggest downside risk to GDP growth and its escalation will be a global shock," he told CNBC-TV18.
Commenting on deregulation of petrol prices, Basu said, "We may decide to regulate petrol prices if the situation warrants itself," before hastening to add that regulation do not mean that prices will not rise. According to him, regulation would mean that the petrol price will be shared by the government and the consumer.
On fiscal consolidation and a gradual withdrawal of the fiscal stimulus package he said a careful balance will be needed to be struck between growth and inflation.
Below is a verbatim transcript of his interview on CNBC-TV18.
CNBC-TV18: Let me start by asking you and this is on the basis of the reactions that we have been getting in through the day on the survey and usually the Economic Survey is now being seen as a big vision document which is not really rooted or connected to the budget or to the political and the economic realities that we find ourself in. Surprisingly or not surprisingly perhaps it was a conscious decision on your part that this survey seems to be more rooted or aligned to the political realities. Was that a conscious decision on your part?
Kaushik Basu: No it is a general orientation of our team that we want to talk about the large policy choices that India faces. We want to analyse the past year that India has just lived through. But it is to do with India’s policy options and so the policies that we discuss, part of this happens to be a wishlist, a part of this is something that we are actually expecting to happen.
CNBC-TV18: But even in terms of the wishlist, the sense is that the wishlist is a more realistic one.
Kaushik Basu: It is a wishlist where we don’t want to be an academic document where you are talking of something for which there is no hope but things for which there happens to be hope and you want these to be evaluated, analyzed.
CNBC-TV18: Hope and confidence that this wishlist will actually be reality or hope?
Kaushik Basu: More hope than confidence I have to confess. Hope is greater than the confidence because political process is a difficult one in a country as noisy and as democratic as ours, all good traits. But that means that very often our hope will not be realized. But it is atleast things which are possible, to bring them into the agenda of discussion is what we wanted to do.
CNBC-TV18: Let me get down to specifics now. Let me start by talking to you about the GDP growth target, and you have said in the survey that you expect the Indian economy to grow between 8.75 to 9.25 per cent, that’s for FY12. What is the downside risk to this 9% growth given the fact that we have seen a crude shock once again and the crisis in the Middle East seems to be worsening. What is the downside risk to this growth?
Kaushik Basu: The crude shock is the big downside risk. We can handle this where the shock stands right now. If the shock goes even deeper we will begin to have difficulties and the difficulties will be more than inflation. People very often say that if the crude goes up there is going to be inflation. But beyond a point it is not inflation as much as the fact that our factories, our various operations which need oil will begin to get hit. And that is going to be a downward shock on India’s growth.
If this happens it is going to be a global shock, we will be a part of that and there is going to be some slowing down on growth. There is one plus side I should mention in this. We are still an emerging economy with a lot of slack. We don’t use all the advantages that we have to the hilt and almost by definition we are an emerging economy.
So yes, if we get the oil shock becoming bigger than what we have got till now and that begins to slowdown, if we do have sufficient determination in terms of infrastructure building up, in terms of alternative energy, in terms of loosening up administrative hurdles, that is a big one in India, if we begin to work on that to make the business atmosphere easier, we can then try to compensate for some of the downside that will come with this.
But the final word is that with a growth forecast of 9 per cent we are fully aware that things can go wrong, fully also aware that we may be lucky, nothing goes wrong on the oil front and we begin to manage to achieve those other things which push us to 9.25 per cent.
CNBC-TV18: In the survey you also talk about the fact that the government will cap auto fuel prices if crude spurts. This was the recommendation of the Kirit Parekh Committee as well, but we don’t have a number. When is the government going to intervene, Bret is almost at $115, closer to $116. Nymex Crude is above $100 continue to trade above $100. The Indian basket of Crude is now at $100, when will the government intervene?
Kaushik Basu: I should clarify first of all. The sentence that you gave is not quite right. What the survey says, which is the known government position on the matter is that the price of petrol is on a free float, we did that, that was announced on 25th of June last year, we intended to be that way.
CNBC-TV18: What is a sufficiently high price?
Kaushik Basu: We don’t have a number there, it is true. But if it goes sufficiently high we may decide to step in and protect the consumer price at that point. However, I should clarify something that stepping for the government does not necessarily mean that you go back to price control. So cap is not the right word and we never use the word price cap. It could be that we begin to share some of the burden at a higher price, we take part of it on the fisc, and part of it we make the consumers bear. If we keep that share constant then it is not like a cap. If it still rises part of it is taken.
CNBC-TV18: But there is still no number that the government has worked out?
Kaushik Basu: There is no number. At times you fix a number then you find that by the time you get there the economy is robust enough to be able to take it. One year ago the kind of FII flows we are getting in now, we would have thought that we would have to step in but the robustness of the economy we are managing to take it. But we don't have a number.
CNBC-TV18: The survey also says that diesel deregulation should be staggered. It has been put on the backburner, and this is publicly known. Is this really going to be the time that the government will even consider a gradual staggering or a gradual deregulation of diesel?
Kaushik Basu: That was the announcement again on 25th of June last year and it is true it’s a long time we have not moved further on diesel. But that remains on our platter of policies that we are considering, that diesel is going to be gradually put on this. But we don’t have a fixed plan and you have to wait and see what happens. There are several ministries involved and a decision at some point will be taken.
CNBC-TV18: Is the case stronger now for rationalization as far as the petroleum duties are concerned, petroleum taxes are concerned. That has been the recommendation of the oil ministry to the finance ministry – is the case now stronger for that to happen?
Kaushik Basu: You are stressing about the fact that the prices (have moved up). There is always a case for looking at this. Rationalization by definition is something that you want to move towards. But rationalization of a particular set of taxes and subsidies is not just those taxes and subsidies. It has ramifications for the entire deficit, fiscal deficit, revenue deficit, it has ramifications for the automobile industry. Yes it is on the cards and it will be looked at. Again I can’t tell you when but that is something that is on.
CNBC-TV18: You have spoken specifically about ATF prices and said how ATF prices in India are the highest globally. This has been a long-standing demand on the aviation sector in this country and you need to bring down ATF prices. Have you got any support within your own ministries?
Kaushik Basu: This is not something that I have discussed enough to know whether the discussion is beginning to rub off on people or not. So I don’t know. Maybe it has had an effect, but I don’t know.
CNBC-TV18: Let me talk to you about the fiscal deficit and you've projected 4.8 per cent for FY11, better than what the government own projections were. Do you anticipate you are being able to do this same number or similar number in FY12. Do you anticipate bettering it because you had the benefit of the 3G revenues this time around?
Kaushik Basu: I am not going to speculate where we are expecting to go but let me clarify that the number 4.8 per cent which you just quoted, I am sure you are quoting the number that appears on Page 2 of the Economic Survey in the table that is not a government plan or something that we propose to do that is the plain simple numerical estimate of the numbers.
If you take the GDP number and the fiscal deficit number and work it out, you get to the number of 4.8 per cent. So that is not quite the intention of where we will be. For that you have to wait for a couple of more days to know what the government is planning to do on that. So that it is a pure mechanical number given that the GDP grew by a very substantial amount, especially GDP at market price grew by 23.3 per cent. That 4.8 per cent number that you are saying which is available there for you to have computed, is really that mechanical number computed with a new GDP.
CNBC-TV18: Can you give us a sense of the kind of market borrowing that the government is going to see next year because on the basis of the number that are publically available. The estimate that the economists are coming up with it will be between Rs 4 to 4.5 lakh crore. What is the sense you will get?
Kaushik Basu: I feel guilty listening to your whole question because I should have started off earlier and said that no I will not talk about it.
CNBC-TV18: Let me talk to you about inflation. There have been several comments that you made that the inflation may stay elevated on the West Asia crisis. Inflation pressures are both from domestic and global factors. Core inflation suggests that inflation has now become more generalized. You also talk about the fact that monetary action is warranted at this point in time. But what about fiscal and administrative action. There seems to be once again a sense of helplessness on the fiscal side when it comes to taming inflation?
Kaushik Basu: We don’t again say monetary action is warranted. We say that there has been a year - actually I do believe it has been a very sophisticated monetary management of the Indian economy. So the fact that despite that there is this inflation which is certainly a matter of concern really forces us to look at events taking place elsewhere in the world which are flowing into their country.
It is with that in mind which we give those figures which are slightly more than what people are used to saying that when you go into a growth spurt in the kind of world that we are in where one country's generation of money begins to flow into another, we may have to be reconciled to a slightly higher inflation than not what we are getting now. Now we are already too high we want to bring it down.
But historically if you see it used to be at 3.5 per cent, 3 per cent inflation. Those periods would now probably be replaced by 4.5-5 per cent inflation. But where we are right now – which is on food right now 9.3 per cent inflation and on overall it is 8.23 per cent is the WPI inflation, there is no two ways about that that we have to work to bring this down.
CNBC-TV18: The part of the panel that the government actually set up in order to find ways of cooling down food inflation, inflation in general – there seems to be a sense of helplessness that seems to be coming from the government in terms of what they should do as far as inflation is concerned. It seems to be the responsibility of the Reserve Bank of India and one does not know what we should expect from the government on the fiscal side.
Kaushik Basu: There is no helplessness. There are certain things which when they come as something completely external coming in, you know it is coming, you have to take it. There is one kind of a spike where we have understood what needs to be done. These are sudden spikes in onion price, cabbage price which happened, and there the system of delivering and marketing needs to be improved so that committee that you just mentioned which I am chairing is an inter-ministerial committee. We are now quite clear that we have to work very hard on the marketing side of it. So there is no helplessness that we want to work on that.
Overall average inflation 8.23 per cent, helplessness is the wrong word. But this is something on which we deliberately do not want to go in with a huge hammer and bring this down suddenly because if you do that factories will close down, unemployment will shoot up and in the Economic Survey you haven’t had time to look at it carefully enoughm but there is a fairly substantial discussion on the trade off between very quick measures, where you bring the inflation down which will cause your unemployment to move up, since in India you get the unemployment number on a weekly basis and not on a monthly basis.
People very often push that aside and the focus has come exclusively on inflation. But we in government have to be careful about balancing between these two because inflation affects the poor, unemployment also affects the poor. So you just can’t say that we will be worried about one and not the other.
CNBC-TV18: Is that the same argument when it comes to the gradual withdrawal of fiscal stimulus because again that is what the survey says the government should implement a gradual exit from the stimulus. Industry is backing for this approach. Economists are saying you need to cool down on the economy already over 8 per cent, withdraw the stimulus now?
Kaushik Basu: If you withdraw the stimulus at one go – it is like suddenly tightening up money at one go. The private sector is not going to be able step in mmediately. You are going to have another economic downturn. You can’t do it suddenly. You will have to do it slowly. We are very clear that that is a direction in which we want to go that the stimulus was put in two years ago to counter the downturn. We can’t live with the stimulus perpetually, but you have to taper it off.
So the analogy for stimulus is not antibiotic where you stop one day suddenly but it is steroids where you taper it off. So getting out of a stimulus is the way you get out of a steroid. You gradually taper it off and we are doing reasonably well on that.
CNBC-TV18: What is a big concern on the fiscal consolidation front, because the government is hoping to move back to the part of its consolidation? You are hoping that by FY12 the situation will improve dramatically even as far as states are concerned. But what are your concerns there, because you are betting on revenue buoyancy where you need to get to that goal, to achieve that objective?
Kaushik Basu: On the part as I just said is we want fiscal consolidation and we want to gradually want to get out of the stimulus. Come back after 4 days, we will have a substantial discussion on this topic.
CNBC-TV18: Let be now talk about some of the other suggestions or the recommendations the economic survey talks about, specifically on the banking side. The service that the business houses may be allowed full banking licenses, that there should be two types of the banking licenses, even MFIs & NBFCs should be considered as far as banking licenses are concerned; even foreign promoters should be; with experience should looked at from banking license point of view. This seems to be not perhaps a variance, but the RBI seems to be a lot more closed in its approach with regards to this issue. Is this a gentle nudge?
Kaushik Basu: It is not a gentle nudge, but it is something to put on the table to discuss and RBI is true, RBI tends to be a bit more close but then you people watch RBI so much more closely, they are forced to be at the top (overlapped).
But we can afford to put these topics on the table, and that is what the whole idea that India has people with money needs from big business, to a very small vulnerable segments who need small amounts money and regular banking cannot reach out to this so you need across the board and we wanted a discussion to this to be placed on the table. It started last year when the finance minister actually talked about the importance to expand our financial system and banking system and actually lot of these ideas were there in the finance minister's budget speech last year, he just freshed these ideas out a little bit more.
CNBC-TV18: RBI is still stuck at giving scenario as far as its issue is concerned; even the guidelines had not been put at. Is this something that the finance minister or the finance ministry will perhaps stick to the FSDC and have a discussion between the regulators on this issue?
Kaushik Basu: This is certainly something that can come up in the FSDC, but if you read this discussion, the economic survey has a sort of advance notice of something that is going to the FSDC that is not correct. In fact, economic survey is such a public document that you want to bring in not just FSDC but people like you and people like just television viewers also to get into this debate, express that opinion so that ideas get formalized and plans get executed.
CNBC-TV18: The survey seems to talk about micro-finance institutions and that the caps on interest rates should not be very severe. The finance ministry to understand, wants to nurture, and wants to support MFIs, because on the back of the legislation that we saw coming in from Andhra Pradesh there was a fear the perhaps the micro-finance industry in this country is on the verge of being stifled?
Kaushik Basu: Yes, that certainly the ministry of finance and even the research division which really works with micro-finance takes a view that it has extremely important sector. So you don't want to take regulatory measures, that actually hurts the sector to a point of closing it down, because in the end it will hurt the people who are borrowing money out of that. So the idea is that you do need regulations. And the regulations primarily have to take the form of transparent contracts. This is everyone; all of the world, there is realization when it comes to financial precuts, people don't quite understand when they sign on the dotted lines what they are signing on to.
So the first and foremost requirement is these simple contracts, when a person is borrowing, it should be made crystal clear that this compound interest rate. This is not simple interest rate, things like that. The cap is something which is open if you read that part of the economic survey closely associated with that, we take the view that you can't take a blanket view on this; as some will say, 'no, there is no caps'.
Even in the United States, there is a usury laws that loan contracts have a cap, simply because people very often don't understand what they are signing on so you may want to place a cap; However, you have to recognize that giving micro credit, is very expensive for the NBFCs that go out and give that credit. So if you keep profit margins very splendor, effectively the segment will close down. So you have to keep a sufficient margins so that the segment continues to, very important segment really, let me stress that is a micro-finance ought to continue to flourish but within a regulatory system.
One more thing add to that, recovery of loans. Recovery of loans, we have to spread the culture that when you borrow alone, you are supposed to repay. However, from big business to small business there are bankruptcy laws, that under certain conditions, we have the right not to pay back and we view the MFI sector also in those terms.
It should not be strong arm tactics we used to recover the loan, there have been some incidents of that and we don't want that to happen at all. There should be a clear regulatory set of norms that under these conditions a person can legitimately say that I am unable to pay, I am bankrupt, and I will not pay. But if those conditions are not fulfilled, you do expect that person to pay but it is not strong arm tactics, but it is a law that will make them repay back.
CNBC-TV18: I want to talk to you about reforms and I want to talk to you specifically about what you said on the retail reform. This is something that I have seen in the last several economic surveys, the fact that we should open up multi brand retail for Foreign Direct Investment (FDI). You have mentioned again in this economic survey, you have also spoken about the fact that for a start perhaps FDI should be allowed to retailers who open up two outlets in the metros. How close is this wish to becoming a reality because we have gone through almost a year of inter ministerial consultations in comparison to the previous years? Are you feeling more confident about this particular reform being turned into reality?
Kaushik Basu: Confident in the medium term, in the sense that I think within government there are several people. So, you are right that the economic survey has had it from the time of my predecessor. It shows that the chief economic advisors are a bit oriented towards that. But government, as a whole in a country as complex and in some ways as magnificent as ours, decisions take place slowly.
But I do feel that there are critical players in government who realize this is important. This is not something that is done just for big businesses to come in but this is something that could affect the farmers by enabling them to get better prices, by helping consumers by enabling them to buy the products at a lower price.
But it’s a big decision, it will take time, multiple ministries are involved. But there is an opinion that is building up which I will just say that I will keep my fingers cross that something will happen on that. But I don’t know when and how soon.
CNBC-TV18: On the reading of the Economic Survey the view that one has got is that perhaps this is the first time that the government has openly acknowledged the severity and the seriousness of the inflation problem. Usually when we talk to Delhi or we talk to North Block or the Finance Ministry the view is that inflation will taper off, it will come down to about 6 per cent or 7 per cent by the end of the year. But the view seems to be that this is the first document from the Finance Ministry that acknowledges very clearly the severity and seriousness of the inflation problem. Would you agree with that?
Kaushik Basu: I haven’t done enough archival work to assure you on that. But we certainly did that and this is something that we discussed together. The Economic Survey is something that the Finance Minister also looks at. And together we believe that we are really want to be completely honest and upfront about this.
On inflation, the levels where we stand right now make us feel uncomfortable, unacceptable, and we want it to go down. But really we have to also remember that from where we were a year ago we have come down quite a bit. So we also point to that. In February last year it was 20.22 per cent for food, we are now down to 9.3 per cent. So we have come down quite a bit.
Another important thing that we have to keep in mind is our inflation is higher and we have been completely upfront given it in every different way, you can look at the numbers, we have displayed those numbers, but please do remember that one year ago when India was inflating we were almost alone. Now there are a whole lot of emerging countries that have joined in and now it’s very clear that India was one of the first countries to get out of the global recession and the economy picked up very quickly and India was also one of the first countries beginning to exhibit a phenomenon that now we are seeing across the emerging economies.
So this is a very global phenomenon that we are a part of, and we are trying our best to handle it.
CNBC-TV18: I wanted to talk to you about subsidies. You talk about several things, smartcards and coupons and so on and so forth to direct subsidies better. Whether it’s the Food Security Bill or whether it’s the fertilizer subsidies. Is this really on a hope list on being able to prune subsidies on being able to direct subsidies better? Is that really the hope?
Kaushik Basu: It is also on my hope list. Let me say that the Economic Survey is not a document that which gives you the ministry’s collective hope or even the government’s hope, but it is a research division that works on it. But it is a point that I've stressed through the year. This you will see actually being mentioned even in the budget speech of last year that when you want to reach out to the poor you are giving out subsidy to them, we do want to be committed to giving that subsidy.
But sending the subsidy on the way to the poor is not the same thing as having the subsidy arrive there as we have now very good studies that on the way the truck loses a lot of the subsidies that is being carted to the poor. So you need better systems to plug this. I do think that there are systems out there and I have been pushing as you know that we ought to adopt the systems that have been driving different parts of the world, there is a good body of economic theory which says that there are better systems to go for.
But when you are trying to push for a change again in a country as complex as ours and in a country where something has been in place for a long time it needs a lot of consensus building to be done. Again on this, I will say that I am hopeful that we will be able to do something. Again I won’t bet on a particular time when we will do it.
CNBC-TV18: Is the Economic Survey this year more aligned to the budget?
Kaushik Basu: Unfair question, so it will go unanswered.
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