If oil prices keep rising, Govt will have to act: Montek

OIL IS WELL: The Deputy Chairperson of Planning Commission defends fuel price rise.

        

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Is the UPA government still capable of handling the economic challenges facing the country or has it run out of directions. That is the key issue Karan Thapar raised with the Deputy Chairperson of the Planning Commission, Montek Singh Ahluwalia, on Devil's Advocate.

Karan Thapar: Many people believe that with just less than a year for elections, the government has run out of directions. It can no longer tackle the challenges India faces. Are you like a ship lost at sea?

Montek Singh Ahluwalia: Not at all. We have had an external set of circumstances that have imposed some difficulties. But the ship is steering pretty much in the direction it should.

Karan Thapar: Let me begin by taking about the oil price hikes. The international prices of oil have jumped nearly 100 per cent in the last one year. Why did you not act earlier? Why did you wait for a crisis like this to take action?

Montek Singh Ahluwalia: I don’t think this is the case. What you actually mean is we did not adjust the prices earlier.

Karan Thapar: Absolutely.

Montek Singh Ahluwalia: Number of actions were taken earlier. Remember this is a big increase in oil prices and all of this could not have been passed on to the consumer.

Karan Thapar: But you allow the situation to develop. Some oil companies will have a projected loss of Rs 250 thousand crore.

Montek Singh Ahluwalia: That is a projection of what will happen in the coming year.

Karan Thapar: But you waited till then. Couldn’t you have acted earlier?

Montek Singh Ahluwalia: All you are saying is should you not have changed the prices earlier. Actually the price adjustment that we have made is a small part of the total burden because the judgement of the moment is that we point the right direction. But a lot of this burden is being borne by reduction in taxes and provision of oil bonds and so on.

Karan Thapar: You say that you should be pointing at the right direction but pause for a moment and think what you have actually done? Rather than get petrol consumers who can afford to pay a holistic price—to pay a price that approximates the real price of oil—what you have done is to continue to subsidise them with money that can be better used for the poor. You are favouring the rich and you are denying an opportunity to the poor. Is that fair economics?

Montek Singh Ahluwalia: Well that is not actually true in the case of petrol by the way. Because petrol is one product partly because of the tax burden on it is quite comparable with the international price. Infect earlier, petrol prices in India were much above international prices. The real subsidy is on LPG and on kerosene and a little bit on diesel. This is a judgemental matter. This is huge price increase. Kerosene is used by the poorest people in the rural areas and the government consciously decided not to increase the price at present.

Karan Thapar: Absolutely. But petrol and LPG is used by the top 15 per cent of the country. They can afford to pay more. Morally they ought to pay more and you would have a better sense of economics if they did pay more. The only problem is that you lack the guts to make them pay more.

Montek Singh Ahluwalia: Well it is a tough decision. I think the fact is that generally there is resistance in the country to see higher fuel prices. All we have done is given a signal that if energy prices rise, then people will have to get ready to pay more.

Karan Thapar: Have you given enough of a signal?

Montek Singh Ahluwalia: That depends on what happens to the oil price. There is an element of uncertainty. There are reasons why action may not have been taken earlier. It was not really clear for how long the oil price would remain high. It’s only in the last month...

Karan Thapar: You say it wasn’t clear how long the oil price would remain high. The truth is that between June 1, 2007 and Jan 1, 2008, the oil prices increased almost 50 per cent. There was no doubt about it.

Montek Singh Ahluwalia: I don’t think in any country domestic prices are changed instantaneously. You could do it that way. You had to make a judgement. Is this a spike? Is it a temporary increase? Will the slowdown in the world economy moderate the increase? Even today there is doubt. Some people think that oil prices will go unto $200 a barrel and others think that with slowdown of world growth, they will come down.

Karan Thapar: The whole world made a judgement that this wasn’t a spike and it was in fact a frightening increase that seem to be rolling forward. The only people who did not come to a judgement were the Indian government.

Montek Singh Ahluwalia: I don’t think that is correct. In the case of Malaysia for example, their timing of the price increase was almost the same as ours.

Karan Thapar: And look at the amount to which they have increased thereafter.

Montek Singh Ahluwalia: That is true. But they have done a very complicated kind of pricing.

Karan Thapar: But they compensated for the delay with a very sizeable increase. You have compounded the delay with a minimal increase.

Montek Singh Ahluwalia: I think the reason for this is that Malaysian petrol prices at the pump were actually quite low. Indian petrol prices at the pump have always been quite high. It has been a source of revenue for the state. What has happened is that with the rise in oil prices, we have been basically cutting taxes down. I don’t think that petrol at the moment is an over priced commodity. If prices rise, you may have to adjust.

Karan Thapar: Since you announced the price increase in India on June 4, it has increased internationally by another $12 a barrel. It is likely to increase another $5 or $6 a barrel in the next month or so. Are you now going to increase the Indian oil prices again?

Montek Singh Ahluwalia: It is not for me to predict what is going to happen week after week. But the issue you raised is a very relevant one. Compared to last year—and last year we did not pass on the full price increase because we felt that the oil bonds could insulate the companies a little bit. Now compared to last year, there has been a $45 a barrel increase in the prices.

We import about 90 million tonnes for our consumption and that means that this import will cost us about $29 billion more, which is about rupees hundred and thousand crore. Now that is the extra burden compared to last year. The issue is that someone has to pay for it. What have we done? We have distributed the burden. We have raised prices worth about Rs 21 thousand crores, we have lowered taxes to about Rs 22 thousand crores, oil companies will bear some burden and they are giving out oil bonds. So share it.

Karan Thapar: The point I want to make is that you say you have distributed the burden, but have you distributed it wisely? Could not and should not the petrol and LPG consumers pay more?

Montek Singh Ahluwalia: That is a judgement.

Karan Thapar: Absolutely. Why did you not come to this judgement?

Montek Singh Ahluwalia: When you balance a whole lot of alternatives, you come to a conclusion and someone will always say that you should not have done that or this.

Karan Thapar: Were you scared of losing votes?

Montek Singh Ahluwalia: It is not a question of losing votes. It is a question of providing something that will be perceived by the public as fair. And I think fuel prices are sensitive. Incidentally, petrol got the biggest hit. There was a Rs 5 increase in petrol, compared to other things.

Karan Thapar: The whole thing hinges upon the fairness with which you distribute the burden. The second aspect of your distribution of burden is that so that you can claim your fiscal deficit is not affected almost 50 per cent of the burden has been actually handed over to future generations?

Montek Singh Ahluwalia:It is true that issuing oil bonds is taking on the burden in the Budget to spread it out in the future. It's a judgmental call whether you should do that now or pass on the burden immediately. Now when you get a big increase in oil prices—any big shock—it is quite normal to insulate the immediate consumer for a little while. What happens if this price (rise) continues? Can we keep issuing oil bonds? We have categorically said no. The Prime Minister has said it's not a permanent solution.

Karan Thapar: Then there is corollary from what you are saying. If the price of oil keeps increasing, if it hits $200 a barrel at the end of this year, then presumably you are not just going to have increase the price but make consumers pay for it.

Montek Singh Ahluwalia: I have no hesitation in saying there is no magic bullet with the government. If import prices increase we cannot insulate the domestic consumer indefinitely. There is a case for insulating the poor, a much weaker case for insulating the general consumer—there is some case because you don't want to shock them too much—and very little case for insulating the rich. But the fact is that if oil prices keep on rising the government will have to do something.

Karan Thapar: That suggests the Government would have to first hit those who can afford to pay whilst protecting those who can't and therefore petrol and LPG consumers can expect that if prices of petroleum increases internationally the price of the product they buy in India will go up. At least appreciably.

Montek Singh Ahluwalia: I can't announce what the Government would do but in my view—and the Planning Commission—has been consistent on this we must bring the country round to the recognition that domestic consumers must pay, except those who need subsidy. Those subsidies should be limited and targeted.

Karan Thapar: Is there consensus in the Cabinet for this thinking?

Montek Singh Ahluwalia: Raising prices, raising taxes these are all difficult issues. Nobody decides these things in anticipation of hypothetical circumstances.

Karan Thapar: Is that a yes or no?

Montek Singh Ahluwalia: The Cabinet's decision is to share the burden. That is a recognition that consumers will have to bear some burden.

Karan Thapar: And the Planning Commission's advice is that burden must be shared by making those who can afford to more??

Montek Singh Ahluwalia: Absolutely! We have been completely consistent on that.

Karan Thapar: Let's come to the second area where public confidence in the Government's ability to handle a problem is sinking: inflation. It was quite clear to the whole world that international oil prices and international metal and food prices were increasing for the last nine months and maybe even a year. Surely you should have stepped in to tackle the inflationary tendencies in our economy earlier rather than waiting for March and April.

Montek Singh Ahluwalia: We didn't wait till March and April; that is not fair.

Karan Thapar: What did you do before that

Montek Singh Ahluwalia: Reductions in import duties took place in September or thereabouts. Inflation is tackled by a variety of ways. You do a little bit of tightening of monetary policy; you can do reduction in customs duties; you can take steps in the supply side. Last year we took a lot of steps on agriculture.

Karan Thapar: The point is you tinkered before March. You did nothing coordinated, nothing effective. In fact when the Finance Minister announced his first set of measures to tackle inflation on March 31 he predicted in public that within two weeks inflation rate would start coming down. Eight weeks later it has jumped from 7.35 per cent to 8.24 per cent and now this week it is hitting 8.7 per cent. Are you doing enough to tackle the problem? Are you taking the right steps

Montek Singh Ahluwalia: I can assure we are taking the right steps. You are not giving me any credit whatsoever for steps the Government has taken to increase supply. Look what has happened in agriculture last year. In 2007-2008 we have had a tremendous growth in agriculture. The most useful way of tackling inflation is to tackle the supply side to the extent we can. We launched a food security mission, we launched a major effort to bring agriculture around. Agriculture growth has been 3.6 per cent in the last four years compared to the previous four years.

Karan Thapar: Absolutely, but the problem is hitting 8.7 per cent and in all likelihood it would hitting 10 per cent in a month's time. If your steps are so effective, so well thought through why is the inflation climbing rather than reducing as the Finance Minister predicted almost three months ago?

Montek Singh Ahluwalia: I don't recall the Finance Minister...

Karan Thapar: On March 31 he said within two weeks the inflation rate would start coming down. It hasn't.

Montek Singh Ahluwalia: In the last two months there has been tremendous change in what has been happening in oil prices. Any prediction in March wouldn't have fully reflected the impact of oil prices.

Karan Thapar: But oil prices between June 2007 and January 2008, just to take that six-month period, have doubled. If oil was a determinant for inflation you could have detected it earlier, you could have acted earlier and if you had acted earlier then you would have a better grip on the problem than you do today. Have you been late in waking up to inflation? Have you been late in acting?

Montek Singh Ahluwalia: I don't think so. I can tell you from personal knowledge that the concern for inflation has been there pretty much for the last eight months.

Karan Thapar: What about the action?

Montek Singh Ahluwalia: Action has also been taking place though in different areas from than you are focusing on. What you are really saying is that monetary tightening wasn't attempted until March of this year. That is true but monetary tightening tends to have the effect of slowing down the economy, so you want to be absolutely sure that signals are such that something needs to be done.

Karan Thapar: So you waited to be sure that you needed to monetarily tighten the economy before you acted. Do you think you waited too long?

Montek Singh Ahluwalia: No, I don't think so. I think these are judgement calls that you have to the Reserve Bank of India. Let's make one important point. You talk about one important point. You talk about economic management. If India were the only country having an upsurge of inflation you could say that we were doing something wrong. The fact is all countries are experiencing this upsurge. What you are seeing in India is much better than elsewhere. The measure of monetary management is are we handling it according to best practice. I think we are.

Karan Thapar: I understand what you are saying. The problem is do you carry conviction with the people of India. The question people of India ask is how is that a government that has Manmohan Singh, P Chidambaram and Montek Singh Ahluwalia—the dream team as they call it—has messed up in this way. Instead of coming up with dream solutions you are suggesting nightmares.

Montek Singh Ahluwalia:That is the problem. You are putting so much emphasis on so-called dream solutions. What you need to know about the economy is you have got a four-year track record of rapid growth which is spread very widely. For the first time in 10 years you have got an agriculture performance that is picking up. You have got social schemes which are putting money into the hands of the poor and yes you have got an increase in inflation in the last six months. It's a global increase.

Karan Thapar: But you have got something worse. Despite all the very obvious positives you have suggested, you don't have a feel-good factor. As the ‘Business Standard’ wrote last week, instead you have a feel-bad factor. The country believes the economy is out of control; that the inflation is raging. Worst still manufacturing and industrial production might be slowing down. There is even concern that we could be caught in some sort of stagflation. So instead of feeling good and confident, the country is diffident, hesitant and worried. Confidence in the government is diminishing.

Montek Singh Ahluwalia: I think it is something we need to explain to the country better.

Karan Thapar: Is there a communication problem?

Montek Singh Ahluwalia: It is always is a communication problem because you are responding to new concerns. Nobody is describing India as a case of stagflation. Most people think India was growing very rapidly, it faced a huge increase in oil prices like every other country and it slowed down. I think it is important for the media to understand that slowing down from 9.6 per cent is not being lost or adrift or an economy in stagnation.

Karan Thapar: But if the economy is growing at 9 per cent, then why are not people feeling richer? Why are they not feeling happier? Why are they not feeling more secure? Why are they instead worried about prices? Why are they instead worried about their future?

Montek Singh Ahluwalia: Because you spend one second talking about the positives and then you are spending 10 seconds about them being worried.

Karan Thapar: Are you blaming the Press for the fact that your message is not getting across?

Montek Singh Ahluwalia: No. I recognise there is a change in the external circumstances which immediately leads people to focus on the problem. But remember there is a difference between a problem that is the result of something that happens domestically and a problem that is the result of what is happening externally.

Karan Thapar: In which case let me ask you a simple question. As Deputy Chairperson of the Planning Commission, one of the top three men responsible for the economic management of the country, do you think this Government has managed the economy as effectively it could have?

Montek Singh Ahluwalia: I think it has managed it extremely well. The way to judge whether an economy is well managed is what people around the world saying compared to other economies.

Karan Thapar: What about the people at home? If you judge what people at home are saying they are full of despair today.

Montek Singh Ahluwalia: I recognize that when signals change, anybody looking at his own situation notices that there is an adverse change. You got to explain to the people that this is not the result of mismanagement; this is the result of external development (and) we have to tackle it. We not saying that it’s (tackling inflation) not the responsibility of the government. What I am pointing out is that we have taken a number of steps. I think it is important to take these steps in a sensible cautious way, not rush around.

Karan Thapar: So you are asking for patience?

Montek Singh Ahluwalia: You always have to ask for patience when you are dealing with big problems. Big problems aren’t solved instantaneously. I am not talking about waiting for years. I am not talking about waiting for years; I am saying in a few months’ time—certainly by September-October we would be in a much better position on the inflation front.

Karan Thapar: Dr Ahluwalia, a pleasure talking to you.