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"The goal is to moderate inflation without affecting growth"

C. Jaishankar

Union Finance MinisterP. Chidambaramshares his assessment of the current trends in the economy and the performance of the UPA Government at the Centre. Excerpts from an interview at Karaikudi:

— PHOTO: S. JAMES

P. Chidambaram: "We must liberalise the financial sector. With financial repression it is not possible to mobilise resources to sustain a 10 per cent growth rate."

How do you rate the performance of the United Progressive Alliance Government, especially its efforts to carry forward the reform process despite the inherent contradictions in a coalition?

We have a National Common Minimum Programme. One way to measure the performance is against the NCMP. Another way is to measure it against objective standards, which are universally accepted as indicative of good governance.

As far as the NCMP is concerned I think a large number of NCMP promises have been implemented. I was not confident that we could carry out all those promises in five years, because I was not certain about the revenues of the Government. But we have been able to implement far-reaching programmes due to the buoyancy in revenue. The Rural Employment Guarantee Scheme, the National Rural Health Scheme, the Mid Day Meal Scheme are ambitious programmes, which have been provided very large amounts of funds. However, the outcome of these programmes is still uncertain. I have laid emphasis on outcomes rather than outlays. It is not yet certain whether the NREGP is delivering wages and gaining rural assets. Likewise there are critical gaps in the rural health mission and the rural electrification mission and even the mid-day meal scheme. I am not despondent. These are programmes which have to take root. It takes a couple of years to take root.

So I can say that the Government has made a sincere attempt to answer each question on the question paper. I am not yet certain about the quality of the answers and marks to be given. I think the quality of the governance can only be measured when we have a better fix on the quality of the outcomes of the various programmes undertaken by the Government. The people will judge in 2009.

Would you like to aim for a growth rate beyond 10 per cent? Can we match China's growth rate?

It is possible to take the growth rate beyond 10 per cent and match China's growth rate. But it requires some very critical decisions to be taken. Firstly, we must liberalise the financial sector. With financial repression it is not possible to mobilise resources to sustain a 10 per cent growth rate.

Secondly, our policies must promote enterprise, initiatives, savings, investments, and others. We cannot blame the people for the poverty that afflicts a large section of the country. Thirdly, the quality of implementation in both meeting time targets and money targets must vastly improve at the State level and more importantly at the sub-State level, district level, and even at the panchayat union level.

Take, for an example, the road sector, I can provide at an average about 3 or 4 crore rupees per km. But the quality of the National Highways and State Highways built at a cost of nearly 4 crore rupees per km turns out to be of different standards. I am afraid the investment becomes optimum. It does not get you the return that it should get. If we address these critical deficiencies, I have no doubt in my mind that we can aim [for] the 10 per cent growth rate and beyond it.

Considering the volatile political scenario in the country, there is a fear among economists that the current growth rate will not be a sustainable one.

I don't agree. There has been a structural change in India's economy. Nearly 56 per cent of India's GDP is now contributed by the services sector. It is recording double-digit growth over the last few years. That itself assures you between 5 and 5.5 per cent growth. The industry grows at double digit and agriculture grows at the desired level of 4 per cent. Surely, we can achieve a very high growth rate over a longer period of time. Sustaining growth requires further increase in savings, investments, and better implementation.

Though the growth rate is good, inflation rules very high. What are the steps taken by the Government to control inflation and when will these measures show results?

There are only three kinds of measures to control inflation. One is supply side, another one is monetary measures, and the third is fiscal measures. In the fiscal side, there is very little space for major fiscal corrections. Customs tariff is already low. We cannot squeeze large revenue because we need large revenue for our expenditure. Yet we have corrected customs duty in a large number of products — edible oil, wheat, pulses, raw materials, metals. We brought it to zero in some cases, two in some other cases, and five in many cases.

And in excise also we have made sharp reductions especially food products. Monetary measures will moderate inflation. Monetary measures come with the price of high interest rate. Beyond a point, people will complain not only about the inflation but also interest rate. But several measures have been taken. Monetary measures are having an impact.

The critical thing is supply side. Neither monetary nor fiscal measures can directly increase production. It is totally dependent on supply and demand. We have a supply and demand mismatch in pulses and edible oil. We had a supply-demand mismatch in wheat last year. If these supply and demand mismatches are triggering inflation, the only way, I repeat the only way, is to vastly increase the production of pulses, wheat, and oil seeds. That is the question which must be addressed by Ministry of Agriculture, Food, and other Ministries.

The demand is rising in India. People are consuming more. We must increase production and productivity of essential food articles. That is the most durable solution for keeping the primary items under a moderate level of inflation.

Middle class people, particularly those who have taken housing loans, feel the pinch of rising interest rates. Is there any move to spare housing loans from the interest rate hike?

The high interest rate is not new. In 1999, 2000, and 2001 the home loan rate was between 12 and 13 per cent due to monetary steps to moderate inflation. It came down subsequently. Commercial real estate and housing are experiencing very rapid credit growth. In fact, it is over 60 per cent. Such rapid credit growth is likely to lead to overheating. It is in our own interest to moderate rapid credit growth. So we increased the price of credit. Yet, we have requested banks, and we have asked the RBI to explore ways in which people who take loans, say up to Rs.10 lakh or so, to be spared from this increase. Eighty per cent of the home loans are between Rs.8 lakh to Rs.10 lakh. I think the banks and the RBI will take measures to see that this segment, 80 per cent of the borrowers, is spared any increase in interest rate.

If you take a larger loan I am afraid that in the interest of moderating inflation you would have to pay a higher interest rate.

Do you think the current measures to control inflation will slow down the growth of the economy?

No. The Prime Minister has said and I have repeated what the PM has said. The goal is to moderate inflation without affecting growth. It is a trade-off. Every country faces the trade-off. It is a delicate balancing act. I think the measures taken so far are not likely to affect growth. I hope the situation will continue.

With regard to infrastructure development, there is a mismatch between the rate of growth and available infrastructure. Many States have been facing a power crisis. Similarly, roads, ports, airports, and others are not meeting the demand.

We have not done well in the power sector. I agree. In the last three Plan periods, we have achieved no more than 50 per cent of the target. It is not my intention to blame one party or other. We have to do better. But, the capacity constraints in roads, ports, airports is because we are growing at a fast rate. If India's GDP was growing at 5 or 6 per cent, the existing pace of infrastructure growth would have been enough. Because the growth has been at an average of 8.6 per cent for the last 3-4 years, the infrastructure is straining, which means that we have to quicken the expansion of infrastructure.

We have to quicken the capacity-addition in airports, seaports, telecommunication, roads, and power. The challenge is how to quicken the sectoral growth to keep pace with the overall growth.

When will the Government resolve the tangle over the land for SEZs? There are conflicting reports coming from different Ministries and allies.

No conflicts. The decision has been taken that the governments will not compulsorily acquire land for SEZ. But, the governments can facilitate acquisition of lands on a voluntary basis. It is possible for the industry to acquire lands and it is possible for the governments to facilitate sale and purchase of lands on a voluntary basis. I think many SEZs have already been started. Many more will come without compulsory acquisitions.

Are you satisfied with the FDI inflows into the country?

They are now better than our expectations. We were only planning for about $10 billion a year. We have crossed $10 billion. We were close to $15 billion by 2006-07. Those investments must be absorbed in the country. The onus is upon India to do that.

The country has achieved a tremendous growth under the coalition government. What has been the role of the Left parties in the growth of the economy?

Of course they have contributed. Whatever has been done would not have been done without the support of the Left parties. Equally, the unfinished agenda also must be attempted. We must complete the unfinished agenda. The Left parties must extend their support to complete the unfinished agenda. There are differences. If there are no differences why should there be a Communist Party, Congress Party or the DMK. The agenda is to accelerate the growth rate, increase revenue, income of people, generate more employment, and allocate more money for social sectors.

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