Chidambaram has inherited a huge fiscal mess: Ajay Chhibber

Last Updated: Mon, Nov 12, 2012 06:28 hrs

Finance Minister P Chidambaram has started to bring the focus back to where we need to contain subsidies but over a period of time, this won't be enough because we have to raise more revenue, says Ajay Chhibber, Assistant Secretary General, United Nations Development Programme. In an interview with Vrishti Beniwal, he says the Centre can cut spend without reducing benefits by delivering subsidies to people at a much lower cost. Edited excerpts:

What is your outlook for the Indian economy? How much of our problem is because of the global slowdown?

We are off the highway of growth and to get back on the highway, it will take some effort. Some of the slowdown is due to the global economy but a bigger part is due to our internal lack of policy reforms. Prospects for the global economy for the coming decade are not that positive. So, to hope that the world economy would get much better and (we can) use that for our recovery wouldn't be a good idea. We will have to do a lot more internally and it is possible. We need a very clear roadmap of the second generation reforms we have to do. We have made a bit of a mess of our macro economic situation. We have to fix that, besides (fixing) structural reforms of labour and land issues. We also have to make sure we don't continue to do so much damage to the economy. The large fiscal deficit is crowding out private investment, creating more inflation, and that is then leading to weakening sentiment for India. Our companies are taking money outside. The rupee is getting weaker and that is adding to inflation and then the fiscal deficit. In a nutshell, maintaining a six per cent growth would be an effort.

Would you describe the recent measures taken by the government as reforms?
You don't get yet a picture of what is the roadmap of the government for getting us back to 8-9 per cent growth. What you have is attempts to contain the fiscal deficit, improve the business confidence by allowing FDI (foreign direct investment) in retail. I would define these steps as an effort to stem the decline because we were headed for junk rating status. Whether they will be able to move from here to a broader roadmap of reforms, given the political cycle is very hard for me to say. But I must say the threat of a decline in ratings has focused the minds enough to be able to say we do need to give the impression that we are behind reforms.

The FM recently revised the fiscal deficit target for this year from 5.1 per cent to 5.3 per cent. Do you think he has given a credible road map?
He is trying hard but it is very difficult, given the government is one to two years away from polls, to really be able to have a very aggressive fiscal plan. This minister has a credible record as someone who brought the deficit down but what he has inherited now is a huge fiscal mess.

Do you see further pressure on the fiscal deficit, as the finance minister would be under pressure to bring out a populist Budget in 2013?
It is going to be a huge challenge. We have to come to a mindset that the road to better benefits to the people is a reduction in fiscal deficit, which will reduce inflation and open space for more private investment. A tough Budget strategy will help a large number of people in the country. One way to do that is to deliver subsidies to people at a much lower cost than we are able to do now. If you do experimentation with cash subsidy, you can target these better to poor people. Then, you are not really hurting the poor by increasing the prices of fuel.

What do you think would be the fate of the Food Security Bill?
Legislating food security is fine but the Bill itself won't solve the hunger problem. We have legislated many things in the past, like we must drive in a lane, but have you ever seen that in India? The Bill raises the consciousness that we have so many malnourished people but in the end, it is the ability to deliver them food at a reasonable price that needs to be focused on.

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