Montek Singh Ahluwalia at Idea Exchange: ‘FTAs with Europe, UK good moves… should ensure industry doesn’t put pressure to take rigid positions’

Economist Montek Singh Ahluwalia. (Express photo by Abhinav Saha)

P Vaidyanathan Iyer: So, what’s the India story now?

The world is preoccupied with too many things and India is not a focus of attention. This is in some ways an advantage. But we should try to reestablish a positive India story.

The positive features about India’s economy are well-known. We have favourable demographics; the economy grew at 8 plus per cent over an extended period before 2010 highlighting the strengths of the Indian private sector; infrastructure and logistics are improving though more needs to be done; the digital public infrastructure has expanded over the past 10 years, leading to an increase in financial inclusion.

All this is good but it is not enough. To reestablish the India story we need a much clearer articulation of how we intend to deal with the immediate challenge we face as a result of the oil crisis and the longer run challenge of how to accelerate growth to achieve Viksit Bharat.

P Vaidyanathan Iyer: Let’s start with the balance of payments. How do you see India’s prospects given there’s no immediate end to the war? Does the three years of continuous pressure on the balance of payments worry you?

As you say there is no immediate end to the war in sight but it does seem as if both the US and Iran want to avoid escalation. There is still considerable uncertainty about when oil supplies will return to normal but earlier fears of oil going beyond $120 have subsided. Even if we assume that the US and Iran reach a satisfactory agreement in the next two weeks, it will still take time for movement through the Strait of Hormuz to get back to normal. And since many countries have drastically reduced their strategic stocks, they will want to build them up as soon as possible.

On need for new Bilateral Investment Treaties | We have a reputation of being ‘investor unfriendly’ because of retrospective taxation and arbitrary changes of policy which are often adverse to foreign investors

All this means oil prices which, are currently below $100 per barrel which is a third higher than in the previous year, may remain at that level for some time. We need to outline a credible strategy for managing the balance of payments in this situation.

As you point out, we had a problem even before the oil price shock. For the past several years, we have run a relatively modest current account deficit averaging around 1.5 per cent of GDP, which was more than offset by a capital account surplus of over 2 per cent of GDP. That surplus declined sharply after 2023 and has almost disappeared in 2025-26. We have seen sharp fall in net Foreign Direct Investment (FDI) and the net flow of foreign portfolio investment has turned negative.

The disappearance of the surplus on capital account would have posed problems even without the rise in oil prices. As it is the higher oil prices will worsen the current account deficit could worsen to say 2.2 per cent of GDP in the 2025-26. To manage this with low capital flows, we have to cut the current account deficit and increase capital flows as much as possible. If things look as if they are going to come back to normal sooner than people think, we could allowing the reserves to take some of the hit.

A conventional response when trying to reduce the current account deficit is to allow the currency to depreciate. This has happened over the past year and I think the RBI did the right thing by allowing the depreciation to take place. This is not to say that continuous depreciation will solve the problem. We have to avoid creating self perpetuating expectations, which can worsen the situation. That is best done by taking other actions to contain the current account deficit and also taking steps to revive capital inflows as much as we can.

A second sensible response is to let the increase in oil prices be passed through into the economy. That too has happened. The increase is modest and the government has also taken some of the hit by lowering excise duties.

P Vaidyanathan Iyer: What else should we do?

Our performance in export of goods has been quite poor for the past several years and this weakness needs to be addressed. Vietnam and Bangladesh, benefited from the China Plus One opportunity, but we did not. The root problem is that Indian industry has been excessively shielded from international competition making us less competitive in exports. The problem was worsened because import duties were raised on a number of items from 2016 onwards. These were inputs of MSMEs which also do a lot of exports. Since the rupee has weakened, these duties should now be lowered. It will help MSMEs and exporters.

The FTAs signed with Europe and the UK are very good moves, but they will only become operational when many details that need to be resolved are agreed upon. We should ensure that domestic industry does not put pressure on our negotiators to take rigid positions on these details on protectionist grounds. We should obviously protect substantive national interests but we should ensure that the FTAs become operational as soon as possible.

On companies investing abroad | Setting up subsidiaries abroad is a natural way for them to expand. If in the next 20 years we don’t see more Indian manufactured products abroad, then the Indian private sector can be said to have failed the country

The Asia region is projected to be the fastest growing region in the years ahead, and we need to integrate more with this region. We decided not to join RCEP in 2015 probably because Indian industry was unwilling to face competition from China. We should now apply to join the Comprehensive and Progressive Agreement for Teans Pacific Partnership ( CPTPP) where China is not a member. It will send a clear signal that India is determined to integrate more fully with the world economy.

The fall in capital flows also calls for corrective action but what we can do in the short run is limited. Portfolio investment is known to be volatile and Indian P/E ratios were over valued earlier. We can only assume these flows will come back as the world economy normalises and the India story comes back into play. The fall in net FDI is more worrying and calls for some re-evaluation of our policy. An area where we can take early steps relates to improving the ease of doing business.

Economist Montek Singh Ahluwalia. (Express photo by Abhinav Saha)

Some months ago, newspapers reported that the Committee examining the ease of doing business under Rajiv Gauba (former Cabinet Secretary and now Member NITI Aayog) had recommended withdrawal of almost 700 Quality Control Orders (QCOs). I thought this was an excellent recommendation but I believe only about 200 QCOs have been removed. QCOs are a disguised form of the import license permit raj. It would send a very good signal if the government implemented the Gauba Committee recommendation in full. This can be done immediately. Open-ended reliance on QCOs creates uncertainty about policy.

The unilateral decision in 2015 to scrap all existing Bilateral Investment Treaties (BITs) may also account for what has happened to FDI flows. Investments already made under the old BITs would continue to receive protection for some years, but for all new investments there is no protection. It was announced a year ago that a new BIT would be released but it has not yet happened.

On fuel price deregulation | As the number of vehicles increases, we need to ensure that more of them are electric vehicles (EVs). Raising the price of petroleum products is a way of encouraging EVs. It is better than subsidising them

The absence of a BIT may not matter when the country is experiencing high growth, FDI is flowing in, and investors have a good story to tell. It is a different matter if there are more exits than entries. The negative effect is magnified if we have acquired a reputation of being ‘investor unfriendly’ action, because of retrospective taxation, and arbitrary changes of policy which are often adverse to foreign investors but favour domestic competitors.

Foreign investors make a detailed assessment of the ‘India risk’ before investing in India and this includes the risk of getting into tax disputes. They have all heard of Mohandas Pai, a well-known investor who has complained of ‘tax terrorism’. This refers to arbitrary interpretations and the likelihood that if you get into a tax dispute, the government will pursue it all the way to the Supreme Court, which will take 20 years. Fixing this problem will help not only FDI but also domestic investors.

I personally think there is merit in having these issues examined by an external high-level committee, headed by someone outside the government, which includes two or three business people, tax lawyers and consultants. We could also have retired secretaries from the Finance Ministry — retirement frees them from positions they may have taken earlier, which they cannot realistically ignore while in service. This committee could be charged with discussing with business groups and making specific recommendations in a report which is made public for wider discussion.

Whatever is accepted could then be incorporated in the next budget. I don’t think this sort of revamping can be done by internal committees of officials, whose reports are generally not made public.

Economist Montek Singh Ahluwalia. (Express photo by Abhinav Saha)

Siddharth Upasani: You talked about markets realising the exchange rate has been overdone. But aren’t price signals across the economy somewhat suppressed, be it fuel prices or in agriculture?

This is a problem. We had announced dismantling of the administered price system in petroleum products in 2002 but it never really happened. Electricity prices are also subject to extensive administered controls determined by state regulatory commissions, which are heavily influenced by state governments. Fertiliser prices are grossly distorted at present with urea being sold to farmers at 10 per cent of the cost of imported fertiliser. We need to review these controls and come up with a policy where these prices respond to global market conditions. Where the resulting price would hit vulnerable sections, we should compensate them through a direct cash transfer. Fortunately, the Aadhaar-based digital system now makes it possible to do this. These changes can be made over a five-year period but continuing with gross distortions in key prices is not feasible.

Managing water scarcity is another problem since water is not priced. Some of what we are doing, for instance, expanding use of methanol to mix with petrol and diesel may not be economically viable if water is properly costed. Large expansion of data centres will also come up against constraints of available water. These are very important problems which need to be spelt out and addressed.

Aakash Joshi: What did you make of the piece Surjit Bhalla wrote for The Indian Express (on May 23)?

Surjit holds the bureaucracy — which he calls the ‘deep state’ — responsible for perpetuating policies which prevent investors from investing in India. I don’t agree with his deep state description, but I agree that we need to review our policies to see why they discourage investors. That’s why I have recommended setting up a high-level committee, drawn from outside the government with its report being released for discussion. Relying on inside groups, whose reports are not made public cannot yield results. Some of the problems which concern foreign investors also trouble domestic investors, so solving them will be a double whammy.

Anil Sasi: One reason for the adverse net FDI inflows is that our manufacturers are not investing here, but outside.

I don’t think we should restrict our companies from investing abroad. Many Indian companies in the IT sector, pharmaceuticals and also others are working in a highly competitive global environment and they want to expand their footprint. Setting up subsidiaries and acquiring companies abroad are natural ways for them to expand and we should not stop it.

In the longer run, this will lead to a larger presence of Indian products and brand names abroad. That has not yet happened, but it is the next stage. If in the next 20 years we don’t see any many more Indian manufactured products abroad, then the Indian private sector can be said to have failed the country. But we should not end up in a situation where they say ‘we were keen to do this, but you didn’t allow us to expand abroad’. Many people say that some of the outward investment may represent Indians wishing to leave the country. We should look into why they want to do this and correct the domestic policy failures that generate this behaviour.

Liz Mathew: How much do you think economic issues influence a voter?

That is a very good question. As an economist, I always hope that politicians can sell a policy which will yield results in the longer run even if is not a winner in getting votes. So politicians have to select a package which also provides some tangible results in the short run. I know it is not easy, but that is the real job of politicians.

Sukalp Sharma: Given the global energy shock, do you feel it would be prudent if the government implemented demand suppression measure on fuel consumption?

If by demand suppression you mean raising fuel prices, yes that is the way to go. We have raised prices a little and the government has also taken a hit. They may have to do more if oil prices move up. If however, you mean ‘managing demand’ through some form of rationing, I feel that would not be workable. You cannot do it by saying only 15 litres will be available at the petrol pump at any given time. It will only lead to use of multiple pumps. You would have to issue entitlement certificates against which petrol and diesel can be bought. That is an impossible administrative task and will also be a disaster. You can be sure that such permits if issued to users would be sold in the black market.

Sukalp Sharma: You spoke of how fuel price deregulation is only on paper. Is a deregulated system better in times of volatility?

As I said, we announced that the administered price system was dismantled in 2002 but we didn’t really deregulate. I think as a matter of policy we should implement effective deregulation. Remember that as the number of vehicles increases, we need to ensure that more and more of them are EVs. Raising the price of petroleum products is a way of encouraging EVs. It is better than subsidising them. Perhaps, the NITI Aayog should prepare a discussion paper outlining how we can move to deregulated petroleum prices over say, a period of five years.