The budget has generally generated optimism in regard to fiscal correction and higher GDP growth in the coming fiscal. What do you think about these two variables over the next six months? How would they behave?
I think the budget is very well conceived. This budget is both responsible and forward looking. It has contained both the fiscal deficit and it has also promised to bring down the fiscal deficit next year. These are the steps which are necessary from the point of view of fiscal consolidation. But at the same time the budget has provided enough incentives for investment and growth and therefore I believe the full impact of measures taken since September as well as the measures announced in the budget will be felt in next fiscal. This is my view that the rate of growth of the economy in this fiscal will be around 6.5 per cent which is what is implicit in the budget as well.
On this of 6.5 per cent GDP assumption, some people are raising doubts over it. What is the basis for economy to bounce back over a percentage over next 6-7 months?
The rate of growth of the economy in current year will be little above 5 per cent. I believe that this rate will be 1 to 1.5 per cent higher in the next year than the current year because we need to look at the impact on investments and therefore on growth. The decisions on investment take time but we are taking number of measures since September and this has been again reemphasized by the budget by providing certain very specific measures to stimulate investment and around so the point I have been making is that our saving rate and investments continue to remain high.
Therefore, under normal circumstances it should give us much higher growth rate than what we have seen in last few years. This is primarily because the investments projects are not completed even though investments are being made to some extent. Therefore I expect that during the course of next fiscal, many of the impediments that have come in the way of completion of projects will be removed. Therefore we will see the full benefit of the investments that have been made in the last two years. So, this is what makes me optimistic about the economy growing about 6.5 per cent in the next fiscal.
Do you have the sense that the political opposition over the clearance of projects have waned? The legislature seems to be more cooperative in regard to pushing new reforms as well as old reforms that were pending. Do you think that itself will lead to this GDP bounce back in terms of projects cleared, other impediments cleared?
There has been considerable amount of consensus in the country on the content of reforms. Different governments have pursued more or less similar measures. For various reasons, there have been differences in opinion, in terms of emphasis, in terms of timing. But I believe that there is high degree of consensus that prevails in the country regarding the nature of other reforms certainly on removing the impediments to the investments on speedy completion of projects. There can be no difference of opinion and I think we have to really act. We cannot allow huge amount of investments being made and not making it fully effective. That is not in the interest of any one.
Are you satisfied with the pace of new cabinet committee clearing some of the impediments over the last three months?
Well, they have just started but certainly at some higher level, for example, the policy level, they have attempted to clear impediments but I think going forward, I see more and more projects being cleared in a shorter time and therefore actions being initiated. For example I have emphasized earlier that the completion of some of the major projects in area of power, roads and railways will push the economy forward and you see that reflected in railway budget and the general budget.
The RBI governor said that he is happy with the fiscal correction which has happened in 2012-13 and he also find that the fiscal number credible for the coming year. Now do we read into this possible interest rate cut which is also needed for the growth?
Well, interest rate is an important factor as far as the investment decisions are concerned even if it does not influence the levels of investments but it affects the timings of investments. Therefore in that sense interest rate is important. At the same time investment is a function of many other factors of the economy. For example, growth itself is important stimulant for investment. That is what we used to call earlier the acceleration principle, for example, investment in any time period is dependent upon increase in the output in previous two periods. Therefore as growth picks up, the investment will also come in. And as I say spirits can also be stimulated or can also be sustained if certain actions can be sustained which show accountability, stability in the system and commitment to the growth. All of these are in place now. In my view, a series of measures have been taken which has improved the investment climate.
As far as the RBI is concerned, there are two major objectives. One is growth and other is containing inflation. Inflation still remains at the high level but monetary authority look at much more closely that element of inflation, which is probably under control which is called the non-food manufacturing inflation, which is treated as the reflection of demand pressures in the system. Since it has come down below 4 per cent, I believe that now monetary authorities have greater space to act in that direction.
Do you think India is also facing stagflatory situation where growth remains stagnant and inflation remains high?
No, the classic definition of stag is a situation when growth is almost zero and inflation remains very high. India does not have that situation. When we talk about stagflatory tendencies one is referring to a fact where inflation remains high when growth is slowing. But in many developing economies including China when growth slowed down, inflation not necessarily has not come down, inflation has remained high. Therefore, Indian situation does not correspond to that of a stagflatory one. We have a slow-down in growth but that is not stagnation. I believe that we still are growing at the rate of 5-6 per cent and I expect the Indian economy to pick up further during next year when we may see a growth rate of around 6.5 per cent. Meanwhile I also expect inflation to moderate a little bit. Growth will pick up here after a period of 2 years of low growth and inflation will also come down and this in my opinion will pave the way for further pick up in the growth in the year after that.
Does this sharp de-acceleration in consumption growth worry you? For the first time in many years we are seeing consumption in several sectors at growth rate which is 7-8 years low.
It is a reflection of same phenomenon after all when growth slows down, then consumption also goes down because consumption is a very much a function of income.
No, I am asking you this because even after global crisis of 2008, consumption kept up. In 2009, 2010, it kept up. It is only now that consumption has come down.
In some sense it is. Consumption is a function of what many people call permanent income. In a sense that when income has remained high, even at that time people look at the past and they still continue to spend on consumption expenditure because of high level income of previous period. But when growth slows down over a period of 2 years, then consumption expenditure also begins to fall. This is used to call permanent income hypothesis.
One more question in people’s mind is that how in this phase of fiscal correction, new schemes like food security bill will impact both growth and expenditure because we are in phase where we are trying to correct excess expenditure -- really excessive spending which happened after 2008 melt down. All governments in the world are trying to reduce their expenditure. In this phase, we are getting new schemes which probably have potential. Budget only provides Rs 10,000 crore. Whether this Rs 10,000 crore is sufficient or more will come in the middle of year or next?
What is really needed is to look at the total quantum of subsidies. The very fact that budget has provided for fiscal correction and takes the fiscal deficit down to 4.8 per cent of GDP next year means that they have looked up overall revenues and expenditures. Now subsidies are one part of the expenditures and within subsidies there are different components. A view can be taken that subsidies on food security are paramount and therefore while containing overall subsidies to a particular proportion of GDP or a particular proportion of expenditure, we can fully provide for subsidies relating to food subsidies and cut the other subsidies.
What you are saying is that diesel price correction would release maybe some Rs 60,000-70,000 crores over 18 months, some of that would be shifted to food subsidies?
I think what is really needed is to ensure that subsidies on other accounts is substantially reduced in order to make up for the increase in subsidies for food security.
What are the other accounts?
Quite clearly petroleum subsidy is one area. That I think is the elephant in the room and needs to be tamed. Then there is fertilizers subsidy also. I think at some point we really need to act on that also. Therefore these are the two major elements. Therefore even on the Food Security next year it all depends on when and at what point the new bill will come into the operation. But even if that bill or act demands more subsidies, we could provide for them but at the same time cut the other subsidies.
Roughly if you take the petroleum and fertiliser subsidies together, they total to possibly $40 billion...
This petro price correction is happening and if you attack fertiliser subsidies realistically how much you can save by 50 per cent?
No, I am saying that this is a calculation that you have to make over a long a period but a as far as next year is concerned, budget has provided for certain subsidies under petroleum and fertilisers and also under the Food Security. Now the question is whether the additional Rs 10,000 crore will be adequate. If need for subsidies under the Food Security Bill goes beyond Rs 10,000 crore, to that extent you reduce the fertilisers or petroleum subsides which have been provided for.
It is the marginal adjustments that I am talking about.
Over the next three years, what could be the kind of adjustments?
It all depends upon the way in which revenues increase after all this is also a function of the total quantum of revenue. Therefore, I expect that it will happen, then growth picks up in subsequent years to 7 to 8 and more than obviously the revenue kitty will also grow. We really need to do is to keep for example the total quantum of subsidies to less than 2 per cent of GDP. It is now about 2 per cent of GDP. Earlier it was indicated that we can move to a level around which it is 1.6 per cent of the GDP. That is the level towards which we should move as far as correction is concerned.
During this period say over the period of one year how much can the direct transfer scheme help in reducing expenditure?
My sense is that in the initial stage, the direct transfer system will really eliminate the mistakes or errors of commissions and omissions, because now the schemes towards which we have moved are cash transfer through a different mechanism. We are trying to streamline the mechanism. We are making it more efficient whether it is scholarships or transfers of pensions. All are in some sense cash transfer system. This will make this system more perfect, eliminate errors of commission and omission.
If you were the RBI governor, what sort of interest rate you would have implemented?
I think there is a scope in view of fact that fiscal consolidation is proceeding along the desired line. Growth needs to pick up and there is also an indication that non-food manufacturing inflation is at comfortable level. It is below 4 per cent. All these are favourable factors for RBI to act in the direction of interest rate cut.
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