The Prime Minister's Chief Economic Advisor Dr C Rangarajan has admitted that a hike in diesel and LPG prices is imminent despite a steep hike in petrol prices last week.
While speaking to Karan Thapar on 'Devil's Advocate', Dr Rangarajan said the government can soften the blow but fuel price hike is the need of the hour to contain the fiscal deficit.
Karan Thapar: Hello and welcome to the Devil's Advocate. How serious is the economic situation facing the country? That's the key issue I should discuss today with the Chairman of the Prime Minister's Economic Advisory Council C Rangarajan. Doctor Rangarajan let me start with a simple question, with sharply falling growth, stubbornly high inflation and the worryingly large fiscal and current account deficit, do we have a serious problem on our hand or even as the Business Standard suggested on Friday, a small crisis?
C Rangarajan: Well, the Indian economy has slowed down. The growth rate for the last year is now estimated to be about 6.5 per cent. This is a steep climb down from the 9 per cent rate of growth that we have seen the last three years after 2005-2006. This is also a climb down from the 6.9 per cent growth rate which was estimated earlier for last year. Therefore, there is a certain amount of concern about the slowing of the growth. It is also true as you mentioned that slow growth is accompanied by high inflation and a high level of fiscal deficit and a high level of current account deficit. These are certainly the disturbing elements of the system but at the same time we must recognise that the world economic situation is passing through a difficult time, and even with 6.5 per cent growth rate India will be the second fastest growing economy in the world.
Karan Thapar: Let's pause for a moment and consider just how serious the situation is and let's start with growth. As you said, we have come in with 5.3 per cent in the last quarter, worst in nine years, 6.5 per cent in the last year, way below the government's hopes but actually if you look at the April post growth figure of just 2.2 per cent which is about half of what it was this time last year, then in fact would seem that the economy is not bottoming out. Economy instead looks like a driver who has discovered that the sea is a lot deeper than he thought, things could get worst.
C Rangarajan: No, I think the core sector growth you should not attach much importance, it is never a good indicator of how the industrial growth behaves. Certainly I will accept that there is definite slowing of the growth of the economy. The question which you raised is have we reached the bottom or is there still further sliding of the growth? In my view we have reached the bottom. I will indicate that the growth rate for the current fiscal will be higher than the growth rate of the last year.
Karan Thapar: Can I interrupt and put it to you this way. Suppose on June 17 the Greeks vote the wrong way is that the bail out exacerbating the eurozone crisis? Suppose in July and August El Nino has an adverse affect on the monsoon and both of those are possibilities. In those circumstances would you accept growth ending in the year 2019 could be badly affected and could fall below 6.5 per cent?
C Rangarajan: Well let's talk about what would happen normally and then what could happen if things go wrong in the direction in which you are talking about? Yes, I would say in the normal circumstances, with the monsoon being normal, with the European situation not getting worst, we should see a growth rate of 6.5 per cent to 7 per cent.
Karan Thapar: And if we don't have a normal situation, which is quite likely?
C Rangarajan: Well if European situation turns into a big crisis or if the agricultural output is affected because of the bad monsoon then we will have to revise it downwards. But barring those situation I would still say that we will have a better fiscal than the last year.
Karan Thapar: Well keeping our fingers crossed, because the likelihood of the Greek vote going wrong is probably very high. But let me put to you something else. You are saying that the current fiscal will be better than the last fiscal. But the Finance Minister has targeted growth in his budget at 7.6 per cent. No one really believes that scenario is likely or even possible? Would you accept 7.6 per cent is going to be very high?
C Rangarajan: At the moment 7.6 per cent looks very ambitious. But certainly 7 per cent I will not rule out. It is still possible for the economy to grow at 7 per cent next year. If you give me time, I will explain why it is so, but at this particular point, attaining a growth rate of 7 per cent in the current fiscal is not something that you cannot rule out.
Karan Thapar: So you are accepting that 7.6 per cent looks ambitious, by which I think you mean, unlikely.
C Rangarajan: Well I think at this particular point, it does look difficult to achieve.
Karan Thapar: In which case, doesn't this also raise serious questions about your fiscal deficit target at 5.1 per cent, that was critically based on growth rate of 7.6. If 7.6 is going fall to 7, and some would even 7 is unlikely, then even 5.1 per cent would seem unachievable.
C Rangarajan: Well definitely the point is that the fiscal deficit is calculated according to what we all call the nominal income that is the real growth plus the inflation. Now for the overall nominal growth rate that they have assumed is somewhere around 13-14 per cent. I don't think that will go wrong very much.
Karan Thapar: You will be saved by inflation, won't you?
C Rangarajan: To some extent, yes, the order of inflation could be between 6-7 per cent, and therefore, you could. But yes, as we go along, if the growth rate of 7.6 per cent does not appear to be feasible at all, it requires even greater action on the part of the government to ensure the fiscal deficit remains at the budgetary level.
Karan Thapar: Let's take stock at this moment, Dr Rangarajan because the one thing you are fully accepting is that 7.6 looks unlikely, you are hoping we will come in at 7 per cent. Secondly, you are also saying that there are serious question marks about the fiscal deficit. May be inflation will help us out, may be it won't. But what they suggest is that two critical aspects of the budget - the growth target and the fiscal deficit target now look questionable and it's not even two months since the Budget was announced. That is bad news for India.
C Rangarajan: I think fiscal deficit is a policy decision. I don't think fiscal deficit is something that can be left to the natural forces. Fiscal deficit is a variable, which should be managed and I would therefore urge, that as far as the government is concerned, even earlier, the achievement of the fiscal deficit mentioned in the Budget was difficult. But if it turns out that we are not getting the kind of nominal growth rate that we originally assumed under the Budget, let us take more action and get the fiscal deficit down.
Karan Thapar: What you are saying and I am interpreting this for the layman, is that if it looks difficult, if you are going to miss the fiscal deficit target, you need to take policy decisions to ensure that you do. I will come to that in a moment's time. I want to leave the steps the government must take for a little later. I want, for now, to continue to explore how serious is the situation. Let's move on and put this to you. The sliding rupee, and it is sliding pretty fast, is a sure indicator that the inflows that are coming into the country are halting, and that in turn is an indication that the people are losing confidence in the Indian economy. Would you accept that?
C Rangarajan: Well, the sliding of the rupee or the depreciation of the rupee is due to the mismatch between the current account deficit and the capital inflows. Our current account deficit continues to remain high. This did not cause any problem in the previous years because the capital flows were adequate to cover the current account deficit, that is, the financing of the current account deficit was not a problem, even though the current account deficit has been showing signs of rising in the last few years.
Karan Thapar: But the reason why now inflows are down is because overseas investors share the concerns Indian investors have: a) the handling by the Indian government of the fiscal deficit and b) about the fact that many reforms which they think are essential, are either have been promised and gone back on or simply haven't happened.
C Rangarajan: I think capital flows are influenced by two factors. One factor is external to us. I think, whatever happens in Europe, whatever happens in the rest of the world, also influences the capital flows. There are risk aversion tendencies and therefore, to some extent, the total capital flows into the developing economy is itself showing some signs of decline.
Karan Thapar: But the fact that we are not giving confidence in terms of how we manage the fiscal deficit and the fact that we are not giving confidence in terms of reforms that people consider necessary, which are not taken, that is adding to concern.
C Rangarajan: Yes, I think so. Yes I think, first of all is the overall flow of capital to towards emerging economies, and the second is the country-specific problem.
Karan Thapar: And the country-specific problem, at the moment many people believe is the real problem that India faces.
C Rangarajan: Well it is adding to the problem, but I believe when the chips are down, the growth rate of the Indian economy even at 6.5 or 7 per cent cannot be brushed aside.
Karan Thapar: That I accept. The problem is will we maintain it at 6.5? That's the discussion we have had we won't go back to that. But let me raise with you another question that faces the Indian economy. We have stubbornly high inflation. You yourself, the deputy chairman of the Planning Commission and the Chief Economic Advisor have variously said it will come down. But it refuses to come down. On the one odd occasion when it did, it went right up again. Would you accept that inflation has become the Achilles' heel of this government?
C Rangarajan: Well inflation is a phenomenon which affects a large section of the community and therefore a high level of inflation is not conducive to economic growth, is not conducive to the prosperity of the country.
Karan Thapar: But has the government failed to tackle it?
C Rangarajan: I think I had earlier as governor of the Reserve Bank of India, taken a very strong position on that and I have always regarded the primary objective of the central bank has been to tame inflation, to control inflation. Well, things have happened in such a way in the last two years, we have been confronted with a situation in which the strong action to contain inflation was also viewed by some as coming in the way of faster economic growth. The first year of inflation was really food inflation. That is a totally different kind. Come the second year, the food inflation got generalised. In addition to it, there was some food inflation because of the rise in the price of vegetables. Now any strong action on the monetary authority was viewed by some people as coming in the way of faster economic growth.
Karan Thapar: In fact you got caught in a pincer. You had slowing growth and stubborn if not rising, inflation. What you did to tackle inflation would effect growth, what you did to generate growth would lead to inflation. You were caught in a pincer, which in a sense make the problem even more intractable.
C Rangarajan: Yes, yes that is why in a sense, very strong action to control inflation at that particular time would have meant a slower growth. And that is why, there was some hesitation. But I have no doubt. I have no doubt in my mind, as far as the monetary authority is concerned, the primary objective is to control inflation.
Karan Thapar: But let me then come back to the question with which we opened this interview. Given the series of problems we have with growth, with fiscal deficit, with sliding rupee, with intractable inflation, are you really sure this really isn't a crisis, even if it is a small one?
C Rangarajan: No, no I think the crisis is slightly different in some ways. If you look at 1991, that was the time which even though we faced acute balance of payments problem and the exchange rate of the rupee was also depreciating, we had no reserves. We have a different situation now. We are now coming at a situation in which the economy had grown at a fairly rapid rate in the previous four or five years. We have adequate reserves but that is only a comfort.
Karan Thapar: In which case, if the word crisis is wrong, would you accept 'serious problem' as more accurate?
C Rangarajan: Yes I think we face a critical situation.
Karan Thapar: A critical situation?
C Rangarajan: But I would rather argue that, that is not something that we cannot overcome. I think with the kind of policies we want to pursue, it should be possible to grow.
Karan Thapar: Dr Rangarajan, let's come to the steps the government needs to take. First will a large fiscal deficit that could be difficult to rein in, and a sharply falling growth, would you accept that the need of the hour is to increase prices in diesel, LPG and kerosene?
C Rangarajan: I think there is a need to raise the prices because the fiscal deficit can be contained only if we act on cutting subsidies and the most important element in subsidies is the petroleum subsidy. Therefore, I would say there is need for action with respect to the prices of diesel and LPG.
Karan Thapar: You are saying diesel and LPG in particular must be increased.
C Rangarajan: Yes I think it should be done, as early as possible.
Karan Thapar: As early as possible. So this is a top priority?
C Rangarajan: I would urge that action be taken in these two fields . But I must also mention that there are different ways of doing it. There are ways in which the low income groups are not affected. The methodology and modes of doing it will have to be thought through. But action is required.
Karan Thapar: Alright. Secondly, would you say that now it is imperative that the Finance Minister live up to his Budget promise of capping subsidies at 2 per cent?
C Rangarajan: I think so. I think the Finance Minister has said it before and I am sure that he believes in what he has said. Therefore, we need to move in the direction of cutting the subsidies and maintaining it at a certain proportion with the GDP, because that is the only element in the total expenditure of the government that there is some flexible.
Karan Thapar: Let me sum up these two points. For politicians, raising the LPG and diesel is always difficult, it tends to be unpopular. For finance ministers, cutting subsidies is unpopular. You are saying these are difficult bullets they have to bite.
C Rangarajan: Obviously. This is very clear that there is a certain amount of resentment and there is some unhappiness about raising the prices of petroleum products and cutting the subsidies on others. But given the kind situation we are placed and where there is a compulsion to keep the fiscal deficit down, we need to take action therefore, however unpleasant it may be.
Karan Thapar: Now the other problem the Finance Minister faces is that you have growth that is disappointing. And there is a danger it could get worse. Given that you have high inflation as well, there is not much room for the RBI to cut interest rates. So, does the Finance Minister need to boost investor and entrepreneurial sentiment by pushing ahead with reforms?
C Rangarajan: We need to push reforms. I would only say that the reform environment has not deteriorated from 2005-06.
Karan Thapar: But it hasn't advanced either?
C Rangarajan: Yes, therefore we need to push it further. But certainly, if we had grown at 9 per cent during the earlier regime, we should be able to grow even now. But certainly, reform is a continuing process and therefore, we need to take action in various fields, such as banking, insurance, pension and get the consent of the people to these reforms.
Karan Thapar: Now some reforms are within the government's executive capacity to do, like the FDI in retail, the FDI in aviation. The FDI in retail was attempted last year. Within 10 days, the government changed its mind. Is it now critical for the government to bite this bullet and push ahead with FDI in retail?
C Rangarajan: FDI in retail is welcome. I think we should take action to get that done, but there is also a need to get some degree of consensus on it. We need to build it, but we must take early action in this area. Also, build the consensus and do it.
Karan Thapar: Now one of the things that is worrying the investors is what is called the combination of the Vodafone amendment, the Supreme Court judgement in the 2G case, 122 telecom licences got cancelled, and the government's proposed GAAR amendments and proposals. The Financial Times says that it has even affected inflows in the last two months. Do you think the government needs to send out messages about these to re-insure investors?
C Rangarajan: Well the pressure on the rupee that we have seen in recent times has been because of the inadequate capital flows to cover the current account deficit. There we must encourage capital flows, and if the sentiment for that has to be created, we must do that. And we should examine critically factors that might come in the way of the perception of the investors and remove them. Some of the things that are being done have been done by other countries as well. But perhaps they are not being viewed in the same way and therefore, there is some misconception there. But certainly, we need to act to remove the impediments and encourage capital forces.
Karan Thapar: My last question. We are talking about decisions that are difficult. The Economic Times on Friday speculates that perhaps the government lacks courage. Does this government have the courage to take tough decisions?
C Rangarajan: I think the government has the courage. I mean I think there are a number of problems that have come in the way of the government in taking economic decisions.
Karan Thapar: But, it has the courage to do it.
C Rangarajan: I think it has the willingness to do it.
Karan Thapar: Dr Rangarajan, a pleasure talking to you.