labels: Interviews
2009-10 to be a better year for India: C Rangarajan news
19 August 2008

There is no freedom from bad news for the economy. The index for industrial production for June slipped to 5.4 per cent versus 8.9 per cent a year ago. For the April-June quarter the industry grew at 5.2 per cent, which is half of the 10.3 per cent in the year ago quarter.

Will the second quarter be any better? Inflation has been inching up the wholesale price index (WPI), which was rising by 0.1 per cent every week. In July it rose by a sharp 0.3 per cent. In the first week of August, Y-o-Y inflation is at 12.44 per cent. If inflation shows one more such nasty jump, the Reserve Bank of India (RBI) may hike rates yet again.

Not surprisingly the economic advisory council to the prime minister, which presented its report this week was rather pessimistic of both growth and inflation. It expects growth to be slower at 7.7 per cent compared to the RBI's more than 8 per cent. What is worse it expects inflation to come down at best to 8-9 per cent by March against the RBI's estimate of 7 per cent.

Even more scathing is its assessment of the fiscal deficit, which we believe will be a tall 7.5 per cent and that is not even including the deficit of the states. Now is it an invitation to rating agencies to downgrade? And given the pay commission's award, won't states also add to the deficit burden next year? Are we going to see a longish period of fiscal dissavings? Will a decade of good work come undone?

 CNBC-TV18 shares with domain-b its exclusive interview Rangarajan,:

So is 2010 going to be an even more difficult year for the Indian economy?
No on the other hand I do think that the fiscal year 2009-2010 will show a better growth performance than 2008-2009. There have been some severe external factors responsible for the slowdown in the growth in 2008-09; the external situation has been extremely bad. From the Indian view point year 2009-2010 may be a better than 2008-09.

So you think that getting back into 8.8-9 per cent trajectory should not be tough? We won't be bottoming out short?
I think we might get back to the 8-9 per cent growth rate in 2009-10 depending upon the circumstances that unfold themselves at the beginning of 2009, it could be 8 per cent or it could be 9 per cent. But certainly I think 2009-2010 will put in a better performance than 2008-09.

Your analysis of the fiscal deficit is perhaps the most severe. Several unstated things have been stated upfront by the economic advisor council. Don't you think that with this kind of a number rating, agencies would definitely be wanting to change their outlook on the rating if not the rating itself?
The rating agencies need to look at the overall performance of the economy in a difficult year like the present one and for the economy to grow at 7.7 per cent now is a good performance.

Therefore, rating agencies need to look at the entire picture of the economy as it is unfolding with the growth rate. The investment growth rate for example may continue to remain at a very high level, if anything the inflation picture could moderate in 2009-2010. Therefore, taking a view of overall dimensions of the economy,  (I feel) the rating agencies should not bring it down.

The issue really is whether it will be a one-year breach. Several factors can make this fiscal intransigence slightly longer. Also the Pay Commission hikesand repercussions on public sector enterprises. So if the fiscal gap goes on for a couple of years it will not be a surprise?
Certainly as we move further into 2009-10, we need to face the issue squarely. They pass through. Some hard decisions will have to be taken both with respect to fertilizer subsidies and with respect to the oil price increases. I am quite sure that sooner or later some decisions will be taken, which will have the effect of reducing the off Budget liabilities.

For this year itself, the government may have to borrow a little more than what it had budgeted for. For bonds like fertilizer, the government is actually paying cash, so it is certainly not going to stop at Rs 30,000 crore as you said, it is going to be closer to Rs1 lakh crore. So borrowing from the market, issuing more gilts looks eminent or do you think that the government may be able to do some creative answers like disinvestment?
I agree that to the extent to which the burden arising out of fertilizer subsidies is made through cash payment rather than through the issue of bonds. It will have a direct impact on the borrowing by the government of India. But I only make the guess that part of it could be made by issue of bonds. 

One of the issues that you will be best placed to answer is the manner in which monetary policy is getting transmitted. You have raised the red flag on inflation. To a large extent, monetary signals transmitted by RBI have not always been picked up by public sector banks. One obvious reason could be that the dominant shareholder has often wanted lower interest rates for at least certain sections. Do you think that because of these ownership issues, there is a genuine problem of monetary policy transmission?
To some extent it all depends upon how the public sector banks or the private sector banks react. This is a problem not only in India but elsewhere too. After all raising the repo rate or the bank rate is only a signal from the Central Bank. How exactly the banks react to it? To what extent they raise the rates of interest depends upon their assessment also.

Therefore I think a greater degree of coordination between the centre and the government and the monetary authority becomes essential even in terms of such issues at the reaction to the raising of the interest rate. 

Would you say therefore that autonomy for public sector banks is necessary not just for sensible commercial banking but actually for monetary policy itself?
I think to some extent that degree of autonomy is there; it is for the public sector banks to take a decision. After all signals can come from several sides. But it is upto the commercial bank to take the decision. Even now I believe that the Chairman of a public sector banks can take his own view as to what should be done in response to the measures that have been announced. 

You spoke about the expansion of M3 continuously for the last three years at a pace much higher than RBI's target at 20-21 per cent. Who would you hold responsible for this? After all inflation was only partly global, everybody recognizes that there is a domestic element to it. What would you blame and whom would you blame?
I think this blame game is a difficult thing to do but let us see why this has happened. I think this has happened because the capital inflows were very strong.

One way of dealing with it would have been to let the rupee appreciate in which case the problem would have been resolved in a different way. But that would also cause problems in terms of export competitiveness and even de-industrialization and so on and so forth.

Having decided that it is not the route that we are taking, we have tried to sterilize the capital inflows. I think the degree of sterilization could have been even higher. But then there were problems of sterilization and that is why we have to introduce a market stabilisation scheme, which is wholly new scheme introduced and therefore we did innovate but perhaps we could have probably done a little bit more and seen that the reserve money expansion is curtailed-the expansion is restricted even more.

Would you say that the government then delayed in certain measures that it took perhaps too late in terms of controlling capital flows? 
These flows through because of the FII investment and so on. And there was also external commercial borrowing. We could have restricted some of these things a little bit more.

They were thinking of it and I think as you know some restrictions on ECB were imposed later on, but it is the right combination of all the three, which was essentially required. To some extent I think the capital inflows were larger than what could be easily sterilised.

There is also a problem of about sterilization. It is not such an easy thing.

Where is Dr Rangarajan headed next now that you are putting your papers at economic advisory council. Where are you in the decision making process?
I am heading towards Parliament and I have been nominated as a member of Rajya Sabha. So I will sit in the Rajya Sabha and contribute my bit to the discussions on the economic issues. 

Being a member of Parliament opens the doors also to a lot of things; for instance being in the ministry?
I have no comment to make on that. I do not think that is an immediate possibility.


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2009-10 to be a better year for India: C Rangarajan