Is there a turnaround visible in the economy?
I think a turnaround is now likely. We were all hoping that this would begin in the last quarter of the previous year, but it did not happen the slow down continued into the first quarter of the current year. But the August September data suggest there is evidence of an uptick. Can we be confident based on these two months? I would keep my fingers crossed but I do believe that we are going to see a turnaround in the coming quarters.
But what makes you think there would be turnaround in the coming quarters?
On the supply side, we have taken several steps to resolve problems affecting large infrastructure projects. You will see the effects of these decisions in the weeks ahead with a restart of investment activity.
Production data for core industries for July and August shows a significant uptrend. It is not yet a strong uptrend, but - steel, cement, coal, power - is much better than two months ago. We can expect a good agricultural performance because of the good monsoon.
This means agricultural income would be higher and as a result there will be demand for other products, so non-agricultural rural production would also be higher. The depreciation of the rupee has improved the ability of Indian industries to compete with imports and also to expand exports. All those are positive signs that will support an upturn.
Do you think we would be able to meet the fiscal defecit target for the year?
Finance Minister has said quite categorically that he is not going to violate this target. The fiscal deficit has been on the high side in the first five months but this should not be read as implying that the overall fiscal deficit is going to overshoot its target. We have been telling the ministries that last year they left everything to the later part of the year and expenditure up to December was very low.
Under the existing rules, you can’t spend more than a certain proportion in the last quarter. So this year we have urged them to spend more in the initial months so that spending would not be delayed. Besides revenues were relatively low because output growth was low. If there is an upturn revenue performance will improve. The Finance Minister has recently imposed a 10 percent cut on non-Plan expenditure which should help in controlling the deficit.
Despite bumper monsoon, food inflation is not coming down. What is the reason?
A big part of the food price inflation is the inflation in Cereals and onions. We have large food grain stocks and the government is planning to offload a substantial quantity which will help contain cereal inflation. There are practical problems with selling grain from food stocks because you need flexibility to offload in different markets at different prices. Several options are possible. One could fix the quantity that would be auctioned in different markets periodically and accept the prices that result. One could for example go in for “descending” bid auctions which would make sure that everything gets sold. But this is just one suggestion.
What do you have to say about the sudden hike in the price of onions?
The spike in onion prices reflects temporary shortage and a price correction is underway. Part of the problem is outdated and inefficient markets. It is unfortunate that states have been unwilling to reform agricultural markets. The APMC is a disguised form of giving a non-transparent monopoly in the purchase of agricultural products to licensed traders. We need radical reforms in the APMC Acts which has to be done by states.
Is it possible to revive the economy through domestic demand because the world economy is growing at such a tardy pace?
We will have to rely on domestic demand because the contribution of global demand will be limited. The name of the game for us is to jack up domestic investment, which has fallen drastically. We need to increase our investment in the infrastructure area. The CCI has been taking steps to accelerate large infrastructure projects and several problems have been overcome, most notably coal supply to power plants. Obviously, these projects also face other problem, especially financing problems which also have to be sorted out. However, as the regulatory impediments are removed promoters will work harder to resolve other problems.
Do you think, in the last 9 years the pace of reforms has been satisfactory?
It is no secret that we have consciously opted for a gradual pace of reform. I suspect in a democratic environment we may have to accept that the pace will be gradual. However, the current slow down in the economy is not due to the slow pace of reforms. We have to remember the Indian economy grew at 8% for eight years even though the reforms were not very rapid even at that time. The slow down occurred for other reasons partly global and partly domestic, especially concerns regarding environment clearance, forest clearance and land acquisition. These problems have taken a little time to tackle but we are now making progress.
Over the next six months there would be election in the country, and in this period no new policy will come in. Don’t you think this will harm the prospects of economic revival?
The time to make new policy decisions is not six months before the elections. But I do not think we need new policies to bring the growth back on track. We need to ensure that existing policies are effectively implemented on ground and inaction is not tolerated. This is what the government must focus on. If we can overcome obstacles to ongoing projects we will be doing a lot. New policies are also important but they will have an impact over time.
The opposition is claiming that it is the BJP led states which are doing better and this is leading to whatever good growth we have achieved. Is their argument valid?
I don’t think growth is limited to states ruled by a particular party. The performance of Maharashtra in many dimensions is as good as Gujarat. Gujarat has recorded a slightly higher growth rate but on social indicators it is doing less well than Maharashtra. Haryana, Andhra, Rajhasthan, Delhi, all these states are doing very well. In fact the most interesting thing about recent growth experience is that the erstwhile BIMAROU states Bihar, Madhya Pradesh, Rajasthan, UP and Orissa are doing much better than they did earlier. These states are ruled by different political parties.
Former NDA finance minister Yashwant Sinha has said that it is the stimulus given in 2008 by the UPA which has done harm to the economy? What do you think about this?
I don’t agree with the view that the initial stimulus was wrong or harmful. I think in many ways, the initial stimulus was highly successful, because it limited the dampening impact of the 2008 crisis. What could be said is that after giving the stimulus, we should have phased it out a bit earlier. Interestingly our data system did not signal the need for withdrawal early enough. For example, for 2010-11 the data initially suggested 8 percent growth but actual growth exceeded 9 percent. This problem exists elsewhere also. Western countries have much better data but in the US two months ago, the Federal Reserve Chairman said that the economy is picking up and they were going to start tapering the QE III stimulus. Subsequently they decided that the condition is not that good, and the tapering was postponed.
Why is the private sector asking for lower rate of interest to stimulate the economy?
There is no doubt that if we could transition to a low real interest rate regime it would help the economy and encourage investment. However, we must remember that a reduction is real interest rates cannot be achieved simply by lowering the short term discount rate. RBI has lowered the MSF rate a little recently and this will help, but a sustained lowering of the real rate requires action on several fronts not all of which are under RBI control. It requires a moderation in inflation which will encourage savings flowing into financial instruments and also a reduction in the fiscal deficit which will release financial resources into the economy. Hopefully all these things will happen and we will be off to transition to a lower real rate regime.