Finance secretary says growth impulse stable, but inflation sticky

Ashok Chawla, the finance secretary, has handled the portfolio amid myriad challenges since he took charge in May last year. Coming in at a time when India was still navigating the aftermath of the global financial meltdown, the 1973 batch Gujarat cadre IAS official has since played a key role in directing the economy to safer shores, with growth now firmly back on track at over 8%. In an interview with DNA, the Delhi School of Economics alumnus showed no signs of fatigue despite a gruelling day’s schedule, and fielded a volley of questions — from double-digit inflation and tight liquidity to the Eurozone crisis and disinvestment. Excerpts:

What is your sense of the overall macroeconomy?
Overall, the situation is very good. But we are just starting the year. It may be a little too hasty for a prognosis on what the whole year will be like. Having said that, the impulses that we get, growth impulses, impulses on various economic parameters, I think are very stable.

What is a matter of concern at this point of time is the fact that inflation continues to be sticky. And this is not something which is going to come down to a moderate or an acceptable level very soon. So we will have to focus on this, we will have to do the best we can in terms of supply-side management of the inflationary tendencies.

Current inflation is substantially driven by food articles and non-food primary articles, as has surfaced in the latest number. But inflation is still not very high on the fuel side and certainly not on the manufacturing side.

Has the inflation problem now become a structural issue?
I wouldn’t call it a structural issue. But yes, just that it is possible that the level of, secular level of inflation, may be slightly higher than what has been in the recent past or traditionally been acceptable.

The finance minister has said he doesn’t want to raise interest rates at this juncture. Is it the government’s position that inflation will cool off and rate hikes for this won’t be necessary?
The ministry is of the view that monetary policy action should not hastily and aggressively put constraints on growth, which has just started. Beyond that, we don’t really have a position.

It is for the monetary authority to take a call. They will, I’m sure in their wisdom, look at various parameters, which include growth, which include inflationary expectations and tendency, liquidity parameters in the economy, etc and take a call on what they need to do, and at what appropriate time.

Is the government looking at any likely contingency measures in the wake of the crisis in Europe?
Our perception is that the Eurozone crisis is going to be contained within the Eurozone, because that (is) of paramount importance to the countries there. And they have, therefore, responded very quickly and put in place a package for Greece and a second package as a backstopping for the entire Eurozone area. They’ve come in together, they’ve got assistance from IMF. These have sent out signals that provide comfort to the market. The probability of the crisis impacting developing countries, including India, in our view, is marginal.

Our exports to some of these countries, which have figured as potential cases where there could be problems in terms of high debt and low growth are rather minimal. So on all these counts, our exposure to them through the financial sector, through the trade channel, is limited.

Therefore, we don’t really need to put in place any special measures to ward off the contagion which might come.

Is there a concern over a likely flight of foreign capital from the country?
Portfolio investment is subject to some kind of movement, up and down, all the time. It is true that some foreign institutional investors’ investment, which had come in the month of April, a lot of that has gone away in the month of May not because of any perceived lack of confidence in India, but because the money is required by those investors to settle their accounts and books elsewhere.

If you talk of foreign direct investment, it is not susceptible to these marginal swings in mood and the issues which come up from time to time. FDI is based on medium-term and long-term potential of an economy, of that sector, of that activity. So that I don’t think is going to be hurt. That was not hurt to any great extent even when we had the major financial crisis that was on from September 2008 to, let us say, the end of 2009.

Is the government looking to then expand the window for foreign investors to invest in government bonds and corporate bonds?
That doesn’t necessarily follow (as a step to stem flight of capital). We are not necessarily looking for more investment on the government paper. That, to an extent, sort of raises the exposure and vulnerability of government paper to FII investment. So it has to be kept within a certain predetermined prudent limit.

Is the current FII limit in gilt and corporate bond investment adequate?
For the present, it is adequate.

You have not provided for any subsidy in the budget for oil except for Rs 3,000-odd crore for sale of cooking fuels under public distribution system. Does that make it imperative for the Empowered Group of Ministers (EGoM) to decide on raising fuel prices at the earliest?
See, the EGoM in any case, has been set up to take a view on that. That’s what is linked to the fact whether or not there is a provision in the budget estimate.

So, we expect and we hope that sooner rather than later the EGoM will take a decision on the broad policy framework on hiking prices of oil products. On the issue of why we don’t have a provision in the budget, my answer is we don’t have a provision because we have not had it in the last few years.

Whatever is the final number post the EGoM decision, post the oil pricing structure which will be finalised, whatever devolves on the government will be paid, and will be paid in cash. So we will provide for it in the other supplementaries as we go along in the financial year.

There’s been quite a jubilation on the success of 3G and BWA auctions, and you received Rs 70,000 crore more than the target. But is this cushion good enough or in the final analysis, we may still see this year’s fiscal gap settling around 5.5% of GDP only?
`See, what I’ve said is that in any case, we are absolutely clear that we’re not going to pierce 5.5%. It won’t go beyond 5.5%. The best case scenario would be that if you take all the Rs 70,000 crore, then it could be 4.5%. But, the deficit therefore will eventually be somewhere between 4.5% and 5.5%. So we’ll do better than we have promised in the budget estimate.

Is the Rs 70,000 crore mop-up from 3G a cushion for the fisc?
As we go along, there will be known unknowns. But we also have, on the other side, the unknown known such as the excess money that we have got from 3G, and we also have a similar unknown known in terms of tax collections.

Are you happy with the pace of disinvestment?
I am told by my colleagues in the department of disinvestment that they are absolutely prepared to meet the Budget estimate of Rs 40,000 crore, that they are working on various companies in various ministries, and that it’ll work out.

Will the new public listing norms affect the disinvestment programme?
No, it will not impact the disinvestment programme or what is going in terms of the pipeline there. But we have come across lots of views and representations, at least through the media. So once we get more concrete suggestions, we will, as we have mentioned earlier, have another look at it.

In our mind, we are very clear that this is a good way to go to increase public shareholding. But if there are issues in terms of operationalisation, in terms of phasing, in terms of moving ahead, etc, we will take a call on that. I mean that’s all that I can say at this stage.

When are you likely to take a call on the issue?
Maybe in about two months’ time.

The auction of a scarce resource like 3G led to a bonanza for the government. Will you extend this policy to other scarce resources as well?
We, in the finance ministry, are preparing a concept note on the desirability of using this method for other scarce resources. So we’ve tried to identify specific areas and the manner in which it can hopefully be replicated. But this is essentially a call which will then have to be taken by the finance minister, the Cabinet or Cabinet Committee on Economic Affairs. To us, at the operational level and the technical level, it certainly seems a good way to go.

Have you identified some of these areas where the auction method can be replicated?
Our people are in the process of doing that. I wouldn’t like to comment on areas and so on. It is still work-in-progress, but conceptually, a good idea.

Liquidity continues to be very tight. Are you in discussion with the Reserve Bank of India for more measures to ease this pressure? Are any specific steps, other than repo window being planned?
It is an issue at this point in time. It is not going to be an issue which will remain on the table for very long. But it is something which needs to be watched and addressed over the next three weeks or so.

It is important that there is enough liquidity out there in the coming three weeks. And, the RBI has been taking some steps. We are in discussions with the RBI. If something more needs to be done, we’ll address that too.

Can monetary tools such as a cut in the banks’ cash reserve ratio be considered at this point?
No, that is something on which we don’t have any views.

Can the government take certain steps to ensure adequate liquidity in the banking system?
Well, the government works through the RBI. There’s nothing that the government can do directly (on this issue). They are the fund managers for the government. But what the government can do and will attempt to do is to make expenditure as promptly as possible so that money is pumped into the system in the first week of July.

Gilts worth Rs 49,000 crore are due for redemption next month. Can the government buy them back this month to infuse liquidity?
I can’t comment on specific intervention.

Is debt buyback possible?
It is possible. Well, theoretically, it is possible. But what will be done or not done, I can’t comment.

Are you going to consider debt buyback to ease tight liquidity?
Well, we keep looking at so many things. It doesn’t mean that we are going to do any of those.

Since you mentioned these three weeks are critical, is the government likely to take steps in this period?
Monitoring is only the basic thing here. If steps are required, they will be taken, and they will be taken quickly. But I can’t tell you now what we will do tomorrow or day after tomorrow.

I don’t want to pre-empt what is going to happen. Well, we need to be watchful of liquidity.

You said on Monday drastic steps, such as cancellation of bond auction, are ruled out. Does the position stand after your meeting with RBI deputy governor Subir Gokarn on Tuesday?
I can’t really comment because these things keep changing. When the situation is dynamic, it evolves.

Are you concerned over rising bond yields at present?
They’re not at an astronomical level.

Could there be a mid-year hike in excise duty and service tax rates or will you wait for the rollout of GST?
This is not an issue which has even been considered at this point in time. So I don’t think it is possible to comment on it at all.
NW18