Chief Economic Advisor Dr Raghuram Rajan has said that forecasting growth around turning points in very difficult and conceded that there is a steady decline in growth, adding that steps need to be taken in that regard urgently.
In an interview with Karan Thapar on 'Devil's Advocate', the Chief Economic Advisor said that all the investments that have stalled need to come back, and that there is need to get new investments as they have slowed down.
Here is the full transcript of the interview:
Karan Thapar: Hello and welcome to the Devil's Advocate. How worrying is the situation facing the Indian economy and what steps is the government taking to resolve the issue. Those are the two key issues I will be discussing today with the Chief Economic Advisor Raghuram Rajan. Mr Rajan, if you look back at the year that is just ending, growth has fallen below 5.5 per cent, many people fear that the fiscal deficit could touch 6 per cent, inflation is stubbornly above 7 per cent and FDI over the last six years has fallen below 40 per cent. On top of that, you have had the worst power crisis in 20 years this July and investors seem to have lost confidence and are not investing. Is this the annus horribilis of the Indian Economy?
Raghuram Rajan: Well, half and half. If you look at one side, you have all these indicators, add them up, this is a total misery index. On the other hand, there is a response which is coming and hopefully what happens is you start seeing some turnaround of some of these and that will create a better environment going forward.
Karan Thapar: Before we talk about the response that is necessary from the government, let us try and paint a fuller picture of what you call the misery index. First growth. In September you said that it will be somewhere between 5.5 to 6.5 per cent. But in fact, for the first six months of the financial year, It has come in at just 5.4 per cent. Now the government is predicting in its mid-year review that for the whole year it will be 5.7 to 5.9 per cent. But is that a realistic prediction?
Raghuram Rajan: It is as good as we can make it. Let me tell you that forecasting growth around turning points is really very difficult because picking the right turning point, seeing how it moves from there is just very hard. What we have seen is a steady decline in growth, which is for sure. And we have to do something about that.
Karan Thapar: You say it is as good as you can make it but if you are aiming 5.9 per cent by March 2013, then the second half of the financial year has to grow by 6.4 per cent. You know and I know that that is completely impossible
Raghuram Rajan: Well it's a little less than that, which comes from statistics of growth itself. But you are right. Hitting that upper band of the target is quite ambitious. What needs to happen is that first all the investments which have stalled need to come back. That is part of what growth is about. We need to get new investments going because investments have slowed down across the economy. You have got to get more confidence among consumers so that they start spending.
Karan Thapar: Which is why even hitting the lower band of 5.7 per cent is difficult because to achieve 5.7 per cent, at least in statistical terms, the second half has to see growth of 6 per cent and that is a huge jump from 5.4 to 6. So you may end up not at 5.7 but lower at even 5.5 per cent.
Raghuram Rajan: Well our best estimate is that we will manage 6. Because there are some factors which are starting to come back. Confidence is starting to pick up. Look at the stock market. That does suggest that there is some buoyancy. Also remember that the rabbi crop is going to look a lot better than kharif crop. Partly because the rain picked up in the second half and also because if you sow less, it creates more moisture in the soil and there is more production. So there are elements which are going to push up growth towards the end of the year. Now how much exactly, of course, that is an art rather than the science.
Karan Thapar: But in a nutshell you are prepared to nail your colours to 5.7 per cent over all my March 2013?
Raghuram Rajan: There are bands of uncertainty around any forecast.
Karan Thapar: Even around 5.7?
Raghuram Rajan: Around any forecast. But we are trying to create the conditions that will turnaround this growth slowdown. That is what we should be focusing on. What are we doing?
Karan Thapar: I will come to that in a moments time. But I want to stay for the moment with these 'bands of uncertainty' around any forecast. The 'bands of uncertainty' around the fiscal deficit target of 5.3 per cent is even more because with growth steadily slowing, with disinvestment either slowed or delayed, and with your target of spectrum revenue sale way below what you have actually achieved, even 5.3 per cent in the fiscal deficit might be difficult to achieve.
Raghuram Rajan: Difficult, but not impossible. And clearly, the finance minister having set those standards, 5.3, 4.8 and so on, it creates a kind of ambition for us to meet. And I think all the steps are being taken to try and nail those particular targets which means given the lack of response to spectrum auctions, we need to move more on a number of fronts including disinvestment. Remember last episode that we had in NMDC was quite good.
Karan Thapar: But you only achieved 7000 rather than your target of 30,000. And in spectrum, it was only 9 out of a target of 40,000 and that 9 also could come in staggered payments.
Raghuram Rajan: Now remember, that yes there is a target for this year, but there is a target also in the future that we have to achieve. We can work on some fronts this year, but w can do more on disinvestment once we have got the process rolling which I think we have and also on the spectrum. Spectrum is not finished. There is more that can be sold. There are bunch of possibilities going forward. We need the medium term to look good.
Karan Thapar: You know you are laying a lot of stress in terms of what you can achieve in spectrum sale in the next remaining three months, in the disinvestment in the next three months. But let me tell you why people think you will achieve less than 5.3 per cent. In September, the Kelkar Panel had reported that the budget has underestimated the subsidies by Rs 70,000 crore, overestimated tax receipts by Rs 60,000 crore and Kelkar said that unless you take stringent actions, your fiscal deficit will be Rs. 1.3 lakh crore more than you expected and he though the overall figure would be 6.1 per cent. How can you be confident today that without taking stringent corrective measures, and none knows what you have done, that the Kelkar forecast would not come true.
Raghuram Rajan: No, we have to take strong action. I am not saying this is easy. I am also not saying that we are going to make up by March the deficiency on the spectrum auctions. We will make it up over time. What we need to do is do our best on every front. That means a whole variety of fronts. For example the expenditures. We will have to be prune.
Karan Thapar: Actually cut?
Raghuram Rajan: We have to take stringent actions on every front and make sure we stay within the 5.3 per cent envelope.
Karan Thapar: So you are actually prepared to cut expenditure or forgo expenditure that is planned but not make it?
Raghuram Rajan: Some expenditures will be foregone, yes.
Karan Thapar: People would be a lot more confident that you would achieve 5.3 per cent in fiscal deficit front if you can actually live up to Pranav Mukherjee's commitment made in the budget that you will cap subsidies at 2 per cent. But most people feel you are not going to achieve that at all.
Raghuram Rajan: Subsidies are an interesting issue. On one hand, the government hears from every quarter cut your spending but when you actually take a hatchet to a spending that is poorly targeted then you hear it from everybody like oh, you are taking a hatchet to a gas cylinder!
Karan Thapar: Except for the fact that this was the commitment the finance minister voluntarily made in his budget speech last year. And if you cant live up to his commitments, which is a two percent cap on subsidies, people say how on earth are you going to achieve in adverse conditions 5.3 per cent on the fiscal deficit.
Raghuram Rajan: At least we are moving in the right direction. That we started with a cap of cylinders, we increased the diesel prices. Yes, more needs to be done to bring it below the two per cent. But you hear a whole lot of political opposition to any move here. But the fact is that we have done something. Obviously, we need to do more. And ultimately we need to target these subsidies better which is where the cash transfer systems start coming in. But there is no doubt that at least we have take the first steps.
Karan Thapar: You know what people who are listening to you right now will think? That there is no doubt that Dr Rajan understands that he has got a serious challenge. There is no doubt that he determined to do his best. But the problem is, that he also knows that 5.3 will probably be unachievable. He has to say he is working towards it he cant really say its unachievable. But the truth is that it is unachievable.
Raghuram Rajan: I would not agree with you on that one. I think it is achievable. But it does require a fair amount of painful decisions.
Karan Thapar: So you are nailing your colours once again?
Raghuram Rajan: As I said, we are going to do our level best to achieve it and we have some confidence we can. Now there are factors that you have no control over. What happens if oil prices take off. You don't have a control over that.
Karan Thapar: Let us then come to the third factor - FDI. UNCTAD figures show that during the first six months of 2012, FDI flows into India fell by over 42 per cent. How much of a cause of concern is that?
Raghuram Rajan: We have to create a better environment in India for FDI, partly because FDI is valuable both from the perspective of bringing in new technologies, more learning into India but also providing much needed competition. So for the people of India, for the aam aadmi, who we always talk about, FDI can be a very good thing. Create jobs, create better consumption opportunities and reduce the cost.
Karan Thapar: Except that at the moment, with FDI level falling, and with oil prices of $109 per barrel and who knows it could shoot up even more if you have a bad freeze in Europe, which is predicted by the way, can you reign in the current account deficit from last year's 4.2 per cent to this year's 3.7 per cent or is that too another target that you must accept is under severe pressure?
Raghuram Rajan: I would say that fiscal deficit is much more directly controllable. The current account deficit, is both a function of the fiscal deficit, but many other things, and therefore much less under your direct control. What you can do in the current account deficit, is try and make sure that it is financed safely. And this is where again FDI comes in. The safest form of finance. If you have to borrow from outside, the safest bet is long term financing with people investing in your country. FDI is the safest form of financing.
Karan Thapar: Which is why FDI falling by 42.8 percent in the first six months of 2012 is a particular problem.
Raghuram Rajan: But the changes that we are making are in the second half in some sense will help. Starting in August/September, we have tried to create a better environment. So my sense is that that hopefully will create a buzz. If you talk to foreign investors, it does seem to be creating a buzz.
Karan Thapar: So 3.7 per cent on the current account deficit is achievable?
Raghuram Rajan: I will not nail my colours to any target there. I would say we need to bring it down from 4.2 per cent.
Karan Thapar: Let us then come to inflation which many people say is stubbornly stuck at 7. Would you say that is an Achilles' heel for the government?
Raghuram Rajan: All these are indicators of the imbalance. Whether it is the fiscal deficit, or whether it is inflation, these suggest that things are not going as well as we would like in the economy. For example, take inflation. Why is it so high? A lot of it is food inflation. Why is food inflation high? Partly because, good news, our people are eating better. They are eating more pulses.
Karan Thapar: And partly because you pushed up minimum procurement prices 2-3 years ago and partly because of NREGA (National Rural Employment Guarantee Act).
Raghuram Rajan: Rural wages are higher, people have higher incomes, people are spending more and yes it also partly bad news, supplier response has not kicked in.
Karan Thapar: So when will it come below 7 per cent?
Raghuram Rajan: Depends on what you are talking about. WPI, CPI? Look again, inflation is another variable. I think you have made the point before that government has been proven wrong about its forecasts on inflation. Again what we can do on the inflation side is focus on real aspects we need to do, let us get the supply side reenergised on the agriculture side but also on the industry side. Create more incentives for the investors, while leaving the RBI to do its bit on the monetary side and hopefully with both pushing in the same direction, we bring the inflation down.
Karan Thapar: the interesting thing is you are not giving me a forecast again. You don't want to nail your colours on this one either?
Raghuram Rajan: I may be a different economist from the ones that you hear often. I think there is a lot of uncertainty especially around the economy. I think you have to recognise the problems but not stand there and say I know what is going to happen. Because we don't.
Karan Thapar: Absolutely. Sometimes it is better not to make a forecast. It is safer at any rate. The picture that emerged as we have talked about the economy, is of an economy with fairly serious problems. Would you concede that?
Raghuram Rajan: I think yes. But let us not forget if you talk to people around the world they see India as a land of opportunity provided we get around the serious problems.
Karan Thapar: The problem with that view of India being a land of opportunities is that so many promised reforms that are essential to get investment fired up, to build confidence amongst industrialists, to put their money into investment aren't happening. Pension and insurance are not going to happen in the winter session. Who knows when GST and DTC will happen and they don't seem to be on anyone's horizon anymore. Wont that add to the pessimism and despondency?
Raghuram Rajan: First, I wouldn't say that they aren't on anybody's horizon. They certinaly are on the government's horizons.
Karan Thapar: Not on Parliament's horizon.
Raghuram Rajan: Well, we need to do all these things. We have just had some success on the banking reforms.
Karan Thapar: But that is the only one.
Raghuram Rajan: The Company's Act.
Karan Thapar: That's hardly a reform. It's a procedure.
Raghuram Rajan:Well, there are elements in it which are quite important. The point is let us get some momentum. Much of what we need to do is not on the legislative side. It is on the implementation side. The coal linkages, the stalled projects, getting them started.
Karan Thapar: Can I come to those in a moment's time, because those are things that people have earlier talked about in this program. There are promises that have been made and they have not been delivered. But at the moment, just to wrap up the picture of the economy, do you think, given the circumstances, given that legislations that have been promised for so many years are stuck, given the uncertainty about the fiscal or the growth, given the FDI situation, India can avoid a rating's downgrade by Standard and Poor's and Fitch?
Raghuram Rajan: I think it can. Because the fundamentals are still strong. I think the government has shown some determination to take the necessary corrective action. Now whether it hits the various targets we have talked about on the nose that is... I think the broader issue is that the direction is the right one. And that we will, over the medium terms, get our finances in order which is what the ratings care about.
Karan Thapar: Let us hope Standard and Poor's and Fitch are listening to you. Let us take a break and when we come back let talk about the critical steps the government needs to take to ensure that the targets that you have hoped to achieve can actually be achieved.
Karan Thapar: Welcome back to Devil's Advocate and an interview with the chief economic advisor Raghuram Rajan. Dr Rajan let us come to what steps the government can take to tackle the economic situations we have talked about in part I. The finance minister has talked about the need of a bitter medicine. What precisely does he have in mind.
Raghuram Rajan: Let us first talk about medicine before we get to bitter medicine. Medicine is restarting growth. That can be a good way. So many stalled projects. We need to deal with the permissions and clearances that they need in order to get them going.
Karan Thapar: In July, Montek Singh Ahluwali said on this program that a series of implementation bottlenecks in infrastructure projects in coal, gas and power were holding up growth and he promised that within four months those bottlenecks would be tackled. Five months have passed and now he is admitting on television that those bottlenecks remain. So you know the problem, but the government doesn't seem to act on it.
Raghuram Rajan: But there is a new hope. We have got a structure which hopefully will help in more coordination. Part of the problem is the lack of coordination. So with this cabinet committee on investment hopefully we can deal with the problems in an expedited way. That is important.
Karan Thapar: You have created a cabinet committee on investment, you have also pushed through FDI in retail and civil aviation, but corporate investment is not picking up. You talk about firing animal spirits, but those spirits remain damp still.
Raghuram Rajan: Corporate spirit depends on a whole set of nebulous things, hard to touch and feel. I think the change in government activity over the last few months is something positive. I think if and when the inflation comes down, it will also be positive, consumers will also have disposable incomes, and they will be willing to spend. FDI coming in is also a process that takes time. Stock markets hopefully retain buoyancy. All these things add to change the environmental picture.
Karan Thapar: Except that Ratan Tata, the premier industrialist of the country in an interview to the Financial Times recently said that government inaction is driving investment away from the country and forcing groups like his to seek growth abroad. And if Montek cant deliver a promise to undo the bottlenecks holding up coal, gas and power, then more and more investors are not going to invest and go abroad.
Raghuram Rajan: That is a very serious concern. We need to make India attractive to investment. We need to take the actions that everybody is asking.
Karan Thapar: Again, why aren't they happening?
Raghuram Rajan: Well, again there are coordination problems. There is bureaucratic slowness. All these things need to energised.
Karan Thapar: You make it sound as if we are our own worst enemies. We know what we need to do but somehow cant get around to doing it.
Raghuram Rajan: We are also in an environment which is changing remember. We have had a whole lot of public scrutiny of government actions.
Karan Thapar: The scams have set things back?
Raghuram Rajan: Various kinds of changes which create a whole lot of scrutiny and then as a result, bureaucrats, politicians are more wary to take actions that need to be taken.
Karan Thapar: Now one thing that is stopping foreign investment coming in the country is what I call the Vodafone issue. The Parthasarathi Shome recommendations came if not months than weeks ago. When will the government take action?
Raghuram Rajan: It will take a decision. It is the government which called for Parthasarathi Shome committee report and those decisions will be taken. I cannot give you a precise time, but yes it does intend to take decision.
Karan Thapar: Let me come back to the bitter medicine. And I emphasize the word bitter. We have talked about the medicine. What is the bitter medicine beyond what you mentioned in part I, the fact that we have to cut some expenditures and forgo the others.
Raghuram Rajan: Bitter in the sense that now we have to live within our means, we cannot spend without limits.
Karan Thapar: So tighten the belt all the way?
Raghuram Rajan: Tighten the belt all the way. There is, in a period of strong growth, a willingness to spend as if there is no limit. Well, now you are in a period of slow growth and if we spend as we were spending in the past, if we don't raise all the revenues that we need to raise, if we don't do all the reforms that we need to do, we could get into much worse situation.
Karan Thapar: In a nutshell what you are saying is that we have difficult days ahead of us and we have to simply grit out teeth and bear it.
Raghuram Rajan: We have to grit our teeth but this could be the beginning of a much better and longer duration growth period if we do the right thing.
Karan Thapar: Let's hope that that's true but what is also inescapable is that gritting of teeth has to be done.
Raghuram Rajan: It has to be done.