Indian economy: Arvind Mayaram dismisses prophets of doom, says fundamentals strong

Written by Himani Kaushik | KG Narendranath | New Delhi | Updated: Sep 2 2013, 20:28pm hrs
The state of the Indian economy might look discomfiting, but not in the least to government managers. The June quarter GDP expansion, the slowest in four years at 4.4%, and a considerable moderation sequentially from 4.8% in March quarter, reflected a near-collapse of investment activity and consumption, but department of economic affairs secretary Arvind Mayaram protests any notion that the Indian economys status has been stained.

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He told FE that the raid by speculators on the rupee was aided by a fear of many unknowns and was unlikely to last for long given the many positives on the current account side which everyone acknowledges. The US economy, he believed, was still in a flux. So it was unclear if the Federal Reserve which created mayhem in world markets by hinting at the imminent withdrawal of its quantitative easing programme without laying out a structured programme would indeed raise interest rates that much. The Fed would rather watch many indicators like the employment data than take the plunge, he said.

On the domestic front, good news is glossed over while wild and imaginative stories are floating around and many bogeys raised, Mayaram said. He listed the aspects that could positively influence the GDP. Rural consumption was going to increase (kharif acreage is up 8% annually) and create a virtuous cycle. Foreign direct investment flows in FY14 would be some $16 billion higher than last years and the impact on the aggregate demand of the expenditure facilitated by $27 billion worth of projects cleared by the Cabinet Committee on Investments between January and April would be felt latest by the fourth quarter. A R1-lakh-crore contraction in government expenditure achieved between October and March to rein in the FY13 fiscal deficit (at a creditable 4.9% of the GDP compared with 6.4% many had predicted) had a (debilitating) spillover effect, the official said, explaining why the Q1FY14 growth was flattish. The enhanced government spending in Q1 roughly the entire Plan amount meant for the first half was released by June would tell on the GDP in the second half.

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Strongly denying any panicking by the government over the rupee and asserting that we are completely in control, the DEA secretary said recent interpretations of the global rating agencies stance with regard to the countrys creditworthiness, on the contrary, reeked of an unwarranted despondency. The fact is all three of them (S&P, Moodys and Fitch) have only reaffirmed their outlook on India and would likely wait for the fiscal deficit number for FY14 (before reconsidering their stances), Mayaram said.

He reiterated that the government was absolutely sure the deficit would be contained at the budgeted level, which is treated as a red line not be breached.

Contending that Indias external debt position was anything but alarming, Mayaram suggested the rating agencies take another look at their indexation methodology. Indias public debt to GDP ratio stood at 66% in FY13 and external debt, at 21%. Even the short-term foreign debt, which has risen recently, stands at 5.2% of GDP (short-and long-term debts due for repayment over the next year are a whopping $172 billion and many analysts have expressed concern over this). Mayaram drew a comparison of this with much higher levels of public debt with Germany (94%), Italy (114%), etc, and wished the agencies would explain why these countries enjoyed better ratings than India. We have been extremely prudent in terms of managing our debt. Also, if you look at the combined fiscal deficits of states, it is close to 3.2% (of GDP) which is very low. As for the current account deficit, it is only looked at from a perspective of (imaginary) default, he said.

The official added that the government had urged Moodys to tell it why the heavily indebted Spain and Greece were accorded better ratings than India. They (Moodys) agreed they needed to revisit the methodology. You need to have more neutral or unbiased indexes.

Asked what the government thought of the level at which the rupee would likely stabilise against the dollar (Crisil recently revised downward its fiscal-year-end forecast to 60 from 56 earlier), Mayaram said it was difficult to predict, adding that a (wrong) perception on current account deficit was causing the rupees slide. The measures announced by the RBI governor and the finance ministry are transmitting, he said, echoing the Prime Ministers statement in Parliament on Friday, which underscored the macro-stabilisation process supporting the value of the rupee. The governments arsenal is replete with tools to deal with any eventuality (including a sovereign bond), but no exigency was noticed at this time to warrant their employment.

The official admitted that a problem existed on account of the weak rupees impact on the oil import bill amid the fear of an oil crisis in anticipation of Syria being attacked by the US. He, however, said since things were still a bit nebulous, it was a bit early for the government to decide on how to cope with the unravelling scenario and identify the (additional) measures needed to contain the subsidy bill. If the rupee had not gone where it went, we would have corrected the oil product prices by December. Now this thing (the spike in oil import bill) has hit us and the period (for correction) has got extended, he said. Giving a medium-term forecast, he said by next year, the under-recovery on oil (suffered by marketing companies) would be completely removed, adding that in the next two years the subsidy on the most commonly used fertiliser urea would also come down.

Mayaram said the full-blown budget impact of the food subsidy Bill would be Rs 1.15-1.2 lakh crore, only Rs 13,000-17,000 crore higher than what were already spending on food subsidy. Pointing out that the MGNREGA budget reduced to about Rs 28,000 crore last fiscal from over Rs 40,000 crore earlier as the demand was less, he said that the expenditure on this scheme would come down by another Rs 5,000-7,000 crore in the next two-three years.

The greatest contribution of MNREGA has been to enforce the Minimum Wages Act in a practical sense. Employers have been made to pay more than Rs 100 a day to a worker. This is one reason why consumption in rural areas has gone up. So it has actually served the purpose for which it was enacted as a livelihood security. However, the scheme will always have to be there for the simple reason that it is sort of an insurance cover for those seeking work.

Cash-rich PSUs have been told by the finance minister in no ambiguous terms that they must either step up investments or pay much higher dividends (use it or lose it), the official said, adding that capital flows from abroad would be helped by a likely spurt (of some $8 billion) in remittances through the year (this despite RBI data showing a drop in non-resident Indian bank deposits in the June quarter to $5.5 billion from $6.6 billion a year earlier) and exports which have started looking up. The official also expressed confidence that $11 billion additional capital flows envisaged through quasi sovereign bonds, PSUs going for more external commercial borrowings and a liberalised NRI deposit scheme would indeed materialise by March end.