Even small downgrade threat must be taken seriously

Written by Himani Kaushik | Subhash Narayan | Updated: Sep 28 2012, 06:55am hrs
Newly appointed chief economic advisor, Raghuram Rajan, has a tough task ahead of him. He has to suggest policy formulations that ensure fiscal discipline while meeting the investment needs of the economy with enhanced private funds. Improving governance is key to reviving investor confidence, the former IMF chief economist tells FEs Himani Kaushik and Subhash Narayan in an interview. The government is willing to take politically painful steps, he says, while terming the recent measures of allowing FDI in multi-brand retail and revision of oil prices as the first set of steps towards more structural changes in the economy that need to be brought about in the near future. Excerpts:

What are your immediate priorities in the role of the chief economic advisor

My role here will be two-fold: In the short term, (it is) to offer views on economic policies that the government intends to carry out, offer policy suggestions and views on what could be the impact of certain policy decisions say, the affect of diesel price hike on inflation. A second set of issues is broadly about (the transition from) short-term to longer-term objectives. So, not only you have to figure out what (ought to be) the (long-term) big picture is but help chart out the way to get there.

How would you define the measures that the government has taken recently

These will have long-term implications. If you take the policy changes in 1991, when we had announced the steps, there was always this talk of structural changes. So, now why are we not calling the recent measures structural reforms These are big steps; just because you heard of them before, you can't say these are not big steps. These reforms have a potential in the medium term to revolutionise price changes in the country.

The measures on fuel price hike are far smaller steps in comparison to what is needed to bring down the fiscal deficit. Given the political uncertainty, are these steps concrete enough to convince the investors and rating agencies that the government means business Also, how serious is the downgrade threat

First of all, you should never take the downgrade threat lightly, even if there is (only) a small possibility of it happening. We should not be focusing too much on whether we will meet this year's fiscal deficit target, instead, we need to look at deficit in the medium term; whether we have got our deficit under a reasonable level of control.

I think what we need to signal is that we do take both our current account and fiscal deficit seriously. We are willing to take politically painful steps. The first reaction of people is why do we need to increase prices but very few people actually understand that these steps were very crucial for controlling our finances. Part of the problem is we have let the gap on subsidies widen so much that we have to take big steps to rectify that. Now, hopefully some of the follow-on efforts of what has been done, including the strengthening of rupee, can help further reduce the deficit.

We would want the credit rating agencies to see (these steps) as an evidence of the government's willingness to prove that what we are doing is painful.

What more steps do we need to take to reverse the perception of investors and make India an attractive destination

FDI cannot be the only answer for more investments, we need to improve the climate for domestic players to invest. The first step is to have clarity (on policy) and proper governance. The National Investment Board could be a big game changer. It could help cut through bureaucratic delays.

One of the biggest concerns when you talks to industrialists is land acquisition and permissions on linkages and clearances. On the issue of land acquisition, especially for major infrastructure projects, a good land acquisition law would be the solution. Finalising the relevant Bill is high on priority.

There are policy actions which don't require legislative changes. In the financial sector, some measures have recently been taken and some regulatory changes are required.

The regulators are independent and they can indeed bring in some changes that would spur investments.

As per CMIE data, uncertainty over environmental clearances, land acquisition and financing has stalled projects worth Rlakh crore in 2011-12.

Ultimately, you will have to energise the pension and insurance sector as well as the corporate bond market to get longer-term funds into the infrastructure and other long-term projects. We can't keep pumping the long-term projects with short-term money from banks or from outside through ECBs, which has its own issues. So, improving the quality of investments by (attracting) the insurance and pension companies is important. On the corporate bond market side, we need to continue work to remove the impediments and facilitate bigger funds. We need to allow foreign funds into the rupee bond market. We also need to work on the institutional structure of the corporate bond market by bringing in a proper bankruptcy code.

The Indian banking sector seems to be getting choked with the delays/default in debt repayment in segments like power and aviation. What is the balance we need to strike between restructuring the bad debt and also protecting the health of the banking sector

The problem is we need to move away from the situation of 'pretend and extend'. You pretend that it's working and keep extending the loan. What needs to be done is to recognise that these loans need to be restructured but at the same time these discoms or corporates will have to become profitable or at least break even. I think in this case, the SEB restructuring package is very useful as it is at least recognising the problem and giving states an incentive to fully price the power being sold.

What are the administrative steps that can be taken to tackle food inflation

The Rangarajan committee has suggested measures to improve the way sugar is priced and sold. Some of the food products can be taken off mandi to bring more competition. For all this, we need to encourage creation of cold storage facilities. When logistics improve, efficiencies increase and prices for the consumer could fall.

Historical experience does justify opening up. Look at the automobile industry, where we now have so much more choice and so much more employment (due to opening up).

We cant keep debating for ever. We should let the states decide (as in the case of FDI in multi-brand retail).