Prime minister?s Economic Advisory Council chairman C Rangarajan feels the Reserve Bank of India (RBI) could now look at easing monetary policy. Headline inflation would moderate to about 7% or even lower in the months ahead, he told MK Venu, in an interview for Rajya Sabha TV. Stating that the Indian economy has the wherewithal to grow comfortably at 8-9%, Rangarajan said growth rate in 2012-13 could be 7.5-8%. The recent sharp depreciation of the rupee was caused by a temporary mismatch in capital flows attributable to global uncertainties. Once capital flows normalise, the rupee?s value will also correct from the present levels, he said. Edited excerpts:
Your view on where India is headed in 2012 given the backdrop of gloom in the global economy?
The year 2011 has not been a good year either for the world or for India. Growth has slowed down in almost every country. Growth in advanced countries is pegged at around 1.5-1.7% ? that?s a very low growth rate. Europe is, in fact, facing a very severe crisis. US seems to be in a better situation. Growth rate in India has slowed down too. This is partly due to external factors and partly due to domestic factors. At this point, we do not know very clearly what the growth rate for the current year is going to be, but I guess it would be somewhere between 7% and 7.25%. Again it?s very difficult to predict what the growth rate would be in 2012. I think perhaps growth rate for India would be between 7.5% and 8%. This would depend on how the world shapes in 2012 and how some of the domestic factors operate.
While global factors are not in our control, which are some of the domestic issues that we urgently need to resolve? Also, the general impression is that the messy state of the political economy has brought about a policy paralysis. Will that change in 2012?
I think some of the negative factors of 2011 may not be there in 2012. I do not entirely accept the proposition that policy decisions have not been fast enough. Efforts have been made to introduce policy measures. Policy changes that need legislative approval depend on the numerical strength of parties in Parliament. I don?t feel the policy environment has in any way deteriorated. Under the same policy regime, we have been able to grow at 9%-plus for three consecutive years starting 2005-06. I do not see a deterioration since then. I agree we could have taken certain other initiatives which could have pushed the reform agenda a little further. I think, for example, that clearing doubts on land acquisition by introducing a new Bill is a good initiative and this might get passed in 2012.
But you are asking me more precisely what can be done that could make a difference in 2012. I personally believe that the investment sentiment in private sector is weak. What really needs to be done is for the government to take the initiative. The public sector must fulfil the target set for production and capacity creation, for example, in energy sector. While we have done well in 2011 compared with the previous years, we have fallen short of target. Whether it is coal or power, we must fulfil the output targets which would act as a stimulus for private investment.
Why is mining showing negative growth?
I feel it?s a managerial problem. We had three successive months of decline in coal production, but November and December figures indicate improvement. There is no lack of policy which has led to a decline in production. It?s a case of pure and simple managerial and governance problems. The whole area of managerial decision-making has to improve. Fulfilling targets in coal production is required.
Some people hold the view that growth cannot be sustained with inflation as high as 9%. The world over, history suggests that growth can be sustained along with high inflation only for a few years and then it starts tapering off. Will India too see growth tapering off after two years of very high inflation?
What is the potential rate of growth for the Indian economy? One needs to look at macroeconomic parameters relating to savings and investments. We have had a savings rate of 34% and investment rate over 36% till a few years back. Even with an incremental capital output ratio of 4:1, it would give us a 9% rate of growth. But many things can prevent us from reaching this potential growth. Certainly, Indian economy has the wherewithal to grow at 8-9% comfortably, but there are other factors that may come in the way of achieving this. One macroeconomic issue is the high level of inflation. I don?t subscribe to the view that high growth rate warrants high inflation.
In the last three years, we grew at a rate exceeding 9% and the inflation was not that high. In fact, it has shot up in the period when growth rate has somewhat slowed down. If high inflation persists for long, it can come in the way of our achieving high growth rate also. In fact, the only occasion when high growth rate can cause high inflation is a situation when growth rate exceeds potential output and it results in what we call overheating. In that situation, inflation can be a consequence of high growth, but we are talking of a situation where growth has not crossed its potential. In order to achieve a high rate of growth, we must bring inflation down as fast as possible and keep it in a range of 4-5%.
The dominant view is that we are not able to achieve our potential output growth (8.5-9%) consistently because there are supply bottlenecks aggravated by governance issues. What is your take on that?
I would identify two sectors where there are supply bottlenecks. Agriculture and infrastructure, and within infrastructure, power. The last two years have clearly shown how a small shortfall in agricultural production can cause serious problems for the economy. From the point of view of food security, balanced regional development and the need to reduce poverty cannot be ignored. We need to grow agriculture and allied activities at an annual rate of 4%. We must ensure that.
Secondly, the non-availability of power has acted as a constraint. Many states today suffer from power deficiency to the extent of 7-10%. Now that is a serious problem and that is linked to the availability of coal. Since most of the power is coal-driven, there is a direct connect. Factors like availability of land and environmental issues are also relevant in terms of adding new power capacity. In the 12th Plan, we focus our attention on agriculture and infrastructure, and more importantly, power. Then we can achieve a growth of 8-9%.
What is your sense about the inflation? Do you think we are importing inflation because of the surge in liquidity from the US, and now due to substantial rupee depreciation?
To the extent to which international commodity prices rise, it has an impact on domestic prices and inflation can be affected by it. But I would say two factors are operating in the international scene. One is the larger availability of liquidity and therefore, financialisation of commodity markets which result in commodity prices going up. On the other hand, since the economy is not growing fast, there is less demand for products. Thus, there are two factors ? one pushes up prices and the other slows down prices. However, I would still say inflation in India has been largely driven by domestic factors.
Now that food inflation substantially is down ? it entered negative zone with a rate of -3.36% for the week ended December 24 ? political pressure must ease and RBI should be able to look at reversing the interest rate cycle?
Yes; we are seeing overall inflation moderating to about 7% and even lower in the months ahead. Going forward, the central bank can certainly look at easing monetary policy.
Is there fiscal room this time round, like the government had in the aftermath of the 2008 crisis?
We don?t have fiscal room at all now. There is an urgent need to rationalise spending. The substantial impact of the Food Security Bill should start taking effect this year itself. We have to seriously consider diesel decontrol and shift subsidies from the middle class to the very poor, for example, to meet the substantially higher food subsidy under the new legislation. This has to be done to keep the fisc under control.
Do you think the rupee will continue to weaken? Is there a big worry on that count?
No, my belief is that the recent rupee depreciation was caused by the temporary mismatch in capital flows caused by the global uncertainties. Once capital flows normalise, the rupee?s value will also correct from the present levels.