?Reducing subsidies to 1.6% of GDP should be our goal?

Prime Minister?s Economic Advisory Council chairman C Rangarajan says the gross domestic product could expand at 6.5% in the next fiscal. The renewed thrust on speedy clearances of projects and fiscal consolidation would help prop up investments, enabling the economy to move on to a higher growth orbit, he believes. A former central bank governor, Rangarajan doesn’t wish to forecast on behalf of the RBI now (the central bank is reviewing its monetary policy today), but feels that with the core inflation slowing, there is a strong case for an interest rate cut. Excerpts from an interview with FE?s managing editor MK Venu for Rajya Sabha TV.

The Budget has generally generated optimism with regard to fiscal correction and higher GDP growth in the coming fiscal. What do you think of these two variables?

I think the Budget is very well conceived. It is both responsible and forward-looking. It has contained the fiscal deficit in the current year and has also promised to bring it down further next year. These are steps which are necessary from the point of view of fiscal consolidation and prudence. At the same time, the budget has provided enough incentive for investment and growth, and, therefore, I believe the full impact of various measures taken since September as well as measures announced in the Budget will be felt during the next fiscal. It is my view that the rate of the growth of the economy in the next fiscal will be around 6.5%.

Some people are raising doubts over the assumption of the 6.5% GDP growth. What, according to you, would drive growth in the next six-seven months?

In the current year the rate of the growth of the economy will be a little above 5%. I expect that the rate of growth in the next fiscal could be 1-1.5% higher because we need to look at the impact of (possible higher) investments on growth. Investment decisions take time. We have been taking a number of measures since September and this has been again re-emphasized in the Budget by providing certain very specific measures to stimulate investment. The point I have been making is our saving rate and investment rate continue to remain high (compared with most other countries). This is primarily even though many projects have not been completed, investments have been made to some extent. I expect, during the course of the next fiscal, many of the impediments that have come in the way in the completion of the projects would be removed and, therefore, we will see the full benefits of investments that have been made in the last two years and also those that will be made in the coming year. This is what makes me optimistic about the economic growth.

Are you assuming that the quick recovery could be on account of investment made where output has not fructified for various reasons?

I think the incremental capital output ratio has shot up in the last two years. But if it settles down at the more normal level of 4:1, or a 30% to 32% investment rate, it will certainly give us 8% (growth). But there have been many factors which have come in the way of the completion of projects. Some of them are purely managerial and procedural and some may have been impacted by policy decisions. But efforts have been made, such as the constitution of the Cabinet Committee on Investment, which is intended to clear the obstacles that come in the way of speedy implementation of the projects. I think it is a key factor which will contribute to the pick-up in investment as well as growth.

Are you satisfied with the pace of the CCI clearing these projects?

They have just started but certainly at some higher level, they have attempted to clear some projects. But I think, going forward, I see more and more projects getting cleared in a shorter period of time and action being initiated. I certainly think that the completion of some of the major projects in the areas of power, road and railways will push the economy forward. You see it reflected in the railways and the general Budget.

I think the issues that have been raised related to land acquisition and environment, but there is a certain understanding that we need to balance different objectives, and it is not as if environment concerns are irrelevant. But at the same time, we need to look at the importance of growth. We need a balanced approach.

You were talking about the criticality of various project investments which need to be cleared. Would you say this becomes one of the most critical aspects of both the Budget and the administration in six seven months ahead?

There’s an emphasis on getting projects cleared and also speedy implementation of projects. Several projects have been initiated in the past years but have not moved fast. Now if they are moved, then you will get immediate benefits of those projects.

Does sharp deceleration in consumption growth worry you? Because first time we are witnessing it in several sectors and the growth is at 7-8 years low?

It is all reflection of the same phenomena as the economy slows down, consumption demands also go down because consumption is very much a function of income.

But even after 2008 crisis, consumption kept up. It is only now that it has come down very sharply.

In some sense, consumption is a function of permanent income in the sense when income has remained high, even at that time people look at the past and they still continue to spend on consumption expenditure because of the high-level income of the previous year. But when growth slows down over a period of two years, then consumption expenditure also begins to fall.

You have industrial production down to around 1%, yet the excise duty is growing at 10%. How do you reconcile the seemingly odd figures?

It all depends on the composition because the excise duty is levied at different rates and on different commodities. Therefore, it will depend upon on the composition of the expenditure.

Shouldn’t the excise duty mirror the industrial production growth?

It should, but in the past we have seen that when income picked up very sharply, the excise duty did not grow that fast. The direct correlation is not very much there. But yes, theoretically one should see that as income grows, people spend more on commodities and excise duty also goes up. But now widening of the base is happening.

For the same reason, the 19% revenue growth shown in the Budget would seem reasonable as there are many more services which will come into the tax net.

I think if you compare the rate of growth last year and the current year and the rate growth projected for the next year, they are very close. Even in a year in which we were supposed to grow only about 5%, we had a good revenue increase. What we are projecting is only a shade higher than what actually happened in the current year. I think it is a reasonable assumption and I think we will be able to get it.

How will in this phase of fiscal correction, new schemes like the food security bill impact both growth and expenditure? Although, the budget only provides for additional R10,000 crore, do you think the amount is enough to implement the bill?

What is really needed is to look at the total quantum of subsidy. The budget has provided for fiscal correction and projected the fiscal deficit to be 4.8% next year. That means they have looked at the overall expenditure and revenues. Now, subsidy is one part of the expenditure, and within subsidies, there are different components. Now, a view can be taken that subsidies on food security are paramount and, therefore, while containing the overall subsidies to a particular proportion of the GDP or expenditure, we can fully provide for the subsidy relating to food security and cut the other subsidies.

Over the period of next three years, what will be the kind of adjustment in subsidies?

If growth picks up in the subsequent years to 7-8% and more, revenue kitty will also grow. So, all that we really need to do is to keep the total quantum of the subsidy to less than 2% of the GDP. It is now around 2% of the GDP, but a year ago it was indicated that it could be 1.6% of the GDP. That is the level towards which we should move as far as the correction is concerned.

Over the next one year, how much will you think the direct benefit transfer (DBT) will help in reducing expenditure?

My sense is that at the initial stage, the DBT will eliminate the errors of commission and omission. Because as of now, the schemes towards which we have moved, we are trying to make it more efficient–be scholarship or pension transfer. The cash transfer system we have now introduced will make the system more perfect.

If you were the RBI governor (now), would you cut the interest rate?

This is not a question you should ask an ex-governor. There’s scope in view of the fact that the fiscal consolidation is proceeding along the desired lines and growth needs to pick up, and there’s also an indication that non-food manufacturing inflation is at a comfortable level. All these are favourable factors for the RBI to act in the direction of easing.