Even though the recovery in capital investment will probably be somewhat deterred due to the global economic slowdown, India’s private sector may be getting ready for stepping up investment as excess capacity is getting utilised. Financial conditions for them are also favourable, Niti Aayog Vice Chairman Suman Bery told FE’s Prasanta Sahu. Edited excerpts.
Is there any proof of revival of private capex?
The (Central and state) governments’ expansion of capital expenditure would improve capacity utilisation in the private sector, for commodities like steel and cement. There has certainly been more encouraging credit growth (double-digit growth rate since the last 10 months) compared to what we had. These, I would agree are largely circumstantial and policy drivers for private investment in the manufacturing sector.
Another circumstantial factor is the relatively healthy condition of both balance sheets and the fairly buoyant stock market, which are preconditions for a revival in private investment. The RBI’s latest capacity utilisation numbers would also suggest that the private sector is getting ready.
If we are aiming for a 7%-8% growth rate and have an Incremental Capital Output Ratio (ICOR) of 3.5 or 4, that is more likely to be attained with a capital formation rate above 30%, whereas we are below 30% at the moment.
How will the cost of capital be lowered to aid private investment?
What the RBI is trying to do is to influence savings and inflationary expectations by trying to move to positive real interest rates. The cost of capital, particularly for MSMEs, is higher in India than in most advanced countries. The anticipation that economic recovery will be sustained should overcome some of the shorter-term hesitation from a temporary rise in interest rates. The larger point is that the investment climate is definitely better if the expectation is of low and stable inflation. This is also a guarantee of a more stable rupee-dollar exchange rate. So, you can’t just look at the cost of capital in isolation.
Will slowdown in exports and capital outflows put pressure on the balance of payment?
Reserves exist to smoothen movements in the balance of payments, but not to maintain the rupee at a particular level. I don’t get the sense within the government that there is much anxiety about financing our balance of payments deficit. There isn’t much anxiety about the temporary use of reserves either as we have had the opportunity to rebuild the reserves at other points in the last 12 months. The latest Union Budget has stuck to the path of fiscal consolidation even though everybody knows that this is in many ways a pre-electoral period. I think this will also convey confidence to portfolio investors.
Do you think a spike in cereal inflation could upset RBI’s inflation forecast of 5.3% for FY24?
Our inflation measure is headline inflation. It’s not as labour market driven as say, in the US. Are wheat prices a possible threat? Yes, they could be. Do we have measures to offset shortages of various kinds? Yes, we do. So, the real question is how the RBI, supported as necessary by the government, maintains its credibility as an inflation-targeting central bank.
Weather shocks and global shocks of various kinds, including the impact on global energy markets, can undoubtedly knock the forecast off course.
Is RBI done with raising policy rates and it’s now the turn of the government to take fiscal measures to rein in inflation?
The limit on the temporary export of wheat was successful. There remains the possibility of lowering customs duties, because that is a disinflationary measure, although, again, it’s difficult to do if your balance of payments is under some stress.
Do you think further tightening of monetary policy rates could stifle growth?
The question is whether you can have disinflation without affecting growth. My sense is that a lot of India’s inflation is seasonal, and we’ve chosen to measure inflation as reflected by the headline CPI, not on a core inflation basis. We have little choice, that necessarily means a reduction in aggregate demand given the way we measure inflation.
