The recent reform measures will help improve investment sentiment and act as a stimulant for economic activity, says C Rangarajan, chairman of the prime minister’s economic advisory council. In an interview to MK Venu for Rajya Sabha TV, the former RBI governor explains how the proposed National Investment Approval Board would allow ministries to move simultaneously on clearing large projects, while also serving as a one-window mechanism.

Commenting on the high inflation and the RBI’s monetary policy stance, he says: ?Even when inflation is ascribed mostly to supply rigidity (as is the case now), there could be certain demand pressures coming into the system which need to be controlled.? Rangarajan argues that although there is no conclusive evidence to suggest that exchange rate depreciation always has a positive effect on exports, we should not let the rupee ? which has gained 5-6% over the last four weeks ? appreciate further in real terms. Excerpts

How useful are the recent policy steps in revving up economic activity?

These measures show the government is prepared to take strong policy action even if treated as unpopular, and so, have helped reverse the adverse investment sentiments and might also act as a stimulant for accelerated economic activity.

Are you confident investments will pick up and we will be back to 6.5% growth?

The decisions to expand the scope of FDI will take time (to materialise and act on the ground). Investment will not come in immediately. Some ?like those related to insurance and pension sectors ? will require legislative clearance. But what these decisions have clearly indicated is the government’s determination to move in the right direction.

There is a certain amount of diffidence on the part of private investors, which could disappear because of these measures and one could see more domestic investments happening.

As far as (growth) forecast is concerned, we (the PMEAC) had estimated a little over 6.5% for the current fiscal. Agriculture may turn out to be better than what we had expected. The monsoon has been good. Manufacturing has not been performing well, inferring from whatever data we have up to the end of August. My sense is that in the second half of the current fiscal, the sector will see renewed momentum.

Latest numbers ? for the month of August ? do indicate a revival in industrial growth. There were months last year when industrial production fell sharply (and this could have a positive base effect).

The fall has been arrested and the turnaround from the previous year could be very strong. However, the growth rate of 6.5% which we and the Reserve Bank of India had indicated might not materialise. (GDP growth in 2011-12 stood at a nine-year low of 6.5% and the expansion during the first quarter of this year was 5.5%).

But can we achieve more than 6% growth this year?

Certainly, 6% growth seems reachable. For that, however, we need to focus on key infrastructure sectors such as coal, power, roads and railways. In the short period, the way to push the economy forward is to push sectors which are in public domain and for which public expenditures have been allocated in the budget. If we effectively use the budget allocation and see coal and power production improve, then these sectors will have a favourable impact on overall industrial growth.

You mean to say since the private sector has withdrawn into a shell and is taking time to come out of it, the cash-rich PSUs should boost investments?

There are both production targets and capacity creation targets which are different (but need to be met). In the case of power, generation is dependent on availability of coal. To some extent, availability of coal also determines capacity creation. But the two are different acts.

The government has to ensure both production and capacity creation targets are met (in infrastructure sectors).

If this is achieved, this will act as a stimulant in the private sector. For example, if road projects pick up, they create demand for cement. In this present situation, public investment can act as a catalyst for faster growth.

The prime minister has talked about taking steps over six months to bring growth back to 6.5%.

In a really short period, what is required is to augment production of coal and power. What we need is month-to-month monitoring to ensure that the targets are achieved. There are issues concerning mining, land acquisition and environment clearances. A conscious decision must be taken by all ministers in clearing projects at a faster pace.

You mean to say the proposed National Investment Approval Board (NIAB) can follow the same democratic processes the Cabinet follows.

That’s right. The issues must be placed before the board and discussed. Once the clearance is given, there should not be any further discussion and the project must go on.

One concern is that if the ministries don?t take a decision on a certain project within a certain period, then it will move to the NIAB and the board will act on the issue, forfeiting the ministries? jurisdiction.

There is a need for clarification on this front because there could have been some concerns about the board, in its eagerness to take decision quickly might at times do it without enough consultation. But these concerns can be taken care of with a clarification.

What is really required is a system in which decisions are taken quickly. This board will reduce the time lag in giving the clearance.

Are you saying the NIAB will provide comfort to bureaucrats to take bonafide decisions as it is headed by the PM?

The fact that the board is presided by the PM means that once it approves a project, it is kind of final. Some people have been of the view that it is something similar to FIPB. But the FIPB had a different role to play (in approving FDI). NIAB is giving the final approval to the project itself.

Any project will require approval from several ministries. As opposed to the present sequential approach which takes time, the NIAB will allow (the ministries) to move simultaneously, besides serving as a one-window mechanism.

Do you think time is ripe for the RBI to take some action as the Centre has done its bit?

Well, the Centre certainly has shown its inclination to act (on the fiscal front). I believe through appropriate action on the revenue and expenditure side, the finance minister will be able to contain fiscal deficit to as close as possible to the budgeted level, although one cannot be sure if the deficit will be brought down exactly to 5.1% of GDP.

The success of fiscal correction efforts is subject to the global crude oil price, which, fortunately, is moderating.

Apart from the decision on diesel price (hike), some further action may also be taken of executive nature in terms of pruning expenditure. There is always (bunching of) expenditure in the last few months of the year and there could be some savings by tightening expenditure schedules.

Has the RBI been appreciative of the government’s efforts?

The (central bank’s) monetary policy statement also says it has recognised that the government has taken some action. The actual stance of (the monetary authority) will depend on the behaviour of inflation (wholesale price inflation climbed to 7.8% in September on dearer fuel prices from 7.6% in August while core inflation remained sticky at 5.6%).

How does monetary policy work in a situation where inflation remains somewhat stubbornly on higher side while growth keeps falling? What does the literature say?

Prescriptions on the monetary policy in the context of expansionary demand is very clear. Even when inflation is ascribed mostly to supply rigidity (as is the case now), there could be certain demand pressures coming into the system which need to be controlled. If some demand pressures are still seen, to that extent, the central bank has to act.

With the rupee’s recent rise and the predicted further strengthening, how strong is the case for monetary easing via rate cut?

If the rupee appreciates despite the (high) current account deficit, it’s because of (large) capital flows. If capital flows are large, the liquidity is also coming into system in some way. I would say that with the trade deficit remaining high, the current level of exchange rate would be appropriate. I believe they (RBI) should take a call based on inflation numbers (rather than rupee).

In situations (where supply constraints are more visible than demand pressures), the monetary authority won’t need to be as aggressive as when demand pressures are very clearly seen.

True, econometric studies do not clearly show that the exchange rate depreciation has a (positive) effect on exports.

In fact, these studies have shown the mere factor is external demand. Having said that, I?d still argue that we should not let the rupee appreciate in real terms further. Let the rupee remain more or less at the current level.