The industrial output growth rate fell to a 15-month low in August, but for C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, the main concern of the central bank should be inflation, which is still very high. In an interaction with Vrishti Beniwal, the former RBI governor says GDP growth and industrial output will pick up in the coming months. Edited excerpts:
Is GDP growth in July-September expected to slow down after recording 8.8 per cent growth in the first quarter? Would you revise the target for 2010-11?
The growth rate of the economy in the second quarter may be around 8.2 per cent. This slowing down is due to the lower growth of industrial production. However, we expect the growth rate to pick up in the third and fourth quarters. Overall, we expect the economy to grow over the year by 8.5 per cent. There is no change from our earlier projection.
IIP growth rate fell sharply to 5.6 per cent in August from 13.8 per cent in July. What kind of IIP growth are you expecting in the coming months?
The growth rate of industrial production in August came as a surprise. The sudden drop in growth rate was due to the collapse of the growth rate of capital goods. It turned negative from a high positive of 63 per cent in the previous month. This could be due to some bunching. I expect the industrial production to pick up in the coming months. For the year, the growth rate will be 9.7 per cent.
Experts and regulators have expressed concerns over so much volatility in the data. Do you think the data we get is credible enough?
There is undoubtedly some noise regarding the data on industrial production. This could be due to non-response and subsequent bunching. The government is already working on a revised series of Index of Industrial Production. WPI was revised recently. Also, there is a move to revise indices on consumer prices.
In light of the slowdown in industrial production in August, what should be the monetary policy stance and how should it be dovetailed with the fiscal policy?
The primary focus of monetary policy at this point should be on inflation. Inflation is still staying at an uncomfortably high level. Therefore, continued action on the part of monetary authorities is justified. Monetary policy has a role to play even in situations where inflation is initially triggered by supply side shocks. Food price inflation when it is sustained gets generalised.
Should there be an increase in policy rates in the next review of the monetary policy on November 2?
I believe that action on the part of RBI will be appropriate. The banking system must respond to the leads given by the central bank. Otherwise, the policy actions of the central bank will have no meaning.
Where do you see inflation heading?
There will be some softening of inflation in the coming months. We expect the inflation rate as measured by the wholesale price index to come down to 6.5 per cent in December. It may go down further to 5.5 per cent by March 2011.
Should the government deregulate diesel prices when inflation comes down?
The deregulation of diesel prices is a natural corollary to the deregulation of petrol. Otherwise, it will create price distortions. It should be done as early as possible. The best time for doing this will be when inflation starts coming down.
Can we expect to close 2010-11 with a fiscal deficit lower than 5.5 per cent, as 3G and BWA auction gave us some windfall gains?
The fiscal deficit will remain around the budgeted level. There have been some windfall gains in the current year. This may not happen next year. Therefore, the task of reducing the fiscal deficit further next year will be tough. We need to act on overhauling the subsidies, particularly petroleum and fertiliser subsidies.
The government plans to raise Rs 40,000 crore from disinvestment this year. Is there a need to dilute so much?
There is a welcome change in the approach towards disinvestment. This is a legitimate channel of raising resources. The target of Rs 40,000 crore is achievable. The buoyancy of the capital market should help. There should be a phased programme of disinvestment.
The government withdrew some stimulus in the last Budget by partially rolling back duty cuts. With the economy out of the woods, can we expect more such measures in the next Budget?
The fiscal stimulus needs to be withdrawn gradually. The government withdrew some in the last Budget and some may be withdrawn in the coming Budget. However, in the field of indirect taxes, the biggest change will be the introduction of GST. As and when it is introduced, there will be a fundamental change in the duty structure.
The talks between the Centre and the states on GST are not going towards any conclusion. What is the possible solution?
GST rollout may be delayed beyond April 2011. So far as the veto is not exercised by either the Centre or the states, we should be able to move forward. The authority to fix state GST rate should lie with the states. But the rate should be uniform and for that, there should be consultations among the states. It is a question of compromise and understanding.
The finance minister has said that steps would be taken, if required, to check capital inflows. Is the time ripe to put in place checks on capital inflows, and to what extent capital controls work?
Capital flows, particularly portfolio flows, have shown a strong surge in September. Until the end of August, the addition to foreign exchange reserves was minimal. Upto the beginning of October, the total addition to reserves is $12 billion. With the adjustment for valuation changes, the addition must be less. There are indications that the current account deficit is increasing. By the year-end, it can be in excess of 3 per cent of GDP. Larger capital inflows are needed to finance the current account deficit. So far the capital inflows are not causing a distortion. We can afford to absorb more of the flows into reserves. It is best not to let the rupee appreciate in nominal terms. The time has not come yet to put controls on capital flows.
Should India side with the US in putting pressure on China to revalue its currency? Should not such a move strengthen Indian exports?
China has a large current account surplus. There is, therefore, a strong case for revaluation of the yuan. Of course, China may not want to do it at one go. It can choose its own pace. Such a move will help other countries, including India. However, the US should not think that the revaluation of the yuan by itself will solve its problems. The trade deficit of the US with China is very large. The exchange rate may be only one of the factors contributing to this. The US must undertake such measures that are necessary to improve its competitiveness. It must act on reducing its fiscal deficit over a period of time and improve its savings rate.
Are you happy with the latest developments with regard to the regulatory framework for the financial sector? Has the RBI governor's stance met with your approval? Is the finance ministry trying to play the super regulator or is it trying to make amends by doling out crumbs to the RBI Governor?
FSDC is a reality now. There is need for greater coordination among various regulators. This will become even more pressing as the financial system becomes more complex. In my view, so long as FSDC plays this coordinating role, there is no harm. It should not in any way impinge on the autonomy of the regulators in their respective domain.
Until recently, the finance ministry was talking about consolidation in the banking sector and now the RBI is planning to give banking licences to new players. Does the country need more banks?
We need to maintain a competitive environment in the banking system. Therefore, entry of new entities must always be encouraged. Consolidation is not an anti-thesis of entry. Consolidation can happen even as new entrants make their appearance. The ‘threat’ of entry should not be eliminated.
There is a debate on deregulating savings rate. What is your view on that?
Savings rate is one rate which is still controlled. There is every argument in favour of freeing this rate. The appropriate time will be when inflation comes down and stays around the comfort zone of 4-5 per cent.