Final GAAR guidelines will remove investor suspicions: C Rangarajan
Interview with Chairman, PMEAC
With Prime Minister Manmohan Singh taking charge of the finance ministry, his economic advisory council chairman, C Rangarajan, holds the responsibility of guiding government policy to revive investor sentiment. In an interview with Santosh Tiwari, he outlines the government’s agenda. Edited excerpts:
With the prime minister taking charge of the finance ministry, expectations of corrective steps abound. In the short term, what are the priority areas for reviving investor sentiment?
As you all know, growth had slowed last year. An area of concern was a decline in the investment rate. Compared to its peak levels in 2007-08, the fixed capital formation ratio has declined by four-five percentage points. Therefore, a key concern is to revive investor sentiment—both domestic and foreign. Whatever impediments that might have come in the way of achieving the investment target must be removed. In the short run, the key to reviving sentiment, as well as overall investment, may be ensuring production and capacity creation targets set for infrastructure sectors in the public domain are met. Some of the key areas are coal, power, roads and railways. Allocations to these sectors have already been made in the Budget. What is critically needed is ensuring the targets set for these areas are met. These would act as stimulants for private investment. Second, we should work towards achieving fiscal consolidation, which is essential for maintaining the government’s credibility. This is also essential to ensure the government’s overall borrowing programme doesn’t exceed the budgeted level, and the room available for the private sector is not crowded out. Third, we should also act on perceptions that might have come in the way of entrepreneurs coming forward to invest. Fourth, we must ensure concerns regarding land acquisition and environmental clearances must be dealt with as quickly as possible.
Critical reforms, including foreign direct investment (FDI) in multi-brand retail and civil aviation and diesel de-regulation, which could be carried out through administrative decisions, are pending.
Reforms that require legislative approval have their own dynamics. However, reforms that can be introduced through administrative decisions must be undertaken as quickly as possible. FDI in multi-brand retail and civil aviation are areas in which we can act very quickly. As far as action relating to the pricing of petroleum products is concerned, there is an in-principle acceptance of the deregulation of diesel. This was announced when petrol was deregulated. Once again, these are areas in which actions would have to be taken as early as possible.
Shouldn’t the government begin with partial decontrol and then opt for complete de-regulation, step by step?
Diesel de-regulation would have to be carried out step by step. The extent of the under-recovery is so large that it cannot be done at one go. Therefore, we have to proceed in steps. But certainly, some significant steps would have to be taken as early as possible.
There are also reforms that need legislative changes—pension, insurance, banking, the Direct Taxes Code (DTC), the Goods and Services Tax (GST), etc. How would political consensus be reached on these?
I agree political consensus needs to be created around changes such as pension, insurance, banking, etc. In my view, a considerable degree of consensus has already been achieved. In the case of pension, the point of contention between the government and the Opposition is whether to prescribe the limit in the statute or the rules. These are issues that can be taken care of. I am sure some progress would be made in the areas of pension and insurance. As far as DTC and GST are concerned, considerable progress has already been made. In the beginning, there were many issues with GST, but most have now been overcome. I think by the end of this year and the beginning of the next, we would see these measures being implemented.
Would the prime minister taking charge of the finance ministry facilitate this?
Well, the prime minister, as the head of the government, always had the responsibility to work towards political consensus. The intensity of this has increased, owing to his taking charge of the finance ministry.
The prime minister talked of addressing tax concerns in his first meeting with senior finance ministry officials. The General Anti-Avoidance Rules (GAAR) draft guidelines are out. Implementation of the retrospective amendments is still a concern, especially in the Vodafone case. What should the government do to address these?
It is difficult to be precise about what can be done to address these concerns. At this point, all one can say is if there are concerns that have a bearing on investment decisions, we need to explore these. But as far as GAAR is concerned, the government would listen to comments received on the guidelines already been put on the website. After that, a decision would be taken. In fact, the original idea of GAAR was to remove investor suspicions. The final guidelines would ensure this basic intent.
Would the decline in crude oil prices help in diesel de-regulation?
I think the degree of adjustment required is now smaller, owing to the drop in crude oil prices. Nevertheless, in case of diesel, it is still fairly high. Action, therefore, should be taken early.
The growth-versus-inflation trade-off by the Reserve Bank of India (RBI) has contributed to growth falling to a nine-year low in the last quarter of 2011-12. Is the time ripe to correct this stance and take steps to prop growth?
The trade-off between growth and inflation is purely a short-term phenomenon. Over the medium term, there is no such trade-off. Over the medium to long term, high growth is possible only in an environment of low inflation. However, even in the short run, the primary responsibility of a central bank is to control inflation. RBI’s ability to adopt an easier stance would be facilitated if headline inflation, particularly non-food manufacturing inflation, begins to show signs of a decline. At the moment, I agree with RBI’s policy. But growth is certainly important. As soon as we get clear signs of a declining trend, action towards an easier monetary policy can be taken.
What is your growth projection for this year?
My growth prediction for this year is close to seven per cent. I think that should revive investor sentiment because it would show we are on the upward path once again.
Despite RBI intervention, the rupee currently stands at about 57 against the dollar. What should be done in the short and medium terms to tackle this?
I think the rupee has strengthened in the last few days. In fact, after having touched a low of 57 against the dollar, it now stands at 54.50/dollar. The major reason for the depreciation was the mismatch between the current account deficit and capital flows. Certainly, over the medium term, we must make all efforts to contain the current account deficit to more manageable levels. But in the short run, the way to approaching the problem is ensuring capital flows are adequate to cover the current account deficit. I think the action being taken now, along with that taken in the subsequent months, would enable more capital to come into the country, and that would somewhat stabilise the rupee. Another important aspect is the perception regarding growth, as far as capital flows are concerned. Ultimately, capital flows into countries where growth is high. Therefore, if we can show a pick-up in growth this year, it would be a great stimulus for capital flows.
How do you prioritise between cutting subsidies and fiscal deficit?
I think for maintaining the government’s credibility, we should ensure the fiscal deficit remains at the budgeted level. An important factor that would help contain the fiscal deficit would be action relating to subsidies. Cutting subsidies and maintaining fiscal deficit are the two sides of the same coin. This is not to say growth is not important. We should get the Indian economy back on the high-growth path, but fiscal consolidation is necessary for sustained high growth.