Tax buoyancy, growth may help reduce deficit, says Ashima Goyal

Ashima Goyal tells Joydeep Ghosh that the RBI will have to consider a number of factors, including fluctuating commodity prices and revival in investment cycle

In the past few weeks, the rupee has been falling and crude oil prices have been on the boil. ASHIMA GOYAL, professor, Indira Gandhi Institute of Development Research, Mumbai, and member of the Prime Minister’s Economic Advisory Council, tells Joydeep Ghosh the Reserve Bank of India (RBI) will have to consider a number of factors, including fluctuating commodity prices and revival in investment cycle, before taking a call on interest rates. Edited excerpts:    

India is facing the twin problem of rising crude oil prices and falling rupee. How do you think the current account deficit and fiscal deficit will be impacted?
 
Both have a negative impact on the deficits, but the final effect depends on countervailing forces and possible policy actions. For example, the latest data shows some rise in Indian export growth. It may be that the Goods and Services Tax related issues are moderating finally. Indian exports usually do well when world demand rises, or oil prices rise.  Tax buoyancy due to reform and improvement in growth together with economy in expenditure may help reduce any impact on the deficit.
 
With crude oil rising above $80, will the impact on inflation be marginal or significant? What is your estimate?
 
It depends on how persistent the oil price rise is, and on possible substitution away from the use of oil. The pass-through of oil price shocks has been falling as the economy diversifies. Moreover, inflation targeting may be able to anchor inflation expectations and limit second-round effects. Impact on inflation of an oil price rise this year may be limited to about 20 - 30 basis points.
 
There is an impression amid analysts that the US may not be too keen to end its sanctions on Venezuela soon because while its customers are bearing the brunt of higher inflation, oil companies in the US are making money for the first time. What is your assessment?
 
There are countervailing forces globally also. Companies will not make money for long if alternate sources of supply and renewable energy get a further fillip. The Organisation of the Petroleum Exporting Countries or OPEC should also be worried about this.  
 
If crude oil continues to stay on the higher side, the Reserve Bank of India (RBI) will also feel the pressure to increase rates. Do you see a likelihood of this happening, if not in June, in the August policy?
 
The RBI looked through a sharp fall in food price inflation in 2016-17 and did not lower rates. This implies they want to be forward-looking and look through sharp commodity price fluctuations unless they are expected to be persistent and have second-round effects. There are also temporary base effects on inflation currently. The taper-on tantrum of 2013 showed that raising interest rates to reduce outflows did not work, while many kinds of intervention were successful in reducing the excess volatility of the rupee. Foreign inflows to India are driven more by its growth prospects, and unique status as the highest growing large economy. Given global vulnerabilities, domestic demand and the beginning of an Indian investment revival needs to be protected. The RBI will have to assess all these factors.
 
The government has announced a massive recapitalisation of over Rs 2 trillion, but the problems of public sector banks (PSBs) do not seem to be receding. Do you think the government will have to put in much more than the amount that was announced to revive the sector?
 
The problem of non-performing assets (NPA) seems to have peaked. The demand-led slowdown in credit growth that was adversely affecting PSBs seems to have moderated, and there is some growth in credit. Also, the first large NPA (Bhushan Steel) has been resolved under the Insolvency and Bankruptcy Code and National Company Law Tribunal. While there is a case for further strengthening bank balance sheets, it should be done on an as required basis and conditional on their efforts to improve governance and profitability.
 
Given the state of public sector banks -- 11 of them are under Prompt Corrective Action, and others are under threat -- how will the small and medium-scale enterprises (SMEs) get the much-needed capital to grow?
 
Non-banking financial companies and fintech companies are able to give non-collateralised loans based on cash flows and other current big data. There are healthy signs of diversification and alternative sources of funds in India's financial sector. PSBs, however, will continue to be a major source of funds for SMEs. The government has made recapitalisation of PSBs conditional on an expansion of Mudra loans. Since these are small denomination and diversified, they are less likely to create large NPAs tied to efforts to improve the risk-assessment capabilities of PSBs.