Business Standard

We're on a sticky wicket, but the sun will dry out the pitch: Raghuram Rajan

Interview with Chief Economic Advisor

Business Standard 

Taking a cue from Tuesday's cricket match between India and Australia, Chief Economic Advisor Raghuram Rajan, in an interaction with journalists, on Wednesday said: "We are batting on a sticky wicket, but the sun will dry out the pitch. We need to be sensible rather than flashy, over-the-top hits. It will be tough, but not impossible." Edited excerpts:

Wide range of forecasts
Reason for the wide band is the uncertainty that prevails in the Indian economy and the world. There is a lot of uncertainty in Europe as a result of the elections in Italy. In India, it's not so much the uncertainty about the policy as it is that we are at a turning point in the economy. Growth forecasts generally should be in bands. I'm also trying to get away from fixation about point forecasts. The broader issue I want people to focus on is, does the government have the set of policies that will turn us around in the directions that we all want? Economic forecasting is more an art rather than science.

Growth drivers
What we have to do is turn around investment, turn around government savings, and increase household savings. Those are the three pillars on which any kind of revival will stand. If you do this, you hopefully will make a dent on inflation, which will allow RBI room to be more accommodative on monetary policy. One of the factors that will help is that the headwinds that are coming from outside; I'm hopeful will diminish this year. Certainly, the US will see stronger growth this year, possibly China (too), and perhaps Japan has started changing macro policy to get growth. Europe may still be in the balance.

Current account deficit
The key number we have to worry about is the current account deficit (CAD). This we have to shrink. Increasing government savings by reducing the fiscal deficit will help marginally. We also need private sector savings. Bringing down dependence on foreign financing, especially when you are a growing emerging market, is probably the most important thing you can do to assure sustainability of growth. CAD has two parts �" size, which we need to bring down, and financing, which we need to do as safely as possible. About 2.5 per cent (of GDP) is what we should not exceed.

If you see government policies over the last few months, you will see a pattern that is basically more fiscal responsibility and consolidation, coupled with measures to re-accelerate growth. As far as items that you want to subsidise is concerned, food is most important because having malnourished people when we have plenty of food is not just economically short-sighted, it is morally problematic. Even in the US, food is subsidised for the poor.

Fiscal consolidation vs growth
There are trade-offs across the board. We need growth, which will help stabilise finances. One of the reasons why tax-to-GDP ratio has come down is because growth has slowed. But ultimately we have to do a bit of everything (including curtailing expenditure) to get fiscal stabilisation.

The Mauritian growth example in the Survey
It is meant to prompt debate. (In Mauritius) ... they manage to employ the entire labour force in a very productive way with substantial increase in per capita GDP. It doesn't mean we follow the same policies they do. But it's important to learn from a variety of experience. We need to have a debate on jobs. Agriculture is not going to create jobs.

Accommodative monetary policy
Clearly, there is an economic rationale for that (easing monetary policy stance) as aggregate demand is contained through fiscal consolidation.

Expenditure control
Every expenditure item has to be examined very carefully to see if we need it. In some situation, because of the rapid increase in expenditure, or at least the Budgeted expenditure of the past years, we haven't been able to spend that much or spent as carefully as we might have wanted. So there is a possibility of shrinking allocation in those areas.

First Published: Thu, February 28 2013. 00:31 IST