The finance ministry?s chief economic adviser Raghuram G Rajan believes that a large number of macro-economic indicators are pointing to a recovery in the economy.
In a free-wheeling conversation after tabling of the Economic Survey 2012, Rajan said that current conditions should be taken as an opportunity to make the economy more competitive for faster and stronger growth. Excerpts:
Why do you think the gap between wholesale price and retail inflation is widening?
The CPI inflation gives a much greater weightage to food than WPI inflation. So with food inflation increasing at over 13 per cent, retail inflation will naturally reflect a high level of inflation. Also, food inflation hasn?t been coming down while other types of inflation have been declining. So the gap is widening. The RBI cannot control food inflation directly but it can?t even ignore it. So it has been doing a balancing act.
What is your expectation from the monetary policy review on March 19?
The RBI will do what it thinks is appropriate. They have said repeatedly that they have multiple objectives and they will work on it. Inflation control has been the primary objective and growth is related but not a secondary objective.
What are the measures that can help reduce the current account deficit (CAD)?
In the short run, the CAD is a consequence of a fairly difficult export environment. Also many of our imports are hard to curb and essential such as oil, coal and edible oil. Lastly, there are gold imports that have picked up quite substantially. In the short term, there is not a lot to do other than increase exports. We will soon have the Foreign Trade Policy. But even then exports are difficult to increase, when your partner countries are not importing much. The good news is that in the last two months, there has been a stabilisation in exports. So I am hopeful that as the world economy starts growing and stabilising, our exports too will pick up. Also, our focus should be on how to finance the CAD ? we don?t want to finance it with short-term foreign borrowings. We should see this as an opportunity on how to make our economy more competitive. In that sense, we should think about how efficiently we can use foreign inflows. For instance, FDI is the safest form of financing and it is also beneficial in the long-term in terms of transfer of know-how and technology. FIIs too can be brought into long-term instruments, equity, into long-term rupee bonds and maybe we can develop some of our local corporate markets and add liquidity to our G-Secs markets.
Does the IIP data for January signal a recovery or is it a result of base effect?
We are in a period when we are stabilising and turning around. I would say it is too early to say with certainty if the economy is turning around, but signs such as the IIP, PMI, credit growth, and a lot of month-on-month numbers are suggesting it. The government itself can?t create the recovery, it is the mood which leads to it. There is no impediment for us to returning to strong growth. Precisely when it can happen, is the question.
Do you think savings rate has been hit by high inflation as people?s real income goes down?
We need more investments and so more savings. The country is saving too less as exemplified by the CAD. Of course, if we consider gold as a saving rather than a form of consumption then it would be different. But overall we need more savings. Saving is just a fraction of the income that is generated in the economy and is kept aside. It has nothing to do with inflation but what you save in ? financial instruments, building a house or buying gold ? is affected by inflation. Higher inflation eats into disposable income of people with fixed wages, but wages have been keeping pace with inflation. We need to explore more carefully, who is slowing down the spending. What is the average wage hike in the private sector and who is not getting the average? I would be very surprised to find that real wages in the private sector have gone down. They may be keeping pace with inflation. That is not to say, everybody is benefited, there could be some who are hurt by the process and could be saving less.
What is happening on the fertiliser subsidy?
That?s being discussed. The fact that we cap subsidies in some areas but leave it uncapped for urea does create the incentive to over use urea which creates some problem for agriculture it self. So we have to keep this in mind and think of how we transfer subsidies in fertilisers.
