Feb 28, 2013 10:16 AM IST | Source: CNBC-TV18

Budget 2013: External deficit worrisome, says Raghuram Rajan

Chief Economic Advisor, Raghuram Rajan told CNBC-TV18 that the Indian economy has decelerated after recovering from a slowdown. He also added that corporate and infrastructure investments have slowed down over the past few quarters and growing CPI inflation remains a major concern for the country.

A day ahead of the Budget, the Economic Survey report has been presented and Chief Economic Advisor, Raghuram Rajan told CNBC-TV18 that there is a need to get investment sentiment back on track. He believes that the policy initiatives taken by the government has turned sentiment around and therefore, it is necessary to assure people that there is a path ahead. Besides, the finance minister has asked the public sector to use the window of opportunity, he said.

Rajan is of the view that there is a need to relook at government spending and therefore, mobilising revenue and considering tax aspects remain a major priority. He also advocates the necessity to create space for food subsidy and cutting out wasteful subsidies.

According to Rajan, diesel price revision is going to make a difference to the country’s fiscal deficit and added that the external deficit at the moment is worrisome. He further noted that the deficit should not be oblivious to the external markets and financing could be unstable if external commercial borrowings or ECBs are not hedged. 

Although, Rajan considers US, China and Japan to be on a strong footing, there is still a question mark over Europe’s growth, he opined. Going ahead, CCI is going to clear more projects, informed Rajan. He also emphasises on the requirement to examine both expenditure as well as tax elements.

As far as the inflation woes are concerned, the Chief Economist feels, apart from food inflation other elements are moderate. Moreover, successful containment of the inflation menace will help to bring down the current account deficit, he noted.

Rajan also thinks that buying into long-term bonds could be an alternative to investing in gold and the investment climate needs to be improved for the micro, small and medium enterprises.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Your maiden economic survey, let me start by asking you about the growth projection of 6.1-6.7 percent. The last economic survey got the growth projection horribly wrong and the estimate in the market also seems to be that this is again on the ambitious and overtly optimistic side. You yourself acknowledged the fact that there are a lot of unanticipated and some anticipated uncertainties and hence, that wide range. But you quoted Nelson Mandela saying high growth trajectories are improbable at this point in time, but everything is improbable till it is done. What levers are you betting on to go from 5 percent to 6.1-6.7 percent?

A: The first thing we need to do is get investment back on track, especially for the large projects that are stalled. That will help, especially getting some of the power projects back on line, but also completing projects that haven’t been finished.

Getting investment by the public sector firms up and running would also be a positive and more broadly getting sentiment up. Sentiment is that unknown which adds tremendously both from the investment side, but also from the consumption side. As people feel more confident that jobs will come, wages will go up, they start buying houses, they start buying cars and that will also help fuel growth.

So what we need to do is assure people that there is a path ahead and also move some levers which will actually help clear the way for certain investments, both the ones that are stalled as well as new investments.

Q: Are the downside risks outweighing the upward bias to the projection that you have put out?

A: If the downside risks outweighed the upward projections, then we wouldn't make the projections that we have made.

Q: The projections were made last year as well and look where we are today.

A: When an economy is slowing, where it stops slowing and turns around, it is a matter of some uncertainty which is why the bands that we have put forward this time are somewhat wide. The reason we think that there is hope that we will be somewhere in that band is first there are a number of policy initiatives that have taken place, that have changed the sentiment to some extent.
Secondly, last year again and again what you had was the headwinds to global growth which were stronger than we thought they were. Initially, at the beginning of the year you thought Europe was recovering and then again and again it hammered you and said no. This year, hopefully, Europe is still a big question mark after what happened with Italy.

However, US apart from the fiscal issues seem to be on a stronger footing. In China also there are some issues but, it does seem to be on a strong footing. Japan has made a lot of good noises this year. So, in general one would think that global growth rather than disappointing continuously, it would perhaps at the very least not disappoint and be a little better.


Q: You are talking about the investment cycle picking up and what one hears from Indian corporates at this point in time in terms of the domestic capex cycle. There doesn't seem to be a pick up and nobody is even talking about a pick up. A couple of months down the line, you talked about the power sector for instance and we have seen several meetings back and forth between the coal ministry and power ministry and the oil ministry. None of those issues have been resolved. Some of them have been, but most of them haven't been. We have seen the CCI meet twice. There hasn't been a definitive outcome. So on what basis are you assuming that we are likely to see a pick up in the investment cycle?

A: The CCI is important and what the CCI has done is it has made some preliminary findings. People go out and then work on that and then come back to the CCI. There are some deadlines which are fixed for the people coming back. So over time, hopefully more and more of these decisions which are stuck will be cleared. Some have already been cleared, but more will actually happen.

Unclogging those large investments will have to be fixed. First, those investments will come to completion and second, it could clear the way for smaller investments around those larger investments.

Q: Will there be more than a gentle nudge as far as the public sector companies are concerned to kick start the capex and the investment cycle?

A: The finance minister has repeatedly said 'use it or lose it'. Do what you need to do in terms of legitimate good investment projects, do the right thing and that will help growth. If you don’t have legitimate investment projects, then give the money back to the shareholders of which the government is the biggest holder, so that the money can be redeployed usefully, elsewhere in the economy.

Q: I want to talk to you about fiscal consolidation and the sense that one is getting from economists and from the market at this point in time is that hopefully, in the quest for fiscal consolidation and austerity, we don't give up on growth because again there are question mark on these levers that we had just talked about. The comments that are coming in from people like JP Morgan and Standard Chartered is that the government cannot achieve fiscal consolidation only by squeezing expenditure that is neither desirable nor tenable?

A: So what's the alternative to squeezing expenditure? It is raising taxes.

Q: Is there a case for raising taxes?

A: What the government has been saying all along is we have to examine every element, whether expenditure or revenues and figure out how best to achieve fiscal consolidation while preserving growth.

As you pointed out, there are some aspects of fiscal consolidation which tend to detract from growth. But it is not very problematic. For example, if you try and shrink wasteful or distortionary subsidies, that could actually be growth positive because on the one hand you are building confidence about government finances and on the other hand, you are reducing distortions and you are repurposing some of that spending to better spending.

So, I think there is a case to be made for relooking, rethinking every aspect of government spending. It is not the case that if you force people on to a tighter Budget constraint, necessarily all the good expenditure gets cut. Sometimes, the fact is they weren't going to spend it in anyway, sometimes it is that it was bad expenditure.

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