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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.

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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