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Bimal Jalan, former governor of RBI says, one should not panic about S&P news. "I don’t think that we should be panicking about the Indian economy’s future," he adds.
Standard and Poor's (S&P) lowered India's rating outlook to negative and warned of a downgrade in two years if there is no improvement in either fiscal or political situation.
In an interview to CNBC-TV18, Bimal Jalan, former governor of RBI says, one should not panic about S&P news. “I don’t think that we should be panicking about the Indian economy’s future,” he adds.
According to him, concern areas continue to be GAAR issue and crude prices. He hopes the government will act on reforms as early as possible. “Oil prices have to be passed on to the consumer immediately,” he asserts.
Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying videos.
Q: The S&P’s change in outlook, do you would think it is justified?
A: I think they have a view, which we respect. But there is no sense of panic. I don’t think that we should be panicking about the Indian economy’s future. I don’t think so. There is always over exuberance, when things are good and there is always over pessimism, when things are going a little slow.
If you look around the market, India is doing well. I agree with the finance minister’s view that things are negative at the moment, but they are likely to become positive with when we take the necessary action.
There are one or two areas where action is urgent, fiscal policy for example. There has been considerable concern about retrospective tax amendment of an unusual kind. Ofcourse the oil prices are very high and there are issues about domestic oil prices and so on. So, this is a mixed picture at the moment. But I still take a confident view that faced with problems, India is in a position to cope with it and it will cope with it.
Q: What's your own view on GAAR? You have seen P Notes (Participatory Notes), they probably started off in your tenure and flourished at that time. There is an argument that you don’t tax FIIs because they are merely like Mutual Funds (MF) vehicles for investing somebody else’s money. Then there is a view that in P Notes they warehouse the shares themselves. What’s the international experience? Is it in a way right to tax them? Even if it were right, may be we need the dollars now too desperately and so we shouldn’t go that way?
A: There is no question of right or wrong per se in a tax policy which we introduce. So, if you look around the world, there are different tax policies for different kinds of flows. That’s a totally different issue. So far as FII that you mentioned, yes, there is a case for taxing them if there is over abundance of capital flows on account of tax free rising Indian economy with very high rates of return, when you are trying to make sure that you don’t have short term capital flows of a kind which are reversible and tax free. So, that can happen but all these things should be prospective rather than retrospective. That is the important point about tax policy.
Q: Do you think the government will take warning from the S&Ps outlook change and do undertake any kind of bold economic reform? Do you expect the government to actually act and improve its fiscal situation?
A: It’s not a government issue per se. It’s a parliamentary issue, and it’s an issue for the people of India. I have no doubt in my mind that if we want to correct the course with both regards to fiscal deficit or rising fiscal deficit and uncertainty about economy, some of these measures are now become essential. Therefore, the government should move. I hope it will move with the support of our Parliament.
There is a consensus. Yes, there are difficult situations that we have to take difficult decisions before it becomes and develops into a crisis situation, most difficult decisions are difficult to avoid. So, now our political system unfortunately what happens is that you wait, you wait, you wait and then when things come to a point where there is no other option then we take action. So, my hope is that we take action as early as possible with a consensus in a parliamentary democracy like ours, that’s important. Hopefully, the government would provide a leadership of the kind that we need.
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