May 23, 2012, 06.44 PM IST
The government needs to raise petrol prices urgently to address the twin problems of fiscal deficit and current account deficit, C Rangarajan, Chairman of Prime Minister’s Economic Advisory Council told CNBC-TV18 in an exclusive interview today.
The government needs to raise petrol prices urgently to address the twin problems of fiscal deficit and current account deficit, C Rangarajan, Chairman of Prime Minister's Economic Advisory Council told CNBC-TV18 in an exclusive interview today.
"There will be a temporary impact on WPI (wholesale price index) inflation when petrol prices are raised, but the impact on fiscal deficit will be much more if (petrol) prices are not raised," Rangarajan told CNBC-TV18.
Cutting fuel subsidy, or in other words, hiking retail fuel prices is the key to the government lowering its fiscal deficit as well as trimming its import bill as crude accounts for roughly a third of the total bill.
Rangarajan said the slide in the rupee was much more than anticipated, and that the problem was being aggravated by lack of foreign capital flows into the country. The rupee today touched a fresh record low of 55.82 to the dollar today even as the Reserve Bank of India is using every weapon in its arsenal to support the currency.
"What is really needed is to revive sentiment to enable large capital flows," he said, adding that the RBI should use forex reserves to prevent abrupt swings in the rupee, and the government should use broader macro economic policy as a tool to encourage capital flows.
Rangarajan supported the RBI's decision to directly intervene in the forex market to support the rupee as it was necessary to indicate the central bank's ability to intervene.
Lack of policy reforms has been a key dampener for foreign investors, and the government's decision to amend tax laws retrospectively has further alienated global investors.
Rangarajan dismissed some foreign brokerages projections of 6.3% GDP growth forecast this fiscal, and said growth would be closer to 7%. He expected strong growth in agriculture on the back of good monsoon, services to sustain last year's growth momentum, and manufacturing too to grow well on last year's small base.
He disagreed that inflation was a structural problem, but said that the increase in farm minimum support price (MSP) every year was one of the biggest contributors to inflation.
He was hopeful that the government would take some strong action shortly, and that both inflation and current account deficit for FY13 would be lower than that last year. Rangarajan saw productivity increases as one of the key to moderating inflation.
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos.
Q: Are you personally a bit surprised at the pace of the decline in the rupee versus the dollar because it seems to have taken most economic participants. The direction may not have been in question but the pace seems to have surprised everybody?
A: I think the fall has been much more than what was expected. But, the underlying factors pointed towards decline in the value of the rupee. The current account deficit has been high, on the rise and the capital flows have not been buoyant. Therefore, the result in pressure on the rupee was evident.
It all depends upon how the capital flows play out. If the capital does not flow in then automatically with a high level of current account deficit the currency begins to depreciate, sometimes fast and sometimes slow.
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