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Apr 08, 2013, 08.16 AM IST | Source: CNBC-TV18

No short term worries from CAD; boost exports: Rajan

Raghuram Rajan, Chief Econmic Advisor and leading academic says, in an interview on CNBC-TV18, that longer-term measures such as increased exports and robust growth in manufacturing are needed to reduce the fiscal deficit, control inflation and ease the current account deficit.

The start of the new financial year has been greeted with a volley of macro-data indicating a negative scenario of the economy. The current account deficit (CAD) for the third quarter on the last trading day of March ushered in the new fiscal year with a pall of gloom.

This was followed by the core sector data for February which showed a contraction of 2.5 percent while the March purchasing managers index (PMI) data was lower than in February revealing a highly negative economic scenario and is a cause for alarm because economic activity  in March is always the strongest in the year.

Raghuram Rajan, Chief Econmic Advisor and leading academic says, in an interview on CNBC-TV18, that longer-term measures such as increased exports and robust growth in manufacturing are needed to reduce the fiscal deficit , control inflation and ease the current account deficit.

Below is the edited transcript of the interview on CNBC-TV18

Q: How would you assess the fourth quarter GDP data for the year gone by as well as the current year?

A: I don’t want to try and forecast the GDP. But it is clear that recovery has been fairly weak and the main task of government is to strengthen it. Some of the data could be due to volatility.

Q: The cause for alarm is the current account deficit (CAD) which in December was 6.7 percent. Will global growth be a panacea?

A: First, of course one must realise that the GDP data for the third-quarter is probably a bit exaggerated. Overall, the year should end with a GDP of around 5 percent. Though that is not comforting, but it is a lot less alarming.

A number of factors could kick-in to help narrow the current account deficit over time. The first factor of course is that exports could pick up strength on recovery in the United States and China. The second key factor is reduced inflation and returns from the stock market and fixed income securities turn more attractive than gold.

A reduction in gold imports will also substantially reduce the current account deficit and in February, there has been a fall in gold imports. So I am hopeful that greater exports and lower gold imports will help narrow the current account deficit. Until both begin to take effect, the government is encouraging more foreign direct investment (FDI) and foreign institutional investor (FII) inflows.

Q: In our focus on the means to finance the current account deficit, could the deficit worsen enough to halt flows and force the government to issue emergency bonds?

A: The economy is nowhere near such a situation and the government hasn’t had to dip into its reserves to finance the current account deficit. Remember, the current account deficit for the third and fourth quarters are fully financed though the problems remain. Export promotion and boosting the manufacturing sector are some of the long-term measures that need to be kick-started now.

Q: Will a month of no FII inflows push the country to the wall?

A: Though there has been no cause for panic despite weak inflows over the last two years, the government needs to focus on a diversified basket of financing instead of relying on FII or ECBs. So certainly at this point there is no reason for panic and all indicator show that the country has the required financing.

Q: Is some kind of limit being reached with respect to opening the doors wider for FII debt?

A: A current account deficit (CAD) of USD 80-90 billion can only be financed with foreign inflows. But there are other factors that need to be taken into consideration before opening the door wider for FDI. Though the inflow of equity is preferred to debt, limit on equity inflow forces the government to rely on debt.

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