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PMEAC chairman Rangarajan explains to CNBC-TV18 that a fall in gold and coal imports would rein in inflation as he presents an analysis of all the facets impacting the economy today
The big news of the week is the change in rating on India by Standard & Poor's. Although the rating hasn't changed, the outlook is imbued with a negative bias which makes India a fence-sitter.
The country is a whisker from hitting junk status and experts have argued that India isn't anywhere near speculative rating. But India's comfortable foreign-exchange reserves and a 7% growth pace, are proof that there is no chance of will reneging on loans.
But both the quantum of reserves and the growth story are under threat. Fiscal deficit has been stubbornly close to 5% for four years in a row and the current account deficit which never went above 3% in the past two decades, will finish close to 4% in 2011-12.
C Rangarajan, former RBI governor and currently chairman to the Prime Minister's Economic Advisory Council (PMEAC) analyses these facets of the economy on CNBC-TV18.
Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos.
Q: I don't want to start with S&P's observations. Let me start with the most recent data on the external front. Khullar has indicated from the DGFT (Directorate General of Foreign Trade) figures that trade deficit in FY12 is going to be USD 185 billion. Usually the final figures from RBI are about 5% higher because of items such as defence imports, so the trade deficit is USD 195 billion.
Invisible flows in the first nine months were USD 78 billion. Even if we add another USD 30 billion in the fourth quarter, that will be only USD 108 billion. The current account deficit looks like it will be nearly USD 85-90 billion and that works to, not 3.7%, but probably 4.25% of GDP. Would you agree with this calculation?
A: Your arithmetic is correct. But I don't think that that is how it is going to pan out. My own estimate is that it will be about 3.8% of the GDP but will be a little less than 4%.
I don't think the total trade deficit is going to be higher than what has been indicated in our review. Exports are also doing reasonably well. Therefore overall, I would say that the current account deficit could be around 3.8% of the GDP and not more than that.
Q: In FY13, between the PMEAC, the Reserve Bank and the government, the assumption was made for 7.3-7.5% growth. So imports will, if anything, be higher, isn't it?
Global markets are weak. Software companies are guiding for lower sales. So are you confident we can bring down current account deficit in FY13?
A: I think the current account deficit can come down on two factors. Gold imports in the current fiscal are almost about USD 56 billion. This is unusually very high and part of it is attributed to the high level of inflation in the country with gold serving as a hedge against inflation.
I believe that the amount of gold imports next year could fall by about
The other factor is the extraordinarily large import of coal during the current year, because of inadequate growth in the coal sector. There has been a fairly large increase in the import of coal from. I believe that in the current fiscal the coal situation will improve.
We have seen it in the last three or four months of the previous fiscal and therefore I think that we need not linearly project from last year to say that the imports will be much higher.
On these two counts, I expect some reduction in imports and therefore the import level may more or less be the same order as this year.
Q: Even if we accept the coal and gold argument, crude is the single biggest component, whether it is current account or fiscal deficit. Crude imports grew by 47% in FY12.
Prices rose from sub-USD 90-per barrel levels in FY11 to over USD 100-per barrel in FY12. But even assuming stable prices, can we bring down crude imports when you expect the economy to grow faster in FY13?
A: We may not be able to bring it down but I don't see it rising too fast either. All indications are perhaps the crude prices internationally will settle down. Therefore on that assumption I think the crude imports may not necessarily go beyond reasonable limits.
I think the assumption that the demand for crude imports will pick up because of higher rate of growth is not justified because to some extent if you adjust petroleum prices during the current fiscal, it also may have some effect on the demand for petrol.
Q: But that assumes the government will be able to push diesel prices high enough. How much do you think the government can do politically and practically on diesel?
A: I think the government will take some action during the course of the year, both in relation to diesel as well as other petroleum products.
Petrol is already decontrolled, though there has been some delay in adjusting the price of petrol to international crude prices but that adjustment will also happen.
Since we have not adjusted these prices for a long time, to have the adjustment fully to the level demanded by international crude prices may be difficult in one go therefore we may have to do it in phases.
I would suggest that perhaps as the inflation rate comes down a little bit, we should really try to push, the prices up as far as the petroleum products are concerned, in stages.
Q: This government could not pass a 5%-10% rise in railway passenger fares that hadn’t been hiked for 10 years. Does this really give you much confidence that the government will succeed in hiking diesel prices?
A: The comparison is not identical. It became complicated in a number of other practical matters. Perhaps it could have even gone through if the political situation had been slightly different.
But I think the Budget has given a certain level of subsidies for petroleum products. If the level of subsidies is to be sustained and is not to be exceeded, then action is required.
The Prime Minister and the finance minister have said that the time had come to bite the bullet. I do expect action to be taken as the inflation shows some decline.
Q: Coming back to the worry of S&P on the current account. Are there any steps the government can take to tackle the widening current account deficit head-on in terms of export sops or wanton depreciation of the rupee? What are the tools available to tackle this deficit?
A: There is not much that can be done by way of policy tools except a few things that we talked about. Perhaps rise in the prices of petroleum products can have a dampening effect on demand. That’s one way of doing it and the reduction in the import of coal and gold through some mechanism is also possible.
As far as gold is concerned, as inflation rate comes down and the rate of return on the financial assets becomes attractive compared to holding gold, gold import can also come down.
In case of coal, it is essentially a managerial problem. If coal production is maintained, then it can come down. Therefore, to a very large extent the action is required on the real side in order to be able to bring down the imports.
The exchange rate can play a role but, the depreciated rupee is not always the answer to the problem. It also has other implications in terms of capital flows but as the current account deficit rises and if the capital flows are not adequate, there will be some decline in the value of rupee also.
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