May 24, 2012, 09.55 AM IST
Chief Economic Advisor Dr Kaushik Basu gives his exit interview to CNBC-TV18's Aakansha Sethi where he says that it is not only the Indian rupee but all emerging market currencies which are currently under pressure.
The RBI has been active in the currency market. But despite a slew of rescue efforts initiated by the central bank, the latest one being the announcement last evening that it will buy government bonds worth Rs 12,000 crore, it failed to arrest the weakened currency.
With our domestic issues and global headwinds to boot, Basu says it is unrealistic to expect the rupee to tough Rs 48-49 to the dollar. His personal calculation is Rs 51-54 to the dollar but remains unclear on the timeline.
Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying videos for more.
Q: Today, the rupee breached 56. Over the last one year we have seen every single macroeconomic indicator register a decline whether it’s growth, it’s inflation, fiscal deficit and now the Balance of Payments (BoP). Instead of drastic action from the government all we hear is silence. Is there a strategy and if so what is it?
A: There are several variables, you bunched them out together. There are some which are indeed at our doorstep and action is needed from us, but the current exchange rate problem that you are seeing, the very sharp depreciation that is taking place, I don’t think it really has anything to do with our policy or policy mistakes being made over here, which is causing that. If you look across the emerging economies and plot it on a graph virtually all of them - South African rand, Brazilian real, Mexican peso all of them are moving very much like the rupee.
Q: But India has been the worst performing amongst emerging economies?
A: If you look at movements right up to now, over the last 18 month period, India is not the worst, India is just neck to neck with South Africa and Brazil. We are neck to neck between them. Mexico has done a bit better. It’s intervened in certain unusual ways, so it’s done a bit better. The exchange rate problem that you are seeing is probably a bit of a bubble. I do think it’s a bubble but it’s not an India specific bubble. There is something global going on.
The slowdown in growth, yes, there was a global factor but there were also domestic factors. I would not deny that at all. I have said this earlier - I wish we were taking faster decisions, more reforms, but I also see it from within. When I see it from within I also realize that with key players and the big decision makers in government all really waiting to take these moves, you also see the frustrations of democratic coalition politics that things get stalled even when we want to do them.
So the two sets our growth slowdown and the current exchange rate problems are very different problems I believe, but yes that’s the mix of things and that is what reality is all about.
Q: So coalition politics is a reality that is not going to change and you hear this over and over again that this is the key problem which is stopping reform but you have something like the Insurance Bill which the BJP will also not vote for and even that the government could not go ahead with?
A: Yes, there is that, there is the Land Acquisition Bill these are some of those low hanging ones we should be able to go for. But again I have to put this into perspective; I myself have been very critical of things that we have done but take it in a bit in global perspective. The slowdown in growth also is happening across the board. The Economist magazine in the back pages gets 42 countries and gives their growth forecast for the year 2012. India is the second highest.
So we are doing much worse. They are projecting that we will grow less than what we have done in the past but still we are second highest which just shows that the whole world chart has moved down ahead of us is China, just behind us is Indonesia and Thailand, so Asia is dominating the globe.
And India is still at the top but yes, it is a global slowdown, it is affecting us. There were things that we could have done better; no two ways where we could have pushed our growth despite that but there is a global situation.
Q: Several people say that several of these problems are self-inflicted and coalition politics is something we will have to live with. Is there no space for bold reforms or bold steps to be taken for subsidies to be curbed or for the fiscal deficit to be brought down?
A: I am not a politician so I can’t really speak strongly to this, but yes, I do believe there are situations where you need to dig in your heels. There are certain policies which are critical come what may that we are going to push for this and take it or leave it kind of a decision and yes, there comes a point when you take those decisions. I don’t take those decisions, I give advice on policy matters but I agree that there are areas where you do that.
But going back to the broad picture till June 17, I am talking of the Greek elections another round, this is a global situation, we can do things better and improve things a little bit, but you have to keep your fingers crossed, base position till June 17 when we will get a sense of what’s going to happen in Europe. After that yes, there are things at our doorstep, we should wake up to and get going.
Q: Foreign investment is something that is not dependent on coalition politics. We seem to have scared away foreign investors as well. They are shy of investing in India and this is primarily because of regulatory changes. Do you think this was unnecessary at a time like this?
A: I am again disagreeing. Yes, there were policies and reforms where we had gone very slow. I am willing to take that. But if you look at the foreign exchange movement, foreign direct investment in the year 2011-12 is a record. India has never received this much. So, that did not go away. When it comes to FIIs, yes, there is movement of money, almost like a tsunami that you get a withdrawal, you are getting a withdrawal, but this is a withdrawal that is happening from all emerging economies because the world is frightened that there may be another massive global crisis if Europe begins to splinter which is a possibility now.
We have seen this happen invariably, they all rush to US treasuries, German bunds and sovereign bonds which the world considers safe. You move there where you have no returns, but at least you feel safe that you will not loose your money. So the FII money movement that you have seen and the FDI FDI has been an inward movement in a huge way, FII outwards is because of that. I don’t want to take away that we have responsibilities which has to do with reforms, which has to do with quicker decision making; we need to work on those fronts.
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