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Last Updated : Nov 23, 2012 03:34 PM IST | Source: CNBC-TV18

Recent govt reforms positive; implementation a key: Jalan

Bimal Jalan, former RBI governor, says that currently it is crucial to give investment confidence in the economy and that will boost growth rate.

Bimal Jalan, former RBI governor, says that currently it is crucial to give investment confidence in the economy and that will boost growth rate. 

Also read: Market may see new highs next year: Raamdeo Agrawal

Below is the edited transcript of his interview to CNBC-TV18.

Q: Inflation in October was 7.45 percent much lower than September's 7.8 percent and thereabouts. According to the RBI, 7.45 percent is still an uncomfortable level but do you think it's time to turn our attention to growth?

A: There is no doubt that we should concentrate on growth. At the moment it is crucial to give investment confidence in the economy and it will boost growth rate. Right now, growth is an important priority.

Q: What is reining in the monetary authority is it the fact that current account deficit at 4 percent, the later trade deficit for October was a humungous USD 21 billion at a record high. Will there be confidence to cut rates and increase consumption at such a time?

A: Again, the relationship between growth rate and the interest rate of 25 basis points on either side is present but is not significant. We worry about 25 basis points of interest rate and when the difference between what the base rate is and the total borrowing costs are or the cost of money is, it is about six percentage points or four percentage points higher. The crucial issue is to revive confidence in our economic prospects and investment climate and take measures which the government has announced but the announcements has not yet translated into action. I am optimistic that things are being done and we will see an uptake on growth. The most important thing that we should get is investment, which is a constituent of growth.

Q: Is current account deficit at 4 percent per se isn't a worry, for two years running, it is almost getting structural. How does one rein it in?

A: Why do we have current account deficit? Is current account deficit the export failure, interest rate, exchange rate, what are the issues, are our exports unprofitable? If the world economy is not growing then why we have a current account deficit of this order? The factor needs to be analysed. Tf the current account deficit is because of wasteful expenditure then we should act on it. We should take care if there is problem that there is not enough exchange rate or real effective exchange rate  These are only symptomatic of macro economic management not being sufficient to revive growth and investment.

Q: Globally, people prefer gold because of the debasement of the fiat currencies and in India there is the added cultural affinity for gold. Gold is the big problem why we have a huge current account deficit. How do you control gold imports?

A: There has been a decline in import of gold. Gold prices are rising because in our society it is treated as an attractive instrument. Lack of alternate investment opportunities makes gold an investment option. People prefer to invest in gold against investing in capital account, saving account, stock markets, mutual funds etc. All the avenues are open, our financial sector has broadened and that gives more opportunity to get a rate of return which is better than gold.

Q: If you want to encourage investors to also consider other investment opportunities whether they are mutual funds, etc how do we make them attractive and overall economic growth the solution for making other asset classes competitive as well as attractive? 

A: We talk about investment and infrastructure growth and measures to complete projects on time via National Investment Board are good and desirable. We should just implement the measures and go ahead.

Q: We hear that the finance ministry is keen to keep the rupee at 51 or so. Now, at this level actually the rupee would be over 10 percent over valued in real effective exchange rate (REER) terms. A higher rupee will bring down the crude bill so the finance ministry would be happy about it but still is it a good idea to want rupee appreciation when the current account deficit is high at 4 percent? 

A: You must pardon me for not making any comment on the exact rate of rupee but I can make a comment on our approach. There is no doubt about the approach to the value of the rupee and among the economists there is an agreement. We should focus on real effective exchange rate of the rupee which is competitive, that's the crux of the issue.

Short term movement doesn't matter but if a line is drawn in terms of a trend over a year or six months or four months there should be enough confidence that the real effective exchange rate of the rupee is competitive and that's what the real effective exchange rate is suppose to tell that it’s a realistic exchange rate after taking into account inflationary factor and competiveness of exports. In principle I am all for that but I am not commenting on whether 51, 52, 53.

Q: Our short-term debt as a percentage of reserves is 27 percent and is getting higher. If we count all the debt with residual maturity under five years, short-term debt moves to 40 percent of our reserves. Can we increase FII exposure to Indian debt in government securities and corporates? Would this short-term debt phenomenon not be a worry?

A: Your point is valid that short-term debt or short-term flows which are reversible should not rise beyond a point which we cannot handle because then the volatility and speculative movement can increase. We have followed a very careful and cautious policy on this front and we should continue to do. 

But whether you can raise corporate bond access for FIIs, corporate bond access to FIIs is good because they would reflect what the market prices are; they would develop the corporate bond market which is underdeveloped in our country. Measures are taken from a policy point of view which broadens the market. I agree that it is important to keep an eye on total volume of inflows of short-term or reversible capital flows.  

Q: The government has already raised fuel prices once and they have paid a political price for it and now it looks a little difficult to expect another round of fuel price hike. Where do you see the deficit by the end of the year? Is it likely to be closer to 6 percent?

A: I cannot predict but we can hope that it does not increase beyond 5.5 or 5.4 percent. Confidence is more important that percentage point. If the confidence in fiscal deficit declines because of your ability to handle subsidies, transfer of government resources to the people at low cost, or avoiding corruption, corruption is also a very big issue. The government is considering all these factors. So, fiscal deficit at 5.1, 5.3 or 5.4 percent will not cause loss of any confidence. This digital surf for 1 percentage point to 2 percentage point all relates to confidence in the economy. If our investment rates goes up by 3 percentage points and even if we import more capital goods which will lead to an increase in fiscal deficit, then it will not matter much to the people. 

Q: Our fiscal deficit is very high due to political compulsions which have made it very difficult to raise fuel prices?

A: We must tackle it. The political situation is because of coalition politics that is now a regular form of government one cannot take further economic risks, then economy will be in doldrums over a period of time.

Q: With this kind of high fiscal and current account deficit don’t you think there is a likelihood of a rating downgrade?

A: Any downgrade would be disastrous for us. Currently when we have issues like current account deficit, FII flows, foreign investment, effective exchange rates we cannot afford to have any further downgrade. Any further downgrade on credit rating would have a negative impact on our economic conditions. Ultimately, economics is certainly about politics, but the fact that you would get into all these kinds of problems does not help politics either.

Q: The government wants the Reserve Bank of India to expedite with issuing new bank license maybe even to corporate’s but the RBI wants the enabling conditions like power to supersede boards, power to call for the books of group companies. Is this a fair demand from the RBI, what is your view on the issue?

A: I am sad to see the kind of debate which is going on several issues where there seems to be a distinction in public about what the government wants and is doing and what is the RBI doing? Not that one is right and the other is wrong but this kind of issue of differences of views in public has impact on market, people expectations with regard to future policies. We should avoid it. 

Reserve Bank has to decide on monetary policy and that we have already introduced that kind of a framework and the government decides on macro economic policy the broad framework and there is always a discussion. So, we should continue with this method.

The bank licenses should be within the purview of the Reserve Bank of India and if the government has a view it should communicate behind public walls. They can transfer their views to the RBI and the RBI can transfer its view to the government there has to be a dialogue, harmonious relationship. One has to avoid conflict of interest on question like kind of bank licenses. You can’t be an owner of a bank and be a great borrower from other banks so you have to avoid conflict of interest.

Q: That means any overt conflict between institutions in public should be avoided?

A: That is absolutely important, then how do you make an effective policy? 


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First Published on Nov 23, 2012 12:50 pm
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