Mfg decline has bottomed; tame inflation to cut CAD: PMEAC

C Rangarajan, chairman, PMEAC (Prime Minister's Economic Advisory Council) explains to CNBC-TV18 that the decline in manufacturing has bottomed out and will record positive growth in first quarter of next year or the last quarter of the fiscal.

He adds that the current account deficit (CAD) could be significantly reduced by taming inflation and making returns on financial assets more attractive. Below is the edited transcript of the reaction on CNBC-TV18 Q: What does the IIP of minus-0.1 percent indicate?
A: It is a bit disappointing, but nevertheless I think that the bottom of the decline in production seen in the first half of the year has been reached. I certainly think that in the first quarter of next year or the last quarter of the fiscal, there will be a definite and positive growth in manufacturing. Q: On Thursday you estimated that growth for FY13 would be at 6 percent and for FY14 it would be 7 percent. For FY13 what would your GDP trajectory be for Q3 and Q4 considering that it would have to be a formidable pick-up after the 5.3- and 5.5-percent rates of growth clocked in the first two quarters of the fiscal?
A: I think the growth rate for the current fiscal will be between 5.5 and 6 percent, perhaps at 5.7 percent. I think that the growth rate next year should be about 1 percent higher than this year. Q: What about inflation? Would that be the most determining factor for the Reserve Bank of India (RBI) to ease rates on January 29? What are your expectations of the consumer price index (CPI) and wholesale price index (WPI) data?
A: I think the WPI inflation, in the normal course of events, would come to 7 percent by March 2013. There could, perhaps, be some pick-up in headline inflation if adjustments were made in administered prices. Therefore that is the repressed inflation becoming the open inflation. Going ahead, I think as far as the WPI is concerned, the inflation rate would hover between 6 and 7 percent next year and perhaps reach 6 percent towards the end of next fiscal. Q: Do you think growth could wither away and the economy relapse into another slowdown?
A: No. I think an honest and serious effort is being made to achieve the production and capacity creation targets in the four infrastructure sectors which lie in the public domain- coal, power, roads and railways. Q: Do you think that the second half of industrial growth could be at 4 percent? What is your assessment of the October-March industrial growth?
A: I think it should be at 5-6 percent. Therefore, for the year as a whole the manufacturing sector will post a growth of 2.5 percent. Q: Our polls estimate the WPI at 7.25-7.30 percent indicating perhaps continued and subdued core inflation with a current account deficit (CAD) of 5.4 percent in the second quarter and almost certainly 6 percent in the third quarter. Do you think RBI has the wherewithal for much stimulus?
A: The RBI will look at a number of factors. I think what the WPI for the next month will show up, will be a critical input for decision-making. Also the RBI will have to look ahead and see whether appropriate action is being taken in order to contain the fiscal deficit. So if the trends are in the right direction, perhaps it will offer manoeuvrability. Q: The CAD has shown a tendency to persist. Do you think the RBI has to perhaps cut and then pause again because of CAD?
A: The CAD will have to be handled through a variety of instruments. It is not amenable to being brought down very quickly in the short run and requires a medium-term strategy. As far as the policy rate is concerned, I think much will depend upon what the inflation data will reveal. Q: In order to curb the CAD in the next two months before the fiscal year ends, do you think that there could be some curbs on gold imports?
A: I think gold import is just one among many factors that have caused the CAD to surge. The real answer lies in taming inflation and making the return on financial assets more attractive. Q: Are you optimistic on the 5.3-percent target for March 2013?
A: I think an effort will be made to contain the fiscal deficit at 5.3 percent. I am sure that in the following months the required initiatives will be taken to contain the expenditure. I am pretty sure that the government will get close to the target of 5.3 percent.