See GDP over 6% for FY14; CAD at 4.7-4.8%: Rangarajan

The recent move to allow power companies to raise electricity prices to match the increased prices of imported coal has sparked off debate regarding the need to import coal. The Cabinet Committee on Economic Affairs (CCEA) on Friday took the decision to ensure adequate coal supply to power plants, many of which are operating at half the capacity owing to scarce fuel.

In an interview to CNBC-TV18, C Rangarajan, chairman, Prime Minister's Economic Advisory Council (PMEAC) expressed concern over declining coal output. Although he advocated imports to meet growing demand, he feared unhindred imports will have a direct impact on growing current account deficit and thus it is top priority to enhance domestic coal production.  

For FY14, he sees CAD at 4.7-4.8 percent of GDP. He is, however, optimistic of GDP growth, pegging it over 6 percent for the current fiscal year. Speaking on Reserve Bank of India's inaction, Rangarajan blamed it on rupee's fall. He sees resumption in capital flows which will ease the pressure on rupee.

Rangarajan does not see immediate pullback of US stimulus as interpreted by markets worldwide. The US cannot provide stimulus indefinitely and at some point it had to be withdrawn, and the Fed chairman had indicated precisely that. A tapering was unlikely anytime soon, he said.

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

Q: The CEO of Adani Advisory spoke on the changes that were recommended coal pricing. What is the basis behind that? Is that the best way to approach the problem for power companies and increases in prices of coal?

A: The availability of coal is extremely important as far as our situation is concerned. If the domestic production is not adequate, with the increase in demand; imports should be certainly looked at. As has been indicated perhaps, the commodity prices including coal internationally is somewhat coming down.

However, the imported coal may still be more costly than the domestic coal. What is critically important is increasing the availability of coal in the country. This has implications for the current account deficit (CAD) as well.

In the recent period we have seen that the coal import into the country has increased almost by 40 percent. It almost touched USD 18 billion, which is twice the value of the import a few years ago. Therefore, increasing the domestic production of coal and making the coal available for the power sector must be the first priority.

Q: What about gas? That decision is still pending. There seems to be stiff operation from the power and the fertiliser ministries to the formula on the gas price hike. Will it come through? What about the availability of gas once the price is fixed? Are we in a position to supply gas to power plants or availability is still a very big question mark price regardless?

A: The committee has looked into all aspects. It has looked into the issue from producers' and gas users' point of view. Taking all factors into account, the committee's recommendations are now being considered very seriously.

We do know that the user industries have certain problems as this will result immediately in an increase in the cost of production. Therefore some adjustment in the prices will become necessary. But decisions will be taken very soon on the subject.

As far as availability is concerned, the impact may not be seen immediately but providing an incentive for the investor is a part of the problem. Therefore, adequate pricing of gas is an important factor in exploration. So, the impact of any change in the gas price formula will be seen not immediately but over the years.

Q: That is your sense that some kind of consensus has been found among the power and the fertiliser ministry. Have you not been asked to work out a different formula with on gas pricing?

A: There are users of gas who have certain interest and producers of gas are motivated by certain other considerations. Taking all of that, the committee made the recommendations. I expect the CCEA will take its decision soon.

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Q: You have been the RBI governor in the past. If you are put in those shoes, would they have watched the events of the last fortnight with consternation? The way rupee moved; US bond yields went up; the elbow room for any kind of monetary easing has reduced dramatically over the last fortnight?

A: RBI action of giving a pause was primarily motivated by the external sector considerations because as the wholesale level inflation has shown definite signs of decline and growth also needed a stimulus.

Therefore, those would have pushed the monetary policy in one direction. But the high level of current account deficit (CAD) under pressure on the rupee constitutes another set of considerations, which made the RBI to pass.

We now run a high level of CAD. Correction of that will take some time. Meanwhile, we need to depend upon capital flows. Whenever there is a mismatch between the CAD and the capital flows, the pressure on the rupee arises.

In last one week the pressure on capital flows arising out of external considerations – was not domestic; which is critically important. Certain interpretations were put on what the Fed chairman had said.

There is a knee-jerk reaction and as a consequence of it the capital flows got affected and therefore we saw the pressure on the rupee mounting.

There was some easing on Friday. But how things will turn out today is unknown. But as the capital flows start resuming, the pressure on the rupee will also cut down.

Q: That remains a question mark. In the context CAD pressure as also on the capital account, it almost amounts to exogenous tightening in the system and more pressure on emerging market economies. They depend on dollar inflows either by foreign direct investment (FDI) or FIIs. Are we heading for a sticky patch than one imagined going into FY14 because of everything that has gone wrong with the currency?

A: No, the prospects of the Indian economy during the current fiscal certainly look better than last year. According to the estimates, the growth rate last year was 5 percent.

The growth rate in the current fiscal will be more than 6 percent. We had originally projected the growth rate at 6.4 percent. Certainly, the growth rate is expected to be in excess of 6 percent.

Therefore, if capital flows are fundamentally influenced by the growth prospects then India is one of the countries, which has the high growth prospects. We ourselves would want the growth rate to grow to be much higher.

We do want to go back to the high 9 percent of growth. There are very few countries, which have a growth rate of more than 6 percent.

Therefore, if capital flows are being influenced by fundamental factors, we should expect the resumption of capital flows as far as India is concerned.

Q: The CAD this year will be a bit better than last year. But that may not be too much comfort given the size of the problem last year. Have enough steps been taken to cut CAD or the rating agencies would still be taking a hawkish view of the progress we achieved on that front with pressure from rupee?

A: The CAD last year was perhaps around USD 90-93 billion and capital inflows were almost equal to that. This year, in absolute terms, the CAD maybe slightly higher but as a proportionate, gross domestic product (GDP) will come down.

If the CAD last year was close to 5 percent of the GDP, this year it will be around 4.7-4.8 percent. Last year we had no problems in getting capital flows equivalent to USD 93 billion.

While there could be periods of pressure, over the year as a whole we should be able to get the capital flows of the order that we had earlier. After all, April and May in the current system were good months.

In fact we had quite substantial capital flows into the country.

The world over there will be a reversal of the reaction to the statement of the Fed Chairman. That statement has been somewhat misinterpreted. There is no question of the United States relaxing from quantitative easing immediately.

If at all it happens, it is going to happen much later. But all of us know – all analysts know that it is not possible for the US to go on this path indefinitely. But what the Fed Chairman had said is that at the particular point -- and he did not indicate what that point was -- he may have to tighten.

Therefore, there will be a reversal of the earlier sentiment and therefore capital flows may resume and in that particular context. India will be one of the countries, which will be fervent.

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Q: Another problem with the currency is that of imported inflation and inflation moving higher over the next couple of months. You had pointed out a few weeks back that there was a risk of stagflation. What would you point on the inflation trajectory? Is risk also back along with the growth problems that we are struggling with?

A: In a sense, the international commodity prices in dollar terms have softened. But in rupee terms it may rise because of the depreciation. But taking both factors into account, the impact on inflation could be moderated.

But for the month of May, the non-food manufacturing inflation was well below 3 percent. Therefore, there is not that danger of the external factors pushing up the inflation that much.

Yes. There will be an impact on inflation but it will not necessarily push inflation very much higher.

On the other hand, growth will pick up. Therefore some moderation in inflation and the growth pick up in the current fiscal will be seen.