See room for monetary easing in India: Saumitra Chaudhuri

The September inflation numbers have painted a grim picture and Saumitra Chaudhuri of Planning Commission feels there is some room for monetary easing in India at this point. He feels, there is a need for more action from the government for fiscal correction and expects current account to be under pressure in Q3 as well.

Chaudhuri is concerned about the slowdown in exports and stresses on the need to expand the geographical horizon of export markets. He believes the free trade agreement with the European Union must be closed and also informs that negotiations with EU on free trade agreement at advanced stage.  Here is the edited transcript of the interview on CNBC-TV18. Q: Even if one removes the diesel price hike, the September inflation number is an uncomfortable 7.45-7.5%. Core inflation is at 5.6% and that’s where it has been for the past 3 months. Do you think we are stabilising in inflation but at a high level?
A: It will eventually decline but I think for the next few months, it probably will remain somewhat elevated. It may slip a bit but likely to remain elevated. There are many factors which are going into this. If anybody thinks inflation is higher than expected, if they look at it, there are some numbers which point to some pressures, particularly farm products and manufactured products of food.
But, pressure from the other side like ferrous metals, chemicals etc are coming down. I think you’re getting a bit of both. I think we are getting some moderation, but perhaps at a slower pace than what one would have liked. Q: What is the average inflation likely to be for FY13, do you think close to 8%?
A: No I think the average is different but let’s put it like this, ending March I think we will be pretty close to 7%. Q: If the average and year end inflation is going to be around 8%, is there really any elbow room to lower taxes in theory?
A: In theory the answer lies both in the domain of yes and no. It’s not a very comfortable answer. If you look at inflation rates and say they are high then you got to maintain the monetary policy. On the other side, you are getting a softness in demand and that is pretty clear.
You are getting a softness in international demand and that is also very clear. There will probably be downward pressures on commodity prices of various kinds, even if not for oil in the near future. That should give you a certain amount of relief. And finally if you look at the monetary policy across the world, it is lose and going to remain lose.
To that extent we are relatively tight perhaps. We go back one year, and you would not have thought that Europe would have pushed monetary policy to where it has pushed now. You may have had reasonable expectation, the Fed is going to change its course of policy, but neither of those two things have happened. Basically, if anything, we are even more wide open with the QE3 or some kind of a QE3 running in the United States today than they were one year ago.
So between one year and now even if we haven't changed our policy stance one bit we have become relatively tighter. I think if you look at this from that point, we have some leeway. On the fiscal side, there seems to be some scope for improvement, there will be improvement, there seems to be some better news on that front. And if you take it all combined, I think the arguments will sit pretty well on both sides.
_PAGEBREAK_ Q: Since you have mentioned fiscal deficit, what's your take on that number in particular? Yes we have made some sort of a cut in LPG on a permanent basis and done away a little bit on diesel as well but do you think that’s sufficient enough for the year? What exactly would your fiscal deficit target be by the end of FY13?
A: It's not this year. You could construct a year ending instead of March 31 to June 30 or September 30. Depending on what you choose you get a different figure for 'this year'. The point is the trajectory has shifted. The issues that were clearly impediments towards any fiscal correction like fuel prices, has been crossed, the Rubicon has been crossed and a political price has been paid.
A very heavy political price in the sense it has lost one of its important allies. Therefore, these decisions are momentous decisions and they had to be taken and they have been taken. Therefore, there is a qualitative change in the way the fiscal moves from here onwards. One can always argue and say, you could do bit more, you can do much more, but that’s a different point.
From here on, fiscal correction on the fuel subsidy which is the one which was ballooning and the fuel subsidy has become possible. There will perhaps be more action on this down the line. Gasoline has become separated from the fisc finally. There would be some improvement further I think as the months go by. Q: The current account deficit at 3.9% in Q1 may be lower than Q4 of last year but, it is still ugly and the last monthly trade deficit number that came in for September is USD 18 billion. That's nearly an all time high in monthly terms, won’t this be another big reason why the Reserve Bank cannot cut rates?
A: I don't think there should be a connection with rates. The trade deficit of September was bad for two reasons. One was exports were lower than I had expected. I thought there will be little bit of export pickup in September, that didn’t happen. In the import side USD 4.5 billion gold was imported, I expected USD 3 billion, about the same as the previous month.
That didn’t happen and it was USD 4.5 billion. Oil was bit more, over USD 0.5 million more than expected. You got USD 2 billion more imports. Essentially that was the higher trade deficit instead of USD 15-16 billion we got USD 18 billion dollars. It is purely gold and oil and these are not linked to anything else.
Since it was the festive season, gold did not come in as much as it came in last year in the same month. Overall, for the first 6 months gold imports are significantly down. Oil imports were another thing because oil prices have again moved north. So, trade deficit is an issue of concern but I think it has got nothing to do with rates.
Second is what’s the outlook for exports? I think there is a reason for concern. Manufactured goods exports, world markets are pretty beaten down. The biggest exporter in the world China is facing problems on exports so I don’t know how this is going to work out. Exporters say that their order positioning looks better for this Christmas season, this winter season but, I think we are going to remain under pressure on exports side.
On the imports side, to the extent that gold covers off we will be better off but we can’t see oil coming off. And we have got a lot of other imports that we make like for example coal for which I don’t think there is going to be substitution right now. We are going to get some pressure on the trade deficit side, there is no doubt about it.
But whether it will be reflected in the current account or not would depend on what happens to service sector. Service sector did a bit better in Q1 and therefore, that will be repeated in Q2. But, current account deficit even then would probably be higher than in Q1. There is another problem, the current account deficit is measured in dollar upon dollar and because of low exchange rate essentially the denominator is coming out lower.
Therefore, the number is looking pretty ugly. But that’s the reality. So Q2 would not be very good. I think Q3 will also be under pressure, I hope there will be improvement in Q4 but we have to get some of these trade issues sorted out. I think we need to close the FTA with the EU, iron out the wrinkles to make a lot of difference to our market access.
I think we need to diversify much more aggressively into East Asia where non-conventionable products, not just an iron ore and cotton but with many other products. We need to aggressively look at Africa. We need to do something about our exports and lift it up.
I am not talking about hand outs, I am not talking about stocks but, I am talking about some kind of clearly directed strategic improvement in the ability of our exporters. Most of them are small and medium exporters to service those markets.
_PAGEBREAK_ Q: You were speaking about the current account deficit and the fact that things could get uglier with every passing quarter. In a circumstance like this it’s a little strange that there is an active push to appreciate the rupee. We are getting finance ministry statements flaunting the fact that the rupee has been stabilised at 52 and that they want or that they see it moving towards 51. Isn’t this dangerous when your current account deficit and trade deficit is expanding quarter after quarter?
A: You do not gain, this is textbook stuff that okay there was a time in history when maybe all these worked. Today you have supply chains, people have long term contracts, they know your company economics as well as you do and every time there is a change in those particulars they know what you have gained what you have lost.
International markets are down, your buyers are also not in a particularly strong position financially and they take it away from you. This idea that if you can play around with exchange rates and you will get more exports is not a very sound one. It is based on lack of understanding of how these markets actually work and there is nothing like stability which helps, if you can keep it stable that helps everybody. Q: What about growth? Do you think that growth has bottomed out at that 5.5% or do you think there's further downside?
A: I think things look better but they don’t look sufficiently better. I am convinced they look better, they will be much better in the second half but they are not sufficiently better. We are not still seeing large investments in the private infrastructure space, we are not seeing any signs of it happening day after tomorrow either.
I think that's where we need to focus our energies on and we think we know it and we are already working on them. But, we need to do it more energetically and hopefully some of the investments will begin to materialize by the end of this fiscal or early next fiscal and that will give us back our growth. The fact that the second half of this year will be much better than the first half, this quarter also probably will be better than the previous quarter. But, the fact of the matter is this will not be good enough. It will only be good enough when we get that investment in. Q: That's some optimism but where is this optimism coming from? All these reforms in FDI in insurance, retail, or sugar sector, drug sector, all these reforms do they amount to much if the economy is fundamentally sick with a high fiscal deficit, a high current account deficit and high inflation. Doesn’t that central malaise have to be corrected before we think of growth?
A: I think many of these things lead to changes. Basically, many of the things that we have done is to correct the fiscal deficit. As far as the current account and the trade deficit is concerned, large part of the problems is on account of gold import. A large part of the account is import.
We sit on the fourth largest reserves of non-coking coal and we are one of the big buyers of non-coking coal in the world, isn’t it strange? Why did that happen? Lot of our trade issues are not unrelated to other domestic policy issues, we need to correct those. They will get corrected if we work on it.