RBI has room to cut rates by 50-100 bps: Arvind Panagariya

The Reserve Bank of India has room to cut interest rates by 50-100 basis points, feels Arvind Panagariya, Vice Chairman, NITI Aayog.In an interview with CNBC-TV18, Panagariya says the time is ripe for a rate cut, and that investment sentiment is turning for the better."The case for cutting their rate is so strong, that whatever the Fed does, we are ripe for a rate cut of maybe say another 50 basis points," he says.He says the economy can still grow 8 percent this fiscal despite a sluggish start in the first quarter."They (first quarter GDP numbers) may get revised upward, there is possibility. And I would not write off the prospects for getting past 8 percent growth rate; we have had quarters when we have grown 9-10 percent," he says.He says other states can learn from Tamil Nadu, which has amended the earlier Land Acquisition Act with the President's assent. Below is the transcript of Arvind Panagriya’s interview with Shereen Bhan on CNBC-TV18.Q: Let me start by asking you what the general mood is as far as the economy is concerned? The Prime Minister held a mega meeting, you were part of that meeting along with the Reserve Bank of India (RBI) Governor, along with the Prime Minister’s Cabinet colleagues. In attendance was the who is who of India Inc. What is the sum and substance at the end of that mega meeting? I understand that several concerns or suggestions were made by industry in terms of what to do to kick start the growth, but are there any real outcomes expected post that? What should one expect?A: It was a very positive discussion and generally the industry and the economists who were present were very optimistic. And lots of suggestions got made. So, I should not talk about what the suggestions were, but lots of good suggestions. Q: You will not talk about the suggestions, but let me bring on the table, I believe what was one of the key concerns that was raised and that was the high cost of capital. On August 28, you have said that the reserve bank should be more aggressive when it comes to cutting rates and they should in fact go as high as 50-100 basis point rate cut. In that meeting as well, of course, polite clamour for a rate cut was made in front of the RBI Governor. We have the credit policy now coming up on September 29, do you believe the time is ripe for a deeper rate cut?A: I have said this before; those were not quite my words that the RBI should be more aggressive, those are your words. But in substance, I have said this that we need a rate cut of 50-100 basis points. I think time is ripe.Q: Do you believe that whether or not the Fed actually lifts off in September, which is the expectation. It is actually still split on whether we should see the Fed move in September or perhaps push it now to December. Do you believe that that could weigh on the RBI Governor’s mind ahead of the credit policy?A: My view has been that the case for cutting their rate is so strong, at least from what I understand, that even if the Fed actually raises the interest rate, in any case, it is going to be baby-steps. It is not going to be a mega increase in interest rates by the Fed. But, whatever the Fed does, we are ripe for a rate cut of maybe say another 50 basis points.Q: If there is no rate cut of 50 basis points, if it is 25 basis points, do you think that will really help change sentiment, turn things around?A: The direction is right and past 75 basis points reduction, it will add up to a percentage point and maybe this will then also begin the process of the pass-through with a little stronger effect. Currently the pass-through has been from what I understand about 30 basis points or so out of 75. So, there is room also for the interest rate to fall through the pass-through.Q: The government continues to maintain that it is optimistic about growth picking up in the second half of the year, but do you believe that the targets set up by both the budget as well as the economic survey of an 8.4 percent kind of growth number for this particular financial year is under stress given what we have seen as far as the latest gross domestic product (GDP) print is concerned.A: We still need to wait. Maybe these are preliminary figures for the GDP, first quarter also. They may get revised upward, there is possibility. And I would not write off the prospects for getting passed 8 percent growth rate. We have had quarters when we have grown 9-10 percent.Q: But the monsoon picture is looking bleak, which will obviously impact agriculture. We are not really seeing high frequency data suggests any kind of big upmove as far as sales are concerned. Corporate earnings continue to look muted at this point in time. What gives you the confidence that we are going to see such a sharp pick up in the second half to be able to get to that 8.5 percent number?A: There are three more quarters left and as I said, the first quarter may itself actually turn out to be higher than what it is, so the pick up required probably is one percent if we go by the current Q1 figures, I think one of the three quarters, so the pick-up required is not huge when I spread it over the three quarters. I think the investor sentiment is turning around and the message that the government is actually moving is passing through.Q: Let me ask you about issues that specifically the NITI Aayog ia looking at and land of course is the big one because that meeting where apparently the Chief Ministers of Maharashtra and Punjab said that State Governments said that they should be more empowered to decide what to do as far as the Land Acquisition Act is concerned, was decided here at the NITI Aayog meeting. What should be the road ahead because now, we have gone back to the 2013 Land Act. The government has not repromulgated the ordinance, but given the fact that 2013 has certain benchmarks as far as compensation, social impact, assessment, etc. is concerned, how easy is it going to be for state governments to deviate from the central law?A: A very well kept secret has been that the state of Tamil Nadu has a different act or an amended act in place since January 5, 2015. So, it has been almost 7-8 months. Very few people knew about it, but Tamil Nadu has in fact amended the 2013 act as it applies to their state. What they have done is they have introduced a new schedule within the legislation and in that schedule, they can list certain state legislations, which then are exempt once those legislations get listed in the schedule called Fifth Schedule. Those legislations become exempt from the 2013 Act.Q: So, then you do not actually need to come back to the president, seek presidential assent or anything. You are saying that Tamil Nadu has already deviated from the central act and made more exemptions than that are provided under the central act. A: Correct. So, that act required presidential consent which has been given. Now, for the future, Tamil Nadu does not have to come back to the central government because they can add to the list of acts that are listed in the Fifth Schedule or they can subtract from it. Other states could follow the same strategy. They too will have to come to the central government for the presidential assent, but my own speculation is that once the assent has been given to Tamil Nadu -- to one state -- I don’t think the central government is going to deny that same thing to the other states.Q: Have you, in the process of the conversation and the consultations that took place, are states like Maharashtra and Punjab now close to moving to seek presidential assent to deviate from the central act?A: Certainly, I have passed on that advice to the Maharashtra Chief Minister. As far as I understand, he has even made a public statement that he was going to actually follow that route. But, remember, first he has to pass it in the Maharashtra Assembly and then after it has been passed by the Maharashtra Assembly then it comes for the presidential consent. I have also suggested the same to the Chief Minister of Rajasthan. So, I suspect that they would be working on it as well.Q: So, Maharashtra and Rajasthan are likely to go the Tamil Nadu route and get the amendments moved in their own assemblies and then seek presidential assent.A: That is my hope.Q: If it was this plain and simple, that state governments could deviate from the central law, why was the need then to make 2013 into this draconian sort of act and then repromulgate an ordinance three times around before you decided or the government decided to back down on it?A: No, remember that I was one of this very strong advocates even before I came to the NITI Aayog that the Land Acquisition Act, 2013 was a bit draconian for the simple reason that in some of the very important cases, where public purpose is actually at stake, the acquisition would take almost four to five years. So, I advocated myself reforming the act. I had also advocated actually reforming the acts centrally because one state at a time is a longer process. And so, the Prime Minister did want to move past it really.Q: But political reality finally caught up?A: No, at the time that initial consultations were done in June 2014, many on the Congress side and on the opposition side had also said that they had difficulty with this act and they would like to see it amended. So, it is not as if the government moved without consultation with the opposition parties. But it is simply that the opposition parties clearly changed their minds later on and then they dug their heels in.Q: Let me ask you about another issue which now looks like it will be only taken up in the winter session of parliament because the government has prorogued the monsoon session. So no special session to try and push the goods and services tax (GST) bill through. How much of a setback is it and do you believe April 1, 2016 is still a possibility?A: In politics, you can never say that anything is not over, things can change or turnaround and so I will not rule it out as a possibility. However, on the other hand, if it is delayed, it is okay because ultimately at least my view has been that this is a process. Remember, you started on this pact more than 10 years ago and the original proposals perhaps even go farther back than 10 years. It is a process and along the way setbacks may happen and it is a process that requires that constitutional amendment, it requires legislation and it requires consent of 29 states, central government, so one knows that there can be hiccups.However, on the other hand for this present government, it has been only 15 months and that is a pretty good progress. It still looks well within our grasp so if not in April, maybe six months later it will be implemented.Q: Speaking of reforms, I had a conversation with you before you moved to Delhi, in the US and one of the big things that was on your agenda was labour reforms or pushing labour reforms forward. Are you disappointed with the face of change that we have seen specifically on labour reforms, perhaps the state of Rajasthan had moved on that but we haven’t seen much action as far as the Centre is concerned.A: You should know that I am in this for a long haul so nothing surprises me or nothing disappoints me. I maintain our optimism, we have to expect to move forward.Q: What is your recommendation on labour today?A: I will tell you -- it is not just Rajasthan. After Rajasthan, Madhya Pradesh (MP) had followed suit. MP had gone a little farther than Rajasthan did. Rajasthan made big jumps but MP took advantage on that and it has gone a little farther. Gujarat is on the way also -- they have made some very interesting changes, some of the changes that I am now recommending also to the other states.Q: Could you articulate that?A: I will tell you but for those changes, the presidential assent is still required for them. However, one of the important changes Gujarat made was that within the special economic zones and the industrial zones etc or manufacturing zones. What they have done is that they would permit a company of any size -- Rajasthan limits it to 300 now, the original limit is 100 but Gujarat has said that in the special economic zones and the manufacturing zones, companies of any size would be allowed to lay off workers provided they pay them sixty days of wage for each year worked. So I think that is a big achievement at least within these special zones.Q: Is this something that you are pushing through the NITI Aayog?A: When I meet the Chief Ministers or state officials, I certainly make them aware of what is happening so more surely, recently one of the senior officials from Telangana visited and I then passed on to him what Gujarat had done and suggested that they may wish to look at what Gujarat has done._PAGEBREAK_Q: What is it that you are working on which are priorities as far as the NITI Aayog is concerned to really push reforms to sort of, you have been in charge of brainstorming now and that is the mandate of the NITI Aayog. What can we expect?A: I will tell you what in the last two or three weeks we have been busy doing. We are looking at one thing is that mandate is very much to work with the states. And I do feel actually that a lot of the reforms that are outstanding can be done in a more expeditious sort of way through the states.Q: The ease of doing business rankings will be put up by the Department of Industrial Policy & Promotion (DIPP) end of this month is what I am given to understand and that will show which state stands where as far as the ease of doing business is concerned. But, since you have been talking and consulting with various State Governments, do you believe that we are going to see significant improvements on the ease of doing business when it comes to individual states?A: I certainly think so. A lot of the things have been done and very recently I actually I was also talking about, with somebody, with one of the industry chambers that is housed in West Bengal, and even they were saying that West Bengal actually had made major changes. I mean, those changes, as they described, excited me sufficiently that I changed my mind and now I am going to visit West Bengal. Q: You should come with us, we are going Inside Kolkata, starting the 14th. We will be there a whole week to try and understand what is really changing in Kolkata. It will be nice to have you there with us.A: Certainly. We will certainly consider that. We will work on it. But, I think we will see the changes. Incidentally on this, since you brought the ease of doing business issue, we at NITI Aayog also, are going to do a big study on ease of doing business. Whereas what the DIPP is doing is to do the survey or interview the officials of the states on what changes they have made, what we are doing, we will go out and survey about 3,000 enterprises around the country in all the states to see how the enterprises see the changes that has been happening.Q: And by when do you hope to complete that survey?A: This is a large survey, so we expect this to be sometime in the summer of 2016.Q: The government has been talking about looking at what is happening with the global slowdown specifically what is happening with China at this point in time and to use this as an opportunity for India to position itself as far as the global map is concerned. But, what can we do at this point in time? And also, what do we do to mitigate, for instance, the currency risk, the volatility risk that we are seeing as far as the currency is concerned?A: Currency risks is not a new phenomenon. We have had these episodes before, we have dealt with these before. And with time, we have only become better and better prepared for it because of our rising foreign exchange reserves. I do not lose too much sleep over it and certainly, we are not in a situation in which we could get into this massive capital outflow crisis kind of thing. That, I certainly do not expect to happen. So, let us rest that. Now, in terms of what India might do as the growth in China slows down, a lot of things have been underway. And we have to keep that process going forward.Q: Let me ask you this. You said the currency volatility does not keep you up at night. You do not feel particularly vulnerable about large capital outflows at this point in time, but what does worry you, what keeps you awake at night if anything at all?A: I work very hard during the day, so I sleep well. No, I mean more seriously, ultimately, we need to have growth accelerate. And that is my main concern because ultimately, through acceleration of growth is how we are going to help the poor, help the farmers, I mean that has been the experience over the last 15 years.Q: Do you think that time is running out; that the window of opportunity is now slimmer than it was 15 months ago to be able to push through some tough reforms in order to get back to the eight percent plus kind of growth trajectory?A: We do not know what the counter-effects are in these cases. I am an eternal optimist, so the window actually might be open wider once we have a change over in the composition of Rajya Sabha. Hence, there will be some changes in 2016 and then with some more changes in 2017. And, as I said, I am here in this for the long haul. There will be a second term of the current administration.Q: You are very clear about that? There will be a second term?A: There may not be my second term, but there will be a second term of the current administration.Q: The three priorities that the NITI Aayog is working on and has the NITI Aayog lived up to your expectation because as far as the general perception is at this point one doesn't really know what has changed at the erstwhile planning commission?A: You are not reading my interviews.Q: I am reading your interview; I am here interviewing you. I said that as a general perception.A: Because I did explain in some detail what we have been doing. So, first we are about to complete the midterm appraisal of the 12th five year plan, that was a large exercise that around this time is usually done in the fourth year.Q: What does the report card look like?A: That we shall see. It is just not out yet.Q: Give us a sneak peak, good, bad, ugly?A: That is something we will see when it comes out. No doubt.Q: What is the deadline?A: Deadline has to be decided meaning that they ultimately it also depends on the Prime Minister. But then we have been working on two task forces which I have chaired, one on agriculture, very high priority for the Prime Minister. Another on poverty, again a very high priority item for the Prime Minister. And then the Prime Minister also on three other subjects that were very appointed sub groups of Chief Ministers; Swachh Bharat, skill development and the third of course has to deal with an immediate issue which is the centrally sponsored schemes. So, those are all well advanced. All five of those plus the midterm appraisal are well advanced. Then we have started a number of other initiatives. I had mentioned to you the ease of doing business. We are also working now with the states on variety of fronts. We have been asked to do the National Energy Policy, we are working on that. We have been asked to study the prospects for electronics industry for Make in India, we are working on that.Q: Through all of this, whether it is agri, poverty alleviation, Swachh Bharat, skill development or the electronic manufacturing policy, so on and so forth. What is it that you see the role of this private sector?A: In many of these things the private sector is very much there. Now since the reforms except for railway private sector is there in every sector. I can't think of - maybe nuclear power is another one where we don't have private sector. Other than that, so, private sector has to be very much there.Q: What would be, for instance, as you go about making your recommendations what would the emphasise be to try and attract more private sector participation, more private sector investment?A: Again I am very eclectic in my approach. So, we need more public sector and we need more private sector. So, there is no issue and our recommendations we will certainly try to move in the direction of private market friendly direction but also the public sector is an important part of the Indian economy and that too we will progress. So, we need forward movement on all fronts.Q: Do you think the pick up that we are hoping for in the Indian economy at this point in time is being held back on account of the stress situation that the banking sector finds itself because of the NPLs?A: No, remember, and this is again a view that I have been advocating well before I came to NITI Aayog that this was a major stumbling block. This is something that the government inherited and it is a tough problem. There is no easy solutions and while at one point I was advocating for an asset reconstruction company (ARC) but that is not an easy thing to do and particularly we have a very limited experience. Already some private ARCs do exist and those have not particularly succeeded. But nevertheless as I said we ought to be open.Q: You believe that it is an ideas whose time has come but the execution and implementation is where you foresee the challenges?A: Maybe, but in the US certainly these have been successfully used, but again this requires a lot of expertise. At the same time, we should not see this as a magic bullet which will loves everything. So we have to wait and see.