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Last Updated : Jan 15, 2015 10:36 PM IST | Source: CNBC-TV18

RBI's rate cut signals turn of economic cycle: Jayant Sinha

The Reserve Bank of India Thursday surprised everybody by cutting repo rate by 25 basis points to 7.75 percent from 8 percent, ahead of its February 3 policy review.

Stating that the government is following prudent fiscal management, Jayant Sinha, Minister of State for Finance, said the credit for rate cut should go to the political leadership, the Prime Minister and Finance Minister.

The Reserve Bank of India Thursday surprised everybody by cutting repo rate by 25 basis points to 7.75 percent from 8 percent, ahead of its February 3 policy review.

In an exclusive interview to CNBC-TV18’s Shereen Bhan, Sinha said the rate cut ahead of the due date signals turn of economic cycle. He feels the government’s commitment to reforms get amplified by the move.


Stressing on building the productive capacity of the country, Sinha said the government has been trying to work through supply bottlenecks. He said the central bank will follow suit and take appropriate action based on economic data.

Sinha is hopeful of achieving the fiscal deficit target of 4.1 percent of the GDP, but feels the quality is more important.

He said the government has been working towards improving infra like power to help manufacturing, but it also needs to look for new sources of equity capital for capex.

We have put effort to monitor, restart stalled projects, Sinha said, adding that improvement in infra is a must to revive growth in sectors.

Below is the transcript of Jayant Sinha's interview with Shereen Bhan on CNBC-TV18.

Q: I can see there is an air of happiness here in North Block and clearly your powers of persuasion seemed to have worked as far as Reserve Bank of India (RBI) is concerned. I won’t use the word pressure hence I am using the word power of persuasion because the governor had made it very clear in the December policy that he would wait to see what the trends on inflation look like and he would wait to see what the data on fiscal consolidation looks like and that gave the street the sense that if there is an out-of-turn rate cut or out-of-policy rate cut, it would perhaps happen post the Budget and ahead of the April cut. A fortnight ahead of the next credit policy, which is on February 3, the RBI decides to act is this because of the sustained campaign of North Block to get a rate cut.

A: I think it is all about the power of leadership and in fact as you know, we have been sent here to do the people’s business and the people’s business is to get the economy moving, to transform the economy and to give better life for all of our people and we have been living in that regard.

If you look at the unprecedented set of measures that we have undertaken perhaps moreso than any government and I would say perhaps even moreso than the government of 1991 with the IMF gun to the head where they had to liberalise and open the economy up, what we have done in sector after sector whether it is in coal, whether it is in mining, whether it is with goods and services tax (GST), whether it is with the planning commission, whether it is what we are doing in the banking reform, while at the same time pursuing prudent fiscal policies saying that we are committed to sound economic management, fiscal roadmap of 4.1 percent, 3.6 percent, 3 percent that is how we have lead and when we lead then obviously all the other institutions follow.

Q: So credit for this out-of-policy rate cut should be given to North Block?

A: I think the credit should go to the political leadership, to our honourable Prime Minister and Finance Minister.

Q: You are very clear about it that it should go to the political leadership?

A: You have to understand the institutional environment in our democracy. You have to understand the institutional environment. In the institutional environment, parliament is supreme, the Prime Minister and the cabinet are supreme and we have to do the work that we have to do to move the economy forward. The RBI has a singular purpose, which is to pursue monetary policy, to ensure that the financial system is sound and if we put the right conditions in place, obviously then the RBI as a professional institution will follow suit. As I said in some of my previous interviews that the RBI of course is an extraordinarily competent and professional organization, they are data driven, they are fact based and if the data and the fact present themselves appropriately, they will take appropriate action, which is what they have done.

Q: They have taken appropriate action and I know because we reported this just yesterday that the North Block and the Finance Ministry believes that the RBI governor should not wait till February 3 but a fortnight ahead of the credit policy, would it have mattered so much as far as the investment sentiment or pick up in the investment cycle is concerned?

A: I think it is very important to set the stage and the reason why this particular action has been so heartily anticipated and subject to so much attention from people like yourselves and other media outlook is just because it is not just a rate cut. It is the turn of the cycle and that is what is important here. What we have demonstrated now is that the economic momentum that is picking up, the investments that are coming in, the confidence that has been built on the fiscal policies that we are pursuing there, the commitment that we have demonstrated to economic reform, that signal has now been fully amplified by the RBI in terms of the rate cut and so the economy is moved through an inflection point. That is why it is so profoundly important.

Q: What is now the expectation as far as February 3 is concerned and then the next credit policy, ahead of the Budget and post the Budget, what is the expectation of the Finance Ministry and the political leadership has as far as rate cuts are concerned?

A: We have a job to do for the people of India and the job that we have to do for the people of India is to continue to position the economy to create millions and millions of new jobs to get through that growth trajectory that we have talked about, which is 7-8 percent growth trajectory, which is non-inflationary and is sustainable from an environmental and an ecological perspective. To do that as I have said many times before, what we have to do is we have to build India’s productive capacity. If we build India’s productive capacity and work through the supply side bottlenecks that we have been facing, the near balance sheet recession that we have had, the debt overhang that our banks have had -- if we work through those serious and difficult problems then of course as I said, we lead and others will follow.

Q: How much would you like the RBI or do you believe that the stage is now set at least for 50 bps to 75 bps cut, do you believe that the policies that the government has undertaken where inflation currently is at, where crude prices are, do you believe that we are on course to at least see a between 50 bps and 75 bps cut?

A: The data will tell us. So we have to wait to see how all these trends play out and what is achievable with respect to investments and obviously working through the difficult challenges we have on the non-performing assets (NPAs). As long as we work through all of that, I think the rate cuts will follow suit.

Q: We have the Budget coming up next month and the sense one gets is and this is something the Finance Minister has stated several times including to us just last week that 4.1 percent is sacrosanct as far as the fiscal deficit number is concerned, the roadmap that you would laid out, do you believe and do you feel confident on the back of where you see tax collections or where you see global factors, where you see domestic factors that you are going to be able to maintain the fiscal deficit target not just 4.1 percent but the roadmap that you would set out for yourself?

A: Those are exactly the right questions and the fact is that while the numbers are always achievable and we have seen in the past how those numbers were achieved, it is not just a question of achieving the numbers, the quality of the numbers, the integrity of the accounting that stands behind them, those are equally if not more important because you can rip through the numbers very quickly and establish what is happening with the economy and the fiscal policies that we are pursuing. So it is very important for us to be able to achieve that roadmap that you have just laid out in the highest quality way possible, that is what we are working towards.


Q: So as far as 4.1 percent fiscal deficit number is concerned you are short on disinvestment as of now and it looks daunting that you are going to be able to come closer or achieve the disinvestment target that you set for yourself. What happens then cut back as far as expenditure is concerned and then this business of trying to rave up the economy by pushing investment especially on infrastructure and so on and so forth should those hopes be put to rest for now?

A: You are asking me to talk about the Budget before the Budget. You will have to wait and see. We have all been quite clear whether it is the honorable Finance Minister, whether it is the Chief Economic Advisor or myself in many of our comments is to what fundamentally we are trying to achieve not just with the Budget because the Budget is just one milestone in a continuous process of our working in economy. 

Q: I am not talking about the reform agenda but I am talking about an expenditure cut back at this point in time because as you are saying the imperative is really to get the economy growing. The imperative at this point in time is to kick start the investment cycle. The hope is that the government perhaps is going to take a leadership even as far as that role is concerned. Is that hope going to be put to rest at least for now given the fiscal constraint? 

A: You will have to wait and see for that we are working hard on the Budget and we hope to able to answer all those question at that point. 

Q: The hope once again is that the Budget will in fact stoke those growth measures. Manufacturing sops related to manufacturing special economic zones (SEZs), tax related issues, minimum alternate tax (MAT), dividend distribution tax (DDT), and so on so forth. Should we be hopeful of significant measures to address some of these tax related concerns to boost manufacturing? 

A: I would answer that question in terms of first principals what are we really trying to accomplish whether it is manufacturing or whether it is infrastructure. There are three or four important aspects to that. The first and the most important aspect to that is the infrastructure has to be there to support manufacturing and to support the natural growth of the economy. So we are taking a number of very important measures starting with power where we are really looking to build up the infrastructure and to be able to establish the platform for manufacturing growth. That is one very important aspect the infrastructure has to be there. 

Number two aspect that we have to put in place is we have to ensure that new investment comes in whether it is in manufacturing or in infrastructure. We have to provide new investment coming in and we know what the situation is right now with respect to balance sheets of the large business group and so on. So we effectively have to find new sources for that equity capital to come in and get new projects started so that is second very important aspect that we are working on. 

The third very important aspect that we are working on and where we think in fact that you are going to see an immediate sort of movement in terms of the economy and the stimulus for the economy is in the stalled projects. There you know that we have put a very significant effort through the Prime Ministers office to monitor those Rs 18 lakh core stalled projects. As well as taking appropriate policy action whether it is through the coal ordinance or whether it is the land acquisition ordinance to actually get those projects moving as well. So that is the third aspect which is to be deal with these stalled projects. 

Then the fourth is which helms a much more benign rate environment and because once that liquidity starts to come in and you find that the pressure on the income statement comes down because of being less as far as debt is concerned then you are in a position in fact to free up much of the balance sheet and income statement pressure that we are facing and really move the economy forward.

Q: Let me address the fourth issue first and I know there is been meetings with banker. In fact there is one slatted for later this afternoon, later this evening as well. Are you nudging banks to transmit the rate cuts that is been announced by the Reserve Bank as aggressively as well. Because the sense once gets is that there is pressure or again powers of persuasion being used to get banks to at least provide for 50 basis point lending rate cut?

A: The Ministry of Finance North Block does not nudge anyone. We have lots of independent institutions which are very capable, very competent to make the right decisions. Our job is to put in place the enabling environment, to be facilitators. As we do so, as we lead in that regard as I said appropriate action across the market economy will happen, this is what will happen I am sure. 

Q: Public sector undertaking (PSU) banks are the banks that you lead so how much are you likely to ask them to cut rates by? Is it likely to be in the vicinity of the 50 basis points which is what we are given to understand is the communication that the Finance Ministry formally chatted with the banks about?

A: We are shareholders and we have been very clear in saying that banks have to make commercial decisions on the basis of their own commercial logic. We have in fact put it out in writing that they the operating autonomy and that they should exercise the autonomy when it comes to making those decisions. That is how it should be, that is how a market economy works. I am very hopeful that they will take into account all of these commercial factors and then make the right decision. 

Q: Let me ask you about global factors because at this point in time oil prices and the collapse that we have seen in the crude oil has certainly been of great benefit to India. It is impacting economies like Brazil and Russia and some other markets negatively at this point in time. What worries you as far as the global markets are concerned and global factors that could have an impact or potential impact on India? As far as oil is concerned the kind of cushion that you will enjoy because of the oil subsidy bill coming down significantly the impact of that on both the current account deficit and the fiscal deficit?

A: Right now as far as India is concerned in some ways we could potentially have not asked for a more benign external environment. There are obviously challenges in terms of global growth; we are seeing quite a lot of weakness as far as Gulf is concerned. Certainly Russia is hurting and so on and so. There is sort of a situation where we would have like to have a more global economic growth of course. In terms of India’s particular situation and that stems from the very high import bill that we have with respect to oil. To see that down by 30-40 even perhaps 50 percent is an extraordinary boost to our economy given our particular situation as oil importers. So in that sense it is a very positive environment for us externally speaking.

At the same time we see very clearly that whether it is the European Central Bank (ECB) or the Bank of Japan (BOJ) and even the Fed which has taken a very sort of guarded view of raising rates right now. We have situation historically low cost of money so there is plenty of capital, commodity price are coming down and we are a net commodity importer particularly with respect to oil. In that sense the external environment for us is a benign environment is very much in our domain now to really be able to accelerate and move growth forward. 

As I said earlier with the leadership that we have in place the signals that we have sent out we are open for business. You saw what Vibrant Gujarat was like you see the positive sentiment that exists around the world for India. I was meeting with the Minister from Australia and he said something that I thought is quite important and interesting. All of us Indians do not really realise that how important what is happening is India is and how the world is perceiving us. He said that this is one of the greatest stories of human history to see India take 500-600 million people out of poverty which is what we can do over the next few years. To do that in a democratic way, in a dignified way that is really the adventure, that is really the journey that we are on and as I said we see this turn in the cycle as allowing us to be able to do that well.

Q: Let me come back to the mundane and which is stuff related to subsidy sharing mechanism, which we have heard so much about for the last several months ever since this government came to office about being able to rework the subsidy sharing mechanism, companies like Oil and Natural Gas Corporation (ONGC) are sending SOS after SOS given where crude prices are currently headed, has there been any breakthrough as far as the subsidy sharing mechanism is concerned because that would then impact the disinvestment of ONGC as well, has there been clarity, finality on that issue?

A: I wouldn’t say there has been finality on that issue. Of course that is a matter that is under serious consideration and we are discussing that. Obviously our goal is to be able to place our oil marketing companies (OMCs) on a sound footing, establish a very appropriate and robust way for them to be able to undertake their business activities and at the same time remove some of these distortions that have become quite extreme for them.

Q: Clarity expected on this front anytime soon or you believe that the road ahead continues to be uncertain?

A: We will have to wait and see on that.

Q: On disinvestment, a big ticket disinvestment candidates like ONGC and Coal India, do you believe that they are going to go through this fiscal, the finance minister speaking with me last week said that he expects a lot of action on the disinvestment front but will we see a lot of these smaller issues being pushed through or do you believe that big ticket ones will have to wait?

A: You don’t expect me to answer that question, you know I have been in the capital markets for a very long time. I am certainly not going to answer that question.

Q: But a likelihood of that you believe that we are going to see the big ticket disinvestment goes through this fiscal?

A: We will have to wait and see, won’t we?

Q: Let me ask you about the Gyan Sangam and banks since we are talking about rate cut cycle and transmission. There was a lot of talk about autonomy, reforms, the move towards reform, the move towards consolidation, how soon are we going to see all of that picking up?

A: Again as we said, our job as a shareholder and as a facilitator is to put in place the conditions and give people the autonomy to make the right decisions. What we want to do is to make sure that we have empowered boards in each of these public sector banks and that these empowered boards go through the process of figuring out for themselves what the right strategies are and what the right actions they should undertake. So the right way for this to happen is to happen bottoms-up that each of the banks for themselves figures out what is the right course of action. After all when Kotak bought ING, it was the two boards sitting together, figuring out what the economics and what the rationale for the merger should be, whether the merger would be value creating merger and whether the two entities could be put together. So it was a decision made at the board level and that is where these decisions should be made.

Q: Do you expect consolidation to kick-start as far as public sector banks are concerned?

A: I think what we will see in the overall financial system is a number of important changes. Consolidation is one of them but you also know that the RBI has undertaken something which again is part of the overall reform agenda, which is differentiated banking licenses on-tap. So we will see payment banks, we will see small banks, we will see potentially more foreign banks coming in, certainly we will see more bank licenses so there is going to be a lot of changes, all for the better because we need to deepen and expand capacity across the financial system and we have to do it in a differentiated way because we need different types of financial institutions to play different intermediary roles. So we will see all of that happening and as part of that process of evolution and development and deepening of the financial sector certainly consolidations are going to happen. We have already seen that with Kotak and ING.

Q: Let me ask you a question about the measures that were undertaken at the previous Budget things like real estate investment trust (REITs) and you did announce some tax incentives and so on and so forth hasn’t kick-started, it hasn’t taken off, you have had representations being made in terms of what ought to be done now as far as REITs are concerned, are we likely to see more clarity emerge, any changes being made to the incentives that were announced for instance for REITs?

A: We have received a lot of representations about certain aspects of the taxation of these REITs and infrastructure investment trusts that are counter productive and that are getting in the way of these vehicles taking off. So obviously those are under advisement we are considering those very seriously.

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First Published on Jan 15, 2015 01:42 pm
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