‘There can’t be painless adjustments’
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Our biggest concern has been, and will continue to be, maintaining the current pace of expansion of the economy, if not accelerating it. There’s a view that the growth momentum of the past five years is running out of steam. I don’t agree. India’s current run of growth is structural rather than cyclical. In the short-term, our central concern is reining in inflation. In a democracy, an inflation rate of 8.75 per cent raises serious challenges.
Which indicators are you watching closely? What are they telling you?
We are watching the inflation numbers and the underlying trends closely to see where the pressures are coming from and how best to manage them. Managing inflation without hurting the growth prospects is a delicate balance. People often ask about the priority between growth and inflation. There is no doubt that managing inflation is the top priority. We are also monitoring investments, both domestic and foreign. We are looking at the investments in the pipeline. Investment intentions seem to be firm, notwithstanding the global downturn. India’s current investment-to-GDP ratio is about 37 per cent. We need to raise that further, while improving the productivity of the economy so that the same investment generates higher growth.
Another variable we are tracking is the exchange rate — a double-edged sword. An appreciating rupee is good for imports, and allows the government some fiscal space. A depreciating rupee is good for exports.
Name: Duvvuri Subbarao
Batch: IAS, 1972
Cadre: Andhra Pradesh
Education: IIT Kanpur, MS in Economics from Ohio State University, Humphrey Fellow at MIT and Ph.D in Economics from Andhra University
Secretary to the Prime Minister’s Economic Advisory Council, Lead Economist at the World Bank, Joint Secretary at the Department of Economic Affairs
What about the small and medium enterprises (SMEs)? Banks are reporting credit defaults by SMEs.
We have not heard of significant defaults or of any scaling back of investment in the SME sector. I must admit though, that we do not track individual SME investments as much as we do large projects. Some defaults are inevitable. We should worry only if the default rate exceeds the norm.
What’s your view of the RBI’s rising-interest-rates monetary policy?
A:Let me make it clear that the RBI enjoys independence in monetary policy. I believe their recent decision to raise the CRR and the repo rate are appropriate given the current high levels of inflation.
How much will the rising global food and oil prices impact the subsidy bill?
A:There will be a significant increase in the subsidy bill as well as in the quantum of bonds that we may have to issue. We will table the figures in Parliament.
Is it an alarming escalation? How will the government foot the bill?
I won’t call it alarming, but the bill is going to be significantly higher than the budget estimates. When oil prices go up as they have, there’s no painless way of making adjustments. I will be less than honest if I claim we can get by with marginal tweaking.
What would be the fiscal implications of more bonds?
By way of increasing the liability of the government, as also the debt servicing obligations on a continuous basis. There will be an impact in the credit markets. We have got into this practice of showing liabilities not accompanied by immediate cash outgo below the line.
Admittedly, this is a questionable practice, but it has been going on for several years now. In acknowledgement of this, the finance minister has indicated he will seek a revised road map for fiscal adjustments from the Thirteenth Finance Commission (TFC).
So it would be for the next dispensation to bring the deficits above the line?
The TFC report is expected in October 2009, after the general elections. The new government will have an obligation to improve the transparency of fiscal accounting.
What sources of revenue can the government tap now? Disinvestment?
Auction of 3-G spectrum is a potentially sizeable source. The Department of Telecom is working on resolving the outstanding issues before going forward to auction 3-G spectrum. Substantial disinvestment proceeds beyond what is indicated in the budget are unlikely.
Isn’t this a good time for tough steps on plugging the delivery mechanism?
Governance reforms are central to second-generation reforms, which are a continuous endeavour. The Centre could push the first-generation reforms, macro-economic in nature, by itself. The second-generation reforms need to permeate through the states and the district administrations. I understand there is improvement in the delivery of social services and accountability systems. Nevertheless, there’s a long way to go.
(Businessworld Issue 24-30 June 2008)