‘Limited Space for Fiscal Stimulus’

Some unpopular measures are needed to stimulate economic growth, says C Rangarajan, chairman of the Prime Minister's Economic Advisory Council. But any cut in subsidy should be balanced with investment in capacity creation, the former central bank chief tells ET's Deepshikha Sikarwar, Vinay Pandey and Shaji Vikraman. Edited excerpts from the interview:  Is there scope for fiscal stimulus? Can the proceeds from spectrum auctions be used to stimulate growth?  At present, we do not have the kind of fiscal space we had in 2008. To contain the deficit at the budgeted level, it will require policy decisions with respect to subsidies. Therefore, the scope is less limited. Any additional revenue generated can be utilised to keep fiscal deficit at the budgeted level. The real question, however, is composition of government expenditure. Reduction in subsides should be compensated by appropriate increase in government expenditure in capacity creation. Fulfillment of capacity creation and production targets in some key infrastructure sectors in the public domain, such as coal, power, roads and railways, will act as a stimulant for private investment and economic activity.  What policy decisions will the government take to boost growth?  The government has provided about . 43,000 crore in the budget for petroleum products. Now that will be inadequate if prices are not raised. With references to LPG and diesel, some action is called for. It is clear that some of these actions will be unpopular, but nevertheless action is required. A proposal being debated is one under which a fixed number of LPG cylinders will be given to households at concessional rates. Beyond that, cylinders would be sold at market price. In the case of diesel, it is difficult to implement a system of dual pricing. A modest increase in price becomes necessary. So these are decisions that need to be taken at the appropriate time. The recent reduction in crude prices gives us some space and enables the price increase to be more modest.  What steps are being considered to fix factors that have constrained growth?  In the areas of coal, power and roads, certain targets have been fixed. Last year, for example, coal production fell for a large part of the year, and for the year as a whole, the rise in coal production was modest. Mining and quarrying showed negative growth last year. Therefore, if we are able to meet targets set for coal, power and roads, we will make a definite impact on the economy.  What is holding back growth? Is it policy paralysis?  We came out of the impact of the global financial crisis quickly. And for two years we grew at 8.4%. It's only last year that growth fell to 6.5%. The explanation for the fall in growth rate last year can be traced to several factors. There have been supply bottlenecks; critical among them are coal and power. There has also been a weakening of investment demand. So we need to address both to raise the growth rate. We must remove supply bottlenecks in critical areas. As for weakening investment demand, one of the contributing factors is high inflation. When inflation is high, it is difficult to lower nominal interest rates, and that impacts investment decisions. If inflation shows a downtrend, there is a possibility of the monetary policy getting easier. And if the investment sentiment has weakened because of the actions of the government, then we will look at them.  In terms of monetary policy, the RBI is the only outlier. Do you think the time has come for being ahead of the curve and for easing, since there are warnings on growth?  We are an outlier, but we have a problem that they (other countries) do not have. Many of them have slow growth, but they also have low inflation. We have slowing growth, not low growth, which is distinct, and high inflation. We have never tolerated 9% inflation in our country; therefore, I am hoping that inflation, more particularly non-food manufacturing inflation, will show some decline. It will give the required space for monetary authorities to act.  Current account deficit remains high and capital flows are not picking up, and one can see the impact on the rupee. The recent steps announced are seen as a short-term solution to a much larger problem...  The CAD exceeding 4% is very uncomfortable. Two or three factors have played a big part in pushing up the CAD. Contrary to expectations, crude oil prices remained high during the year. Import of coal was also fairly large because of the decline in domestic production. We also had a very large import of gold, which was being treated as a hedge against inflation. These factors will be in the reverse direction in the current year. Inflation is likely to be lower, which could drive down its import. Domestic coal production may improve and crude oil prices may stay lower. Therefore, we can expect to see the CAD at a moderate to lower level in the current fiscal. Over the past several years, we have had no problem in financing CAD. Even in recent years, we have been able to add to our reserves to a small extent, but last year this did not happen. Although capital flows over the year seemed to be reasonable, they were not continuous. There were periods of mismatch between the CAD and capital flows, and that resulted in the rupee's depreciation. We would certainly like capital flows to come in the form of FDI or in forms other than debt. But it is not always possible to insist on only non-debt capital flows. Therefore, our medium-term objective should be to encourage capital flows that are permanent in character, which have also a beneficial effect on the economy in terms of capacity creation.  Is the government considering steps to boost inflows?  The measures being talked about are FDI in multi-brand retail and aviation. Both have been proposed and both have been considered. And I think we should take a step forward in both. We can create safeguards with regards to both. For instance, in the case of FDI in multi-brand retail, states can be given the option to disallow it in their jurisdiction.  You have always supported new banking licences. Do you think that is still the way forward?  There is scope for more banks to come in, as they come with new ideas. But, regarding the number and the kind of entities that can be permitted, it is something the Reserve Bank has to consider. If old regulations are inadequate, they must be modified. Otherwise, the Reserve Bank can also consider using old regulations, on the basis of which it can give new licences.  Two issues that have affected investor sentiment are GAAR and retrospective tax. Can investors look for clarity on these?  I think GAAR has a history. It was included as part of the direct taxes code. When it was circulated, it did not invite comments. The original purpose of introducing GAAR was to bring in certainty and clarity. Now it is being argued that it will lead to the opposite. All that I can say is that guidelines have been issued and some clarifications have been issued. They have been put up on the website. Once public opinion is known, these guidelines will be suitably modified. They were introduced to preempt taxpaying entities from creating structures that are intended to defeat the very purpose of taxation.  Mauritius has offered to incorporate LoB (limitation of benefit) in the treaty. Could that be a way forward to providing certainty to investors coming in from that country?  I think it is under discussion now. I do not want to anticipate what negotiations will result in. Basically, our concern is that the Mauritius route should not be used for tax avoidance. If the Mauritius route is taken to encourage investment flow, that is the very purpose of the thing. In that context, LoB has been thought of. At what level and what kind of structures, that will have to be discussed.  Do you agree with the suggestion of a duty on diesel cars?  The suggestion has been made because there has been a delay in increasing diesel prices. I think it is best to find ways to raise the price of diesel directly.  What is your view on overseas bonds, such as the Resurgent India Bonds?  I think raising money through issue of bonds is one way of augmenting capital flows, but the timing is important. While this option should be kept in view, a good time may be sometime later, rather than now. I think the rupee needs to stabilise at some level before we can talk about this. But this is an option that can be looked at.  So, should it be quasi sovereign or through sovereign?  We had done this before as a quasi-sovereign and we have never done it as a sovereign bond. Since that route is known, we can follow it. But, as I said, the timing is not just now. C RANGARAJAN  CHAIRMAN, PRIME MINISTER'S ECONOMIC ADVISORY COUNCIL