 "Measures taken in the past couple of months to contain CAD are working: Arvind Mayaram")
As the economy goes through a rough patch, Economic Affairs Secretary Arvind Mayaram is the man strongly defending it, along with boss P Chidambaram. With some positive indicators in recent days, he says the downturn is temporary and growth will pick up in the second quarter. In an interview with Vrishti Beniwal, he also rules out the impact on markets here of the US Federal Reserve’s tapering of stimulus. Edited excerpts:
Some economic indicators have shown hope in recent days. We saw markets recovering and the rupee appreciating against the dollar. Do you find yourself in a position where the current measures are sufficient and more might not be needed?
I don’t think so. We have to continue to deepen reforms. There is no question of our saying that everything has happened and nothing more should be done. As far as reforms are concerned, we will have to continue to work on those and keep opening the economy more.
What kind of measures can we expect in the short term and long term?
There are a large number of measures; the finance minister has himself spoken on these. We are going to make it friendlier for investors. The Foreign Direct Investment policy has just been announced. Similarly, a number of changes are happening on foreign institutional investments in India and Sebi (the capital markets regulator) is taking several measures on that. The Reserve Bank is looking at other measures. For instance, banks’ capitalisation is now up to 100 per cent through external commercial borrowing. Earlier, it was only 50 per cent as tier-I capital. This is a continuous process.
Is the improvement we have seen in the currency and equity markets temporary, due to what analysts call the ‘Raghuram Rajan effect’? Or is that here to stay?
I have consistently said the sharp depreciation in the rupee was an irrational sentiment. Its intrinsic value is not reflected by the currency markets. It was more a pessimist sentiment which gripped the market. Therefore, there was a huge amount of forward booking on higher rates because of the fear that the rupee was going to further depreciate.
The measures taken by the government in the past couple of months in controlling imports of non-essential items, gold and other things, are working. Credit Suisse, for example, has said the year’s current account deficit might not go beyond 2.5 per cent of GDP, much below the 3.7 per cent we were saying. Exports are improving. Then, there are obviously clear indicators of growth in the coming year. For instance, we are going to have a bumper crop. The growth in agriculture is estimated at almost six per cent this year and this is going to create a huge amount of resource in the hands of those living in rural areas. This, in turn, will give impetus to demand for consumer goods.
Look at the investments going to happen. In the first quarter (April-June), there was an inflow of about $9.1 billion as FDI, against $5 bn in the same period last year. This money, directly flown into projects, is going to be expanded. Cabinet Committee on Investment approvals for projects up to early August were $30.5 bn. In the first quarter itself, public sector units invested $1.16 bn, at least 20 per cent higher than last year. Total capital expenditure through the year will be more than $25 bn. Therefore, I don’t believe the improvements are temporary in nature. In fact, the downturn was temporary.
All independent analysts are saying growth will pick up only in the third quarter but the government is pinning hopes from the second quarter itself.
It is a question of acceleration. We believe the second quarter will be better than the first one but the real results you will see in the third and fourth quarters.
When the rupee hit a record low last month, the finance ministry said it was undervalued. What is the appropriate level, in your view?
I won’t say what is appropriate. The market must determine that, which means the real market. Market imperfections should not reflect the real value of the rupee and the correction is already happening. Analysts say it will be somewhere close to 60 (to the dollar) for the time being and then if exports surge and capital flows pick up, it might even get stronger. We have consistently held that the government and RBI do not target the exchange rate. Our effort is to reduce volatility to the extent possible and that is working.
The (US) Fed Reserve might announce partial withdrawal from monetary stimulus in its meeting on September 17-18. Wouldn’t that again lead to reversal of capital flows?
I think the current indication is that they might reduce it from $85 bn to $75 bn. It is not such a great reduction to warrant any panic in the market. It shouldn’t have any impact because markets have factored that in.
Some economic indicators have shown hope in recent days. We saw markets recovering and the rupee appreciating against the dollar. Do you find yourself in a position where the current measures are sufficient and more might not be needed?
I don’t think so. We have to continue to deepen reforms. There is no question of our saying that everything has happened and nothing more should be done. As far as reforms are concerned, we will have to continue to work on those and keep opening the economy more.
What kind of measures can we expect in the short term and long term?
There are a large number of measures; the finance minister has himself spoken on these. We are going to make it friendlier for investors. The Foreign Direct Investment policy has just been announced. Similarly, a number of changes are happening on foreign institutional investments in India and Sebi (the capital markets regulator) is taking several measures on that. The Reserve Bank is looking at other measures. For instance, banks’ capitalisation is now up to 100 per cent through external commercial borrowing. Earlier, it was only 50 per cent as tier-I capital. This is a continuous process.
Is the improvement we have seen in the currency and equity markets temporary, due to what analysts call the ‘Raghuram Rajan effect’? Or is that here to stay?
I have consistently said the sharp depreciation in the rupee was an irrational sentiment. Its intrinsic value is not reflected by the currency markets. It was more a pessimist sentiment which gripped the market. Therefore, there was a huge amount of forward booking on higher rates because of the fear that the rupee was going to further depreciate.
The measures taken by the government in the past couple of months in controlling imports of non-essential items, gold and other things, are working. Credit Suisse, for example, has said the year’s current account deficit might not go beyond 2.5 per cent of GDP, much below the 3.7 per cent we were saying. Exports are improving. Then, there are obviously clear indicators of growth in the coming year. For instance, we are going to have a bumper crop. The growth in agriculture is estimated at almost six per cent this year and this is going to create a huge amount of resource in the hands of those living in rural areas. This, in turn, will give impetus to demand for consumer goods.
Look at the investments going to happen. In the first quarter (April-June), there was an inflow of about $9.1 billion as FDI, against $5 bn in the same period last year. This money, directly flown into projects, is going to be expanded. Cabinet Committee on Investment approvals for projects up to early August were $30.5 bn. In the first quarter itself, public sector units invested $1.16 bn, at least 20 per cent higher than last year. Total capital expenditure through the year will be more than $25 bn. Therefore, I don’t believe the improvements are temporary in nature. In fact, the downturn was temporary.
All independent analysts are saying growth will pick up only in the third quarter but the government is pinning hopes from the second quarter itself.
It is a question of acceleration. We believe the second quarter will be better than the first one but the real results you will see in the third and fourth quarters.
When the rupee hit a record low last month, the finance ministry said it was undervalued. What is the appropriate level, in your view?
I won’t say what is appropriate. The market must determine that, which means the real market. Market imperfections should not reflect the real value of the rupee and the correction is already happening. Analysts say it will be somewhere close to 60 (to the dollar) for the time being and then if exports surge and capital flows pick up, it might even get stronger. We have consistently held that the government and RBI do not target the exchange rate. Our effort is to reduce volatility to the extent possible and that is working.
The (US) Fed Reserve might announce partial withdrawal from monetary stimulus in its meeting on September 17-18. Wouldn’t that again lead to reversal of capital flows?
I think the current indication is that they might reduce it from $85 bn to $75 bn. It is not such a great reduction to warrant any panic in the market. It shouldn’t have any impact because markets have factored that in.
About sovereign bonds, the Finance Minister had said it was an option. Would you consider that in the current circumstances?
Every option is on the table. But if your question is ‘Is the government considering issuing sovereign bonds’ the answer is ‘no’. At this point in time I don’t think we need it. Sovereign bond is not issued for shoring up foreign exchange reserves. These are issued for benchmarking Indian bonds.
When you issue a sovereign bond it is like a G-Sec which is the benchmark based on which the corporates are able to go to the market and raise money. Similarly in the international market there is lot of demand from the Indian corporates that sovereign bonds should be issued to create a benchmark.
But then it is not a one-time sovereign bond you issue. Then you decide to issue it for a couple of years so that a proper index is created. That is always done in a stable market. Today global markets are not stable. Therefore as of today the government is not thinking of doing it.
The finance ministry is quite confident of meeting the fiscal deficit target. Where do you get this confidence from in an environment where disinvestment is not happening and tax collections may be less than Budgeted?
This is exactly the question people asked us last year. As far as fiscal deficit is concerned all questions should be put to rest because we shall not exceed 4.8% of the GDP.
Does that mean the solution to the problem is also the same—a cut in Plan expenditure?
If the growth is in the manner in which we are seeing it happening then certainly it may not be required. Because of the receding threat of Syrian war oil prices have started going south. So if oil prices don’t increase too much and the rupee becomes stable then those measures may not be required to that extent. But whatever is needed we will do.