As Standard & Poor's (S&P's) and Fitch warned India on cutting its sovereign ratings to junk, chief economic adviser Raghuram Rajan says there is no point in grudging that India’s ratings are on par with debt ridden European nations. He tells Indivjal Dhasmana and Vrishti Beniwal that India should convince these agencies that it is an investment grade country and would remain so. Edited interview:.
The rating agencies have put India on par with debt-ridden economies of Europe. The Finance Ministry always objects to that. What is your take on these rating parameters?
There are many things a rating agency takes into account. We can pick one or two and say we object to this or we object to that. But, the task is to convince them taking the entirety of Indian picture that we are an investment grade country and will continue to be so. So, I think that basically the objective is not to say that you rate country A on this parameter and you rate us on that parameter, how can you be so unfair? They might say these countries in Europe have some sort of support from Euro area, India does not have that. Whatever be the reasons, our job is not to question their job. Our job is to say look we are a healthy country for so and so reasons and look at how we are over the medium term and that is what you should be thinking about when you rate us.
Despite FDI reforms and measures taken to rein in fiscal deficit, S&P has cut India's growth forecast from 6.5% to 5.5% for 2012-13. Do you think reforms undertaken by the government have not convinced the rating agency?
S&P lowered the growth forecast partly because it was at 6.5%, while most private investment banks have already lowered it to 5-5.5%. So, S&P was an outlier. At the first glance, it does not appear that S&P lowered the numbers because of the new information that came in. It was basically trying to update its forecasts. Don't expect people to upgrade forecasts of their growth dramatically for this year. We should give them incentive to see growth coming in medium term.
Critics say FDI reforms and fuel price corrections announced by the government are no reforms but incremental policy changes. Your take?
Call them whatever you think, that is semantics. The actions are important for pushing the economy forward. Reforms just don’t mean legislative changes. We have capped the number of LPG cylinders, that is what traditionally called reforms. Opening up of FDI was always called reforms.
India's GDP growth declined to 6.5% in 2011-12, lower than 6.7% in the crisis period of 2008-09. This fiscal, the growth is not looking any better. Are we back to the crisis period?
The potential for damage in 2008 was greater because of the fears that the world economy would be tanking, that we will see great depression again. The level of anxiety in 2008 was higher than now because it was not clear how bad things would get. Lots of 2008 effects were because of external factors, this time it is combination of external and internal. In terms of what policy needs to do, this time probably policy has to do more. Then, you could just try to stabilise the financial sector because there was pressure on financial sector. But, fundamental growth impetus was quite strong that time. You saw it in the recovery.
And what factors will you include in domestic reasons?
The most worrisome is that corporate investment has fallen considerably. Both public and private sectors have seen slowdown in the number of projects initiated. It is a source of worry. How do you get investment sentiments up so that people start putting in projects. Obviously, part of the answer is you have to remove the bottlenecks they are worried about-- permisions, land acquisitions. First, you have to get existing projects going which have stalled, sometimes because of coal linkage, sometimes for other reasons. But, down the line you also have to create environment where new projects will start in much greater volume. For that, we need to give investors more confidence. Some of the measures that have been taken will help and hopefully clearing the path for old investments will also convince them.
Policy changes that are being attempted-- be it on GAAR or retrospective amendments -- may give a positive signal to investors. But, these measures were defended in Parliament and changing them in between may also give signals that India would attempt policy changes mid-way whenever pressures come in.
I don't think, these moves necessarily imply change in policies. I think, the big concern about measures like GAAR was that investors want clarity as to how would it apply, when it would apply and who it would apply to. What we are trying to do is to give them more certainty about the circumstances, time when it would apply etc. I don't think there is any way a desire to basically reverse the whole thing. Say, Direct Tax Code, there is certain language on this. So, think of it as a process of clarifying--what the government intent is and giving the international investor more certainty.
Your predecessor Kaushik Basu has advised you not to waste your energy on the small issues and matters; in fact, be prepared to lose. But dig in your heels quietly but firmly on a few matters which are important.
There are various ways of taking it. My own sense is that there are lots of small things that can be done, which can together add up to very big things. At the same time, my job as a Chief Economic Adviser is to tell the government very clearly what I think economics says and when it is at odds substantially with politics, my job is to emphasise economics. The decision will ultimately have some political elements to it. What he meant by dig in your heels, he means when there are big economic consequences of decisions, make that very clear. That is very good advice.