Most of the work on the Mid-Year Review was complete when Cornell University professor Kaushik Basu joined the finance ministry as Chief Economic Advisor in December last year. Effectively, this is Basu’s first Mid-Year Review and he preferred calling it the Mid-Year Analysis. Basu is also trying to change the design and format of the Economic survey and will bring more analysis into it. In an interview with Vrishti Beniwal, he discussed the broad areas mentioned in the Mid-Year Analysis. Edited excerpts:
Why did you call it Mid-Year Analysis? How is it different from Mid-Year Reviews in the past?
A large part of it is review, commenting on the state of the economy and giving the facts that we have. This year, we decided to take it a little bit further, analytically. It is not quite as analytical as the Economic Survey is, but there are lots of discussions floating ideas. For example, there is a debate on issues involved in microfinance — what are the pros and cons, how the government should intervene if it does. On a sensitive topic like capital flows, we have discussed whether there was a need to restrict the flows. There is a discussion on big fiscal inflows like the 3G auction money – do you spend it or you put it in a fund, what are the options before the government. This kind of analysis usually does not appear in the Mid-Year Review. Next time, we will try to provide even more analysis.
Your growth projection is higher than what others have forecast. Planning Commission Chairman Montek Singh Ahluwalia said he would stick to 8.5 per cent GDP growth projection for this year. Prime Minister’s Economic Advisory Council Chairman C Rangarajan also said the growth would not be more than nine per cent. From where do you get the optimism?
We are giving quite similar figures. We gave 8.5 per cent in February and stuck to it until recently. But the second quarter data, along with some other pieces of information, makes us feel the economy is doing a little better than what we had anticipated. The International Monetary Fund is forecasting 8.8 per cent for India, which is close to our forecast. We are expecting a bounceback in agriculture and manufacturing. Services, we don’t know, because it is driven by the global scenario. If services do well, we can cross nine per cent. If services do badly because Europe and the United States are doing very badly, then we will be back to 8.4 per cent.
How much growth should we expect in the next two quarters?
It will be difficult to give exact numbers, but as long as the second and third quarter growth is about 8.6 per cent or so, we will make it to 8.75 per cent. If you have to reach nine per cent, then the second half growth has to be faster.
What kind of performance can be expected from the agriculture sector in the second half of the year?
Agriculture has already done well. The third and fourth quarters will be even faster, for the reason that the net area sown is more or less the same this year as last year. But last year after the area was sown, we faced one of the worst droughts. This year, the rainfall is two per cent more than the average. There were some regional imbalances, like the Northeast did badly while the rest of India performed well, but generally, with the monsoon having been good we should see a substantial bounceback in the next two quarters.
Your earlier GDP forecast for 2011-12 was nine per cent. Would you also revise that?
This year’s growth buoyancy is partly coming from the base effect. Next year, there is no reason to expect that to happen. Even nine per cent next year is phenomenally good performance.
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With the economy in good shape, is this the time to increase tax rates and roll back the stimulus?
We did make a plan that stimulus would be slowly folded down. Last year, fiscal deficit was 6.7 per cent. This year, we are aiming 5.5 per cent. Next year, we are hoping for 4.8 per cent and year after that, 4.1 per cent. So, it’s a slow rollback of the stimulus and I would like us to stay exactly in that form. We are collecting comfortable revenues right now and there is no obvious case for raising the rates.
This year, we got some windfall gains. What will the government do next year?
This year we had 3G money, so we made some special expenditure. Next year we will not make that expenditure. You have to keep in mind that raising tax does not raise revenue. At times, raising tax means the activity shrinks and total revenue goes down.
Do you expect disinvestment proceeds to be buoyant next year as well?
We have targeted Rs 40,000 crore next year as well. It will be little harder than this year. But I expect we will get it.
While you are projecting the economy to do well and inflation to come down, the industrial output data for two consecutive months was not encouraging. So what should be the monetary policy action?
I’m expecting a much better IIP figure on the 12th of this month. Manufacturing should see a big revival. Inflation is tapering. So, the whole economy is beginning to look very good. Nothing dramatic has happened since the last review of the monetary policy. I cannot comment on policy action.
Do you expect the liquidity situation to improve soon?
Short-term liquidity seems to be tight. Lot of borrowing is taking place from the repo window. Recently, there were open market operations by the Reserve Bank of India to balance that out. The government cut its borrowing a little bit to allow more money to be there. Also, if the government spending goes up, which happened very often in the last months, the credit situation eases a little bit. I expect these measures will make sure this is not a long-run feature of the economy.
The Mid-Year Analysis says current account deficit is not a matter of concern, but the central bank does not have the same view...
The central bank is not saying it is a matter of concern. It is being watched. There are enough capital flows coming and we are managing. If it deteriorates much more, then you need to take steps. My view is very close to the central bank view, that if you look at all the indicators like exchange rates and prices, the current account deficit is not giving a signal that we are not able to manage with it.
How much of capital flows can the economy absorb?
This year, the flows were bigger than ever before, including two years ago when a huge surge came into India. But this year’s inflow has not affected our exchange rate that much. There is only a tiny appreciation, showing that the country’s ability to absorb this has gone up. We do not give a number, but if there is a very big movement on the exchange rate and you have reasons to believe that it is a temporary movement, the RBI tries to step in.