Chairman of the Economic Advisory Council to the Prime Minister, C Rangarajan, on Friday said the ensuing Budget should give a clear indication of a road map to bring down the fiscal deficit in the coming year.
“This will require acting on subsidies. Some policy decisions will have to be taken with respect to petroleum subsidies,” he said while maintaining that the fiscal deficit would be exceeding that of the budgeted level of 4.6 per cent of the GDP in the current year. Further, he advised the government that it should try to ensure that the excess over the budgeted levels of fiscal deficit was as limited as possible in order to maintain credibility.
Interacting with the media after delivering the foundation day lecture on ‘India and Global Economy’ at the Icfai Business School here, Rangarajan said the government should attempt to reduce the current account deficit to lower than or around 2.5 per cent of the GDP over the next five years in consistent with the capital flows.
“That is one way by which we can try to see that you are integrated with the rest of the world but at the same time the pressures of external world do not impinge on India too much,” he said, elaborating on one of the observations he made in his lecture that India can always take measures to ‘insulate’ from the impact of external factors.
The mismatch between current account deficit and capital inflows, particularly in the quarter ending December 31, 2011, has put pressure on the rupee. “However, with the resumption of capital flows in the first quarter of the current calendar year, I expect the pressure on the rupee to ease,” he said. Rangarajan expects this resumption to stay all along the fiscal year, resulting into only a marginal decline in reserves.
Further rate cuts
On the recent cash reserve ratio (CRR) cut, he said when there was a large liquidity gap, a reduction in CRR could also be attempted though open market operations, which is a superior instrument from the point of view of easing liquidity because liquidity could be injected an appropriate time and calibrated.
But in his view, the RBI’s move was motivated by two considerations, “First, to improve liquidity. And also to send out a signal. They did not want to use policy rate as a signal because it was considered to be premature. (So) they used CRR as one signal.”
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He ruled out the possibility of rate cuts until there were definite signs of decline in non-food inflation. It all depends up on how inflation behaves in coming months, he said.
9-10 per cent growth
While it is possible to get back to the growth rate of 8 per cent in the next two years on its own steam as India's growth is primarily driven by domestic demand, achieving 9 to 10 per cent growth would depend on how the world economy shapes, Rangarajan said in his lecture. He said, all in all, growth will remain subdued in the western world.
“The risks of an open economy are well-known. We must not, nevertheless, miss the opportunities that the global system can offer.” The available data do not indicate that the developing countries as a group have suffered in the process of globalisation either.
In fact, if the industrialised countries grow at the current rate of 3.5 per cent in nominal US dollar terms and the developing economies at around 8 per cent, the share of advanced economies in the global GDP will fall from 65 per cent in 2011 to 51 per cent by 2025. Correspondingly, the share of emerging economies will increase from 35 per cent to 49 per cent over the same period, according to him.
Encourage capital flows
He said we must take all measures to encourage capital flows. However, given the inherent volatility of capital flows, our objective over the next decade must be to reduce the current account deficit to a much lower level.