Fitch Ratings India Managing Director and CEO Atul Joshi says fiscal deficit will grow to 5.6 per cent of the Gross Domestic Product (GDP) this financial year if disinvestment proceeds are not included and if they are, it would grow to 5.1 per cent from 4.7 per cent during 2010-11. He, however, expects the economy to grow at 7.7 per cent against 8.5 per cent last year. In an interview with Nayanima Basu and Indivjal Dhasmana, he says the Reserve Bank of India’s monetary tools cannot rein in food inflation, and now manufactured products inflation has to be controlled. Edited excerpts:
Fitch has retained India's credit ratings, is there a chance of upgrading it?
Fitch's affirmation of India's rating is based on prevailing and likely macro-economic and financial situations. Rating movement would depend on factors ranging from benefits of structural financial reforms resulting in a strong improvement in the fiscal deficit and general government debt ratios to improving investment climate supporting greater infrastructure investments and sustained decline in inflation rate.
How sure are you the government would be able to rein in fiscal deficit at 4.6 per cent this year, despite elevated global crude prices, and parts of the economy showing deceleration?
High global commodity prices and slow growth will have its impact on the fiscal ratio. Fitch expects the fiscal deficit, excluding earnings from privatisation, to decline to 5.5 per cent. It expects privatization or disinvestment receipts to be around 0.4 per cent of the GDP and fiscal deficit, including disinvestment proceeds, to be around 5.1 per cent. Both slower growth coupled with higher than budgeted subsidy levels will have its impact on the fiscal deficit. Fitch lays more emphasis on general government deficit (centre and state) and estimates the deficit in 2011-12 will decline to eight per cent from nine per cent in 2010-11.
Does 8.5 per cent growth seem a possibility?
There is unanimity on growth slowdown in 2011-12. Although resilience of the Indian economy has increased, it is no longer a closed economy and is linked to the global economy through trade and financial flows. Our sovereign team expects India to grow by 7.7 per cent.
Food inflation has again crossed nine per cent. Your views.
Initially, food inflation was driven by supply shortage and now by rising income and changing dietary habits. If you look at the sources of food inflation in the recent past, it was driven by fruits, milk and poultry products.
Do you think high inflation will lead to tighter monetary policy and result in slow growth?
Monetary policies are not capable of addressing food price inflation. It basically addresses manufactured products inflation. What is worrying the RBI and the government is increase in non-food manufactured prices, which increased 7.2 per cent in May compared to 5.8 per cent last November.
Transmission of monetary policies are slow and takes time before it starts reflecting on inflation. Rise in interest rates as a result of the monetary policies is an example of the transmission mechanism. Banks try to absorb monetary tightening and pass it on to consumers only when it starts affecting their bottom line.
What is your assessment of the global economic growth, particularly in the Euro zone? Will it affect India's growth?
The economic recovery in Euro zone is very worrying. Fitch estimates, Euro zone growth will contract by 0.4 per cent in 2011. There will be some impact (on the Indian economy) through trade and capital flows.
Diesel price have increased by Rs 3 a litre. Do you think it would fuel inflation further? Or was it a necessity?
Fuel price rise will certainly add to the inflation, it was a necessity and beyond delay. Diesel price will have both, first round (direct) and second round (through freight) impact on inflation.
