RBI should strike a balance between inflation firefight and growth push: Naoyuki Shinohara

Interview with Deputy MD, IMF

The International Monetary Fund (IMF)’s Deputy Managing Director, Naoyuki Shinohara, on Friday said if India wanted to go back to its high-growth trajectory, it has to address some key bottlenecks in terms of infrastructure, project back-logs, policy making and bureaucratic redtape. In an interview with Nayanima Basu on the sidelines of the ADB annual meeting, he also said the RBI would have to strike a balance between supporting growth and managing soaring inflation. Edited excerpts:

In your address to the Indian industry recently, you put a lot of emphasis on domestic capacity constraints that were hampering the country’s growth today. What, according to you, can be done?
  If India needs more investment to come back to the growth rate that it enjoyed in the past, let’s say three to five years back. In contrast to China, what India needs is probably more investment and less consumption. By less consumption, I mean you do not need to reduce the consumption, but more investment in proportion to GDP (gross domestic product). But if you look at the investment activity, which is slowing down, then clearly, there are some serious constraints that have appeared in the economy in terms of delays in approvals, bureaucracy and unstable supply of electricity and transportation. So, it is both institutional, as well as physical infrastructure that makes it difficult to increase investments in the domestic economy. These problems are same for foreign investors, too.

The IMF recently said India could consider a sovereign bond issue that would provide a benchmark price for its companies borrowing abroad and would also reduce the cost of borrowing in the domestic market. Do you think this is feasible at this point?

It is very good to have a benchmark, it creates a good environment to further develop the bond market. So, in that sense, creating a benchmark is a necessary step. But whether to issue it or not depends on the government. It depends on the market conditions. At the moment, the main constraint to India’s growth is not lack of finance, we think India has the financing, but it is really constrained on other structural bottlenecks.

The IMF has been advising the Reserve Bank of India (RBI) to continue guarding inflation. it has reduced the repo rate by 25 basis points in its annual policy review today. How do you view this?
Striking a good balance between the fight against inflation and achieving sustainable growth is a challenge. The RBI has to face it. Our view is that inflationary pressure is still there. Although the wholesale price index has slightly fallen, the consumer price index is still high, which means the food price pressure is still there. So, we think RBI will keep a close check and the balancing act is very important even if it is difficult.

The IMF does admit that emerging countries are playing an instrumental role in the recovery process. So, do you not think it is time these countries get more? I am referring to the quota-reform process?
We agreed on the quota increase, doubling of the quota a few years ago and we are in the process of getting ratification from member countries. We need 85 per cent majority and we are very close to reaching the target. But an agreement is missing. One of the very big countries has not agreed. So, we are waiting. We are looking forward to completing the process as soon as possible. The authorities concerned are working very hard to complete the process. We are working on another round of quota reform exercise. So, it is important that this one completes so that we can go to the next process. It is important to have the quota share increased for countries of importance as per the strength of each country in the global economy. This is why last time there was a shift in the quota reform exercise by around six per cent from the advanced economies to the dynamic emerging economies. So, the broader structure is changing and things are moving in the quota reform issue.

The IMF has pegged India’s FY14 growth rate at 5.8 per cent, which is slightly conservative to the government’s projection of 6.4 per cent by the Prime Minister’s Economic Advisory Council. Why this contrary view?
On a like-to-like basis our projection compared to the PMEAC is low but not dramatically lower. We see these investments in infrastructure bottlenecks and given that there is a backlog of projects that needs to be cleared then it becomes a challenge. It will take some time to go back up to 7 per cent growth rates. Slowdown in global economy has resulted in a slower growth for India.

Talking of bottlenecks, recently the Planning Commission has made an ambitious target of achieving current account deficit (CAD) to 2.5 per cent of the GDP in the next three years while IMF sees CAD at 4.9 per cent of GDP this fiscal. Do you think this is achievable?
The key things are to bring the inflation down to bring the CAD down. Then there has to be a considerable amount of subsidy reform to bring down not only fiscal deficit but also CAD.