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Not out of woods yet; quality fisc spending needed: Rajan

The outlook upgrade is a positive perception of what we have done over the past few quarters. Presumably Moody’s sees this as a first step to rating upgrade, said Reserve Bank Governor Raghuram Rajan.

He however cautions that the government and regulators should not lose sight on what more needs to be done. “We should not celebrate upgrades as we did not worry about downgrades. There are a lot of low-hanging fruits that need to be picked,” Rajan said in an exclusive interview to CNBC-TV18.

The RBI left the key interest rates unchanged at its bi-monthly review on April 7, after effecting two out-of-cycle rate cuts earlier this year for 25 basis points (0.25 percent) each.

Rajan said the quality of fiscal spending, which has been subdued over the last few years, is more important. The state of economy is weak and a high quality fiscal spending can be a good thing, but ramping it up will take some time.

On inflation, Rajan said that the country is still not out of woods and he would be happy to see more steps on fiscal consolidation.

Below is the transcript of Raghuram Rajan’s interview with Latha Venkatesh on CNBC-TV18.

Q: It is a great morning to have an interview with you, Moody’s has upped the outlook on India rating. Do you see this as a first step to a rating upgrade at all?

A: Presumably they see it as a step towards reconsidering our rating. However, when they downgrade us, we claim not to be very so focused on these ratings. So I think we should display equanimity at such times.

The real issue is this is a positive perception of all that has been done in the last few quarters. But going forward there is so much that we need to do and so we shouldn’t lose sight of the work that remains. I have always said we have a lot of low hanging fruits to pick in India and the tragedy is we haven’t picked them so let us go about and pick them quickly.

Q: Even they point out that this is only today and India still remains an outlier in terms of fiscal deficit. In that context I didn’t see too much of mention of fiscal deficit in your latest monetary policy statement. Since March 4 statement some of the state budgets are known and how have you evaluated the deficit number. It doesn’t seem to have gone down?

A: Two things. One, the quality of spending is important. State of the economy is weak and high quality public spending can be a good thing in such circumstances, but the line that is there in the statement is about repurposing spending from misdirected subsidies towards high quality investment and that will be good for the supply side in the longer term and we should look for that also in the state spending. It is not just the deficit number but it is what they are spending on.

Of course there is some talk, oh it is not about investment, it is about other kinds of spending but we have to see. The other thing that we have to remember is that any kind of spending if it is in new directions takes time to ramp up. So investment spending has been sort of subdued over the last few years. So, even public investment spending will take time to ramp up.

Q: Actually some calculations indicate that this year is actually a fiscal expansion year, net of asset sales especially and even without that it is a 0.1 percent higher for fiscal expansion over previous year, it doesn’t worry you?

A: Would I be happier with more fiscal consolidation, of course. From a fairly narrow monetary policy perspective, yes I would be but these are calculations that the government makes taking into account the various demands including what it needs to do to get investment up and going. So, we have to work with the reality. There has been a substantial number of good medium term measures that have been put into place in the Budget and there is a fiscal consolidation path that is set in place over the medium term. So keeping that in mind we have to work with the space we have.

Q: Let me come to the other big caveat that you always have for rate cuts, inflation. We have moved away from double digit to just a little north of 5 percent. How much of this is structural or secular, how much of this is just because we are lucky, cyclical, lower prices? 

A: If it is luck, the main thing is does it bring the economy to a different level in terms of expectations, in terms of demand for wage increases, etc. When you were at double digit inflation, yes we needed a little bit of luck so as to dis-anchor or un-anchor inflationary expectations.

Now, that inflation is lower and if people see it coming off the items that are most salient to them – things like vegetables, things like milk, things like petrol – if they see inflation there coming down then their perceptions come down. As their perceptions come down then the demand for double digit wage hikes, etc also come down. So, hopefully we have at least accomplished the first part of that which is the salient items are perhaps less expensive today than would have been true if the previous rate of inflation had gone on. 

Now we have build on this, this is why we can’t relax our guard quickly. We cannot say that we are out of the inflation woods. This is the time we have to consolidate and ensure that the disinflationary perception is entrenched. 

Q: Have you seen any victory at all in terms of structurally inflation coming down? 

A: A number of elements are coming down including the services. So, it is not just vegetables, number of services are also coming down or at least not going up at the rate that they were going up at. That to my mind is a positive development. However, we have to build on this. We can’t at this point say we are done and so I think it is a long drawn out battle.

Q: Your inflation expectation survey of March 31 indicates that household inflation expectations have inched up a snitch, that is why my question does it look like the deflation process is over?

A: I don’t think that is the message takeaway. These expectations certainly have built up over a long period of time but also driven by what has happened most recently. So to the extent that vegetable prices started firming up some of it is seasonal, also petrol prices started firming up a little bit so given that I wouldn’t be overly worried about a notch up in those expectations but if it starts climbing back up, I would start worrying if this persisted for a reading or two.

Q: If you looked at your real rate, at the moment we are at 5.4 and the repo rate at 7.5, we are at a 2 percentage point real rate or real return. As of March, we will be at 5.8 and if we continue where we are then we will have a lower real rate, should it not be the other way round, then you should have a lower real rate when growth is low and as growth picks up you should have perhaps a higher real rate. Isn’t there a case to advance the rate cut, if any?

A: I didn’t follow the reasoning there.

Q: The real rate is higher now and if inflation went to 5.8, the real rate will be lower in March given the same repo but shouldn’t it be the other way round, growth is weak, it deserves help now?

A: Growth is weak and it deserves help. That is the statement that I hear often. Growth is helped by many factors and the interest rate is just one of those factors and of course to the extent that it can be moved based on perceptions of inflation etc, it will be moved. As far as our projections, why are our projections of inflation higher down the line — in fact they come down and they come down because of what we call base effects. That inflation last year was higher in July, August and as a result from that reading to August this year we may look lower and that is why inflation will come down not because over the period, the underlying inflation has been slower. But we are looking through all this and what we said in the statement is we want more information what is the underlying process of information when people say 5.8 is your forecast, I keep saying we are not astrologers — “the good astrologers” — we don’t know exactly what is going to happen. These are not perfect forecasts, these are best estimates and as information comes in, will see how much more room we have or how much less room we have and act accordingly.

People say oh you have no room or you have room. That depends on the entire set of information that we will make our decision on.


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