Experts have reacted in a positive manner to Saturday's Economic Review meet. The statements by the finance minister, particularly regarding the fiscal deficit target has according to them instilled confidence.
Here are the views by the experts including S Narayan, Former Finance Secretary, Ananth Narayan, professor at SPJIMR, Rahul Khullar, former chairman TRAI and former secretary, Ministry of Commerce, Rakesh Mohan, former deputy governor, Reserve Bank of India (RBI), Gautam Chhaochharia, MD and head-India research at UBS, Jayesh Mehta, MD and country treasurer-Bank of America, Upasna Bhardwaj senior economist at Kotak Mahindra Bank, Yashwant Sinha, former finance minister and Ashima Goyal, member, PMEAC regarding the matter.
Q: No measures being announced today, just a review and a check of the economy saying that we are in fine fettle, what do you make of it? Mohan: I was really very happy to hear the statements from the Finance Minister. Just before the statement came and you had asked me what I would suggest, this is exactly what I was going to suggest that the government has to instill confidence in the economy. This statement, which emphasizes the maintenance of fiscal prudence, the sticking to the 3.3 percent fiscal deficit target, noting that inflation is very much under control as expected, noting that growth will possibly be higher than what was projected also the trend of taxes both direct taxes and indirect taxes, even that there might be some questions to do with the collection of the indirect taxes and then also confidence in terms of disinvestment target – once again the performance so far in the first five months on disinvestment has not been very impressive but all in all, in my view, the exact thing, the correct thing for the government to do in these circumstances is to provide confidence, stability in economic policy rather than a sort of panicky, knee-jerk measures because of the exchange rate movement. So I very much welcome this step. Q: So no more new measures being announced today, but unequivocally the Finance Minister making it clear 3.3 percent the fiscal deficit target is going to be met which also then suggests that there is unlikely that we are going to see the government move on an excise cut because Rs 1 cut is about Rs 14,000 crore or Rs 2 cut in excise is about Rs 30,000 crore odd and the negative impact that has on bond yields and borrowings cost, so it seems very clear for now that it is a hold when it comes to excise duties and possible excise cuts. Your take on the same? Sinha: It is good that government is holding on to this policy of no excise cut as far as petroleum products are concerned. It will certainly help them maintain the fiscal deficit target. But how will it respond as far as electoral politics is concerned that remains to be seen. But having said that I would like to ask you about the nature of the present crisis. If it is a crisis. What is it? Is this is a balance of payments crisis. Quite clearly it is not. Because after all we are holding almost $ 400 billion worth of foreign exchange and it has got reduced by $ 26 billion otherwise it was way beyond $ 400 billion, so it is not a balance of payments crisis. What is a nature of the crisis? The nature of the crisis is undue volatility in the exchange market leading to a sharp depreciation of the rupee over the last few days.
Now, clearly, management of the exchange market is the responsibility of the Reserve Bank of India and any old timer will tell you what are the various measures in which the Reserve Bank of India cools the exchange market? But nowhere is it prescribed that you hold the value of the rupee at a certain level. The value of the rupee is market determined, your responsibility is to cut undue volatility. So, with all the reserves that we have that should happen and as Rakesh Mohan was saying on your program, if the rupee is overvalued nobody would have minded if the rupee had depreciated by as much as it has done. Over a period of time instead of rushing over it over the last two to three days, so I think what needs to be done is not be bothered about deprecation of the rupee so much as to ensure that the markets are cooled down, that there is no undue volatility and it is business as usual.
Also, additional point which I would like to make is that the measures that the government has announced especially restriction on what they consider to be unnecessary imports is something to which I take very strong objection. Coupled with the fact that they raised tariffs on certain products in the Budget this is the reversal of the long established liberal policy which I think is a panic reaction the government could have avoided. The most important thing is so the government should maintain the sentiment.
Q: You said that you are not in favour of import curbs, we haven’t seen the government announce specifically what it intent to do except to express the intent of being able to bring in import curbs. But if at all that were to be the case do you expect action on electronics, do you expect at all any action on gold because after oil those are the other two big items? Sinha: I don’t think gold imports this time have been primarily responsible for increase in the current account deficit. I am all for promoting exports. We have never touched the USD 330 billion worth of annual exports that was achieved during the UPA time, they haven’t crossed the figure of USD 300 billion in any year. But the point I would like to make is there is need for export promotion and that calls for an application of mind which unfortunately has not been in evidence in the last year. So, by all means go ahead, promote Indian exports, if you still have some current account deficit because the main reason for the current account deficit is the huge trade deficit. So, that has to be balanced to the extent possible and the balance has to meet by capital flows. Q: I would imagine that you might bat in the same camp as the finance minister there when it comes to the issue of import curbs, but on balance, as Mr Yashwant Sinha was pointing out, this is not a balance of payments crisis, all of our panellists are in agreement, there is enough ammunition that we are sitting on - USD 400 billion - in reserves but what do you make of what has been announced and what would you like to see for the road ahead? Khullar: I agree with what Mr Sinha said and I also agree with what Rakesh Mohan said that the measures are actually in thought and more importantly, ask yourself even if you were to encourage short-term capital inflows, who is going to make those inflows. Are domestic investors going to abroad and raise external commercial borrowings (ECBs) in today’s market and if they are not going to do it then those measures are just half-baked so the real point is not only what Rakesh Mohan said, the second point is they cannot succeed.
Another point which Rakesh made which is an exchange rate depreciation is good for the current account deficit so why do you want to reverse that. What I think is really going on is that for at least three-four years, you have this implicit strong rupee policy, which has been pursued, which is the stronger the rupee, the stronger the economy. It is complete rubbish and people conveniently forget what happened.
That is one big problem that if you have a mind-set, which thinks that the strong rupee as a strong indicator of the economy then you are naturally in trouble and that is why you had these sorts of reactions and Rakesh is right. There has been a 20 percent appreciation in real effect in exchange rate, why should we let the rupee slide, the normal exchange rate, let it slide, it doesn’t make a difference.
Third and that Mr Sinha was absolutely spot on, he said that for one year, there has been no thinking. My view is that for three years, there has been no thinking on export policy. So essentially what has happened is the bonanza that came in because of low oil prices, just led people into believing that this is going to continue forever because they realised that at some point it is going to reverse and what are you going to do then.
That is why there was no conscious concern even though exports were sliding. He used to make the usual rumblings and mumble a few words and that is a real problem that is being going on, not now. It has been there for three and a half years.
Q: Specifically on the export front, what is it that you would like to see from hereon then? Khullar: I will give you a couple of example and I am sure what I say is controversial but nevertheless – for one, I had written about it, I wrote two and a half years ago, that you should reopen the policy decisions that were taken by the finance minister in 2012 on special economic zones (SEZ) that was your largest growing sector for exports. There is no evidence that the department of revenues has produced that it is fantastically increased revenue by shutting down SEZ and virtually killing the incentives, why couldn’t you do that? What did it cost you? If the economic activity goes in to see SEZ, which economic activity will not arise in the domestic economy but in the area outside the domestic tariff area, what is your problem? So why couldn’t you have done that? It wouldn’t have cost you that much. So this is one simple example of something that could have been done.
Second example, export infrastructure – give me one example of what government has done in terms of public investments for export infrastructure and you will come up empty because most of the public infrastructure that is actually working for exports is all in the private sector. So it is ironic. This needs much more concerted thinking.
The last point is something again which I had made that many of your foreign trade problem, current account deficit or balance of trade deficit problems have nothing to do with exchange rates or even tariff policy. They have a lot to do with the domestic policy. If you cannot produce enough coal because you have a bad coal policy, you are going to import all the coal you need. If you have a situation where everybody wants to run abroad rather than India, you are going to have invisible payments on your current account, which are a drain on your current account. Those require policy action and we have not seen that policy action.
As always because it is economist driven, your first thought is what can we do about the exchange rate, what can we do about tariffs and here is the solution. We stop exchange rate from depreciating and we start imposing tariff or a quantitative restrictions which will restrict import. How is that a solution?
Q: 3.3 the government making it clear, it intends to stick with the fiscal deficit target. Very confident on both direct tax front, indirect taxes and non-tax collections as well. What do you make of that? Ghosh: I agree with your point that the fiscal deficit target 3.3 percent is going to be a little bit challenging this year because the way the GST collections have settled down around Rs 94,000-95,000 crore and given the fact that you cannot round it of at Rs 1,00,000 or little more than that so there will be pressure on the fiscal deficit, but it is heartening to see that the government is still holding out of no excise cut and that will instil a much needed confidence.
The second point which I would like to say is yes there is a lot of news which has been made that there should not be any tariff import cuts. But it is a fact that if you take out the gold imports and the electronic imports from Indian export in August Indian imports have actually hardly grown. So, it is a fact that there is a huge amount of electronic imports and gold I am not sure has not come to that level but it is a fact that it is actually adding to a huge imports surge in the country. So, the government needs to look into holistically why there is so much imports when they announced a Make in India policy.
Third thing which I would like to see maybe next week is that I think this is a first time that the government has gone ahead and made the announcement regarding the controlling of the current account deficit. I would like to see that the central bank also coming out on next week to announce some measures possibly on the rupee. So these two measures will complement each other because at the end of the day it is the job of both the central bank and the government to maintain a decent current account deficit.
Q: You just heard what the Chief Economic Advisor at State Bank of India has to say but what would your expectation then be from the Reserve Bank because that seems to something that the market is working with the next steps, the government has done its bit and the next steps possibly from the Reserve Bank? Mohan: I first want to comment on this issue of export promotion. Very little has been done, Rahul Khullar was right. Actually in the last four years in export promotions I know for example Arvind Panagariya as the Vice Chairman of NITI Aayog has put forward pretty comprehensive proposals for export policy. Which as far as one can see didn’t see the light of the day so one think the government can certainly do is look at what he was saying and recently he is coming out with an excellent book on trade which will again I think government should read whenever it comes out. Second, the point that Rahul Khullar made on SEZ, I think among the issues that Panagariya had raised was that these SEZs have been too small and for SEZs to be effective we need much larger SEZs.
One connected point is that we know that today and the next 5-10 years continuously labour intensive manufacturing exports are moving in large numbers from China to the rest of Asia right now they are going to Vietnam, to the Philippines, to the Cambodia, to Bangladesh we are nowhere in the picture. You can have a pretty strong, one can have a focused policy on tracking that movement of labour intensive exports which will do a great deal and of course that doesn’t affect immediately short term, but even certain announcements of measures would impact the confidence. One completely unsaid point is none of this can happen unless the government does labour reforms which the government gave up right in the beginning of its tenure.
I wrote a three part article on the economic reforms under the Vajpayee government. If they could do the kind of reforms they did and of course as Yashwant Sinha as the Finance Minister that time when they didn’t an absolute majority in parliament there is no reason why this government with an absolute majority in parliament there is no reason why it cannot do similar significant reforms that would effectively promote exports and of course that doesn’t have short term effect except an announcement effect.
Finally there is also just two days back McKinsey Global Institute released a report on growth in emerging markets and among the very interesting issues that they highlighted was the importance of large firms in exports. One thing we do not have is the presence of large firms in labour intensive manufacturing and the government would do well to examine the report and see what can be done to encourage large firms to go into exports. Because given the current structure of international markets, these large firms have the negotiation powers to deal with international markets and of course to be part of the global supply chain.
Q: What is the expectation now for Monday morning for trade? Narayan: I think the reiteration on the fiscal deficit target is very positive. One thing I would add is he also reiterated that he will adhere to the capital spend target. The last year the government was guilty of blowing up the revenue deficit and actually cutting on capital expenditure, so that is a very good thought as well.
Having said that, second point, the question mark about the fiscal situation still remains, unfortunately even though it is a good commitment to give because GST collections aren’t looking great, you have the MSP issue and you have the subsidy on account of oil prices and LPG, which is going to go up. So there is going to be pressure and the market will be watching that very closely.
Last point, I wish they had announced something on the austerity measures as well. I know, we have this focus on growth right now but at a time when our current account deficit is blowing up and our fisc is not looking great, there is a need for austerity measures and other financial stability measures.
Our banks, NBFCs, our entire financial ecosystem is still looking weak, we are kicking the can down the road on that and the power sector etc, we need reforms there to be able to attract durable FDI to come through on a regular basis.
Ghosh: I would broadly agree with Ananth Narayan’s point on the fiscal deficit challenges but I also welcome the fact that the central bank has also announced that it has announced OMO operation. So I think there should also be concerned effort to cool down some bond yield because that will also go a long helping the beleaguered banks in terms of the MTM losses. So overall these steps are in the right direction but I would like to see more steps specifically from the central banks in the coming weeks so as to improve the market sentiment.