Sunday, June 3, 2012

Have we reached the bottom? Inflation is hurting the salaried class especially the Veterans

We have reached the bottom: C Rangarajan
Interview with Chairman, Prime Minister's Economic Advisory Council
Karan Thapar / Jun 03, 2012, 00:55 IST

In an interview with Karan Thapar on CNN-IBN’s Devil’s Advocate show, Prime Minister’s Economic Advisory Council Chairman C Rangarajan admits that the Budget target of 7.6 per cent GDP growth looks too ambitious at present, but does not rule out seven per cent. Edited excerpts: How serious is the economic situation facing the country?
The economy has slowed down. The growth rate for last year is now estimated to be about 6.5 per cent. This is a steep climb-down from the nine per cent growth rate in the last three years and also from the earlier estimate of 6.9 per cent. Therefore, there is a certain amount of concern, as it is accompanied by high inflation, high level of fiscal deficit and current account deficit. At the same time, we must recognise that the world economic situation is passing through a difficult time; and, even with 6.5 per cent growth rate, India will be the second-fastest-growing economy in the world.
If you look at the core sector growth of just 2.2 per cent in April, it is about half of what it was in the same month last year. It would seem that the economy is not bottoming out. Things could get worse...
The core sector growth is never a good indicator of how the industrial growth would behave. In my view, we have reached the bottom. I believe the growth rate for this financial year will be higher than the growth rate for last year.
Suppose, on June 17, the Greeks vote the wrong way, revoking the bailout and exacerbating the Euro zone crisis... suppose, in July and August, El Nino has an adverse affect on the monsoon — both of these are possibilities. In such circumstances, would you accept that growth in the financial year ending March 2013 could fall below 6.5 per cent?
Let’s first talk about what would happen in normal circumstances, and then about what would happen if things go wrong. I would say, in normal circumstances — with the monsoon being normal and the European situation not getting worse — we should see a growth rate of 6.5-7 per cent.
You say the current financial year will be better than the previous one. But the finance minister has, in his Budget, set a target of 7.6 per cent growth. No one believes that scenario is likely, or even possible. Do you accept 7.6 per cent is going to be very high? At the moment, 7.6 per cent looks too ambitious. But, certainly, I will not rule out seven per cent.
Doesn't the likelihood of Budget target for GDP growth being missed also raise serious questions over your fiscal deficit target of 5.1 per cent?
The point is, fiscal deficit is calculated on the basis of what we all call nominal income… that is the real growth plus inflation. The overall nominal growth rate they have assumed is 13-14 per cent. I don't think that will go wrong very much.
You will be saved by inflation, won't you?
To some extent, yes. The order of inflation could be 6-7 per cent; therefore, you could. But yes, as we go along, if the growth rate of 7.6 per cent does not appear to be feasible, it requires even greater action on the part of the government to ensure the fiscal deficit remains at the Budgetary level.
What this suggests is that two critical aspects of the Budget - the growth target and the fiscal deficit target - now look questionable. And, it's not even two months since the Budget was announced...
I think fiscal deficit is a policy decision. I don't think fiscal deficit is something that can be left to the natural forces. Fiscal deficit is a variable and should be managed. As far as the government is concerned, the achievement of the fiscal deficit mentioned in the Budget was difficult even earlier. Therefore, I would urge, if we are not getting the kind of nominal growth rate we originally assumed in the Budget, let us take more action and get the fiscal deficit down.
The sliding rupee is a sure indicator that inflows into the country are falling. That, in turn, is an indication that people are losing confidence in the Indian economy. Would you accept that? Well, the depreciation of the rupee is due to the mismatch between the current account deficit and the capital inflows. Our current account deficit continues to remain high. This did not cause any problem in the previous years because the capital flows were adequate to cover the current account deficit; that is, the financing of the current account deficit was not a problem, even though the current account deficit was showing signs of rising in last few years.
Would you accept that inflation has become the Achilles' heel of this government? Inflation is a phenomenon that affects a large section of the country. So, a high level of inflation is not conducive to economic growth and prosperity of the country.
Has the government failed to tackle it? Earlier, as governor of the Reserve Bank of India, I had taken a very strong position on that and I have always regarded that the primary objective of the central bank is to tame inflation. In the last two years, we have been confronted with a situation in which the strong action to contain inflation was also viewed by some as coming in the way of faster economic growth. The first year of inflation was really food inflation. That is a totally different kind. Come the second year, the food inflation got generalised. In addition to that, there was some food inflation because of the rise in the price of vegetables. Now, any strong action on the monetary authority was viewed by some people as coming in the way of faster economic growth.
Let me come back to the question with which we opened this interview. Given the series of problems we have with growth, with fiscal deficit, with sliding rupee, with intractable inflation, are you sure this isn't a crisis, even a small one?
No, I think the crisis is slightly different in some ways. If you look at 1991, even though we faced acute problem of balance of payment and the exchange rate of the rupee was also depreciating, we had no reserves. We have a different situation now. We are now in a situation in which the economy has grown at a fairly rapid rate in the previous four or five years. We have adequate reserves, but that is only a comfort.
In which case, if the word crisis is wrong, would you accept 'serious problem' as more accurate? Yes, I think we face a critical situation. But it is not something that we cannot overcome. I think with the kind of policies we want to pursue, it should be possible to grow.
With a large fiscal deficit that could be difficult to rein in, and a sharply falling growth, would you accept that the need of the hour is to increase diesel, LPG and kerosene prices? There is a need to raise the prices because the fiscal deficit can be contained only if we act on cutting subsidies and the most important element in subsidies is the petroleum subsidy. Therefore, I would say there is a need for action with respect to the prices of diesel and LPG. There are different ways of doing it. There are ways in which the low income groups are not affected. The methodology and modes of doing it will have to be thought through. But action is required.
Would you say that now it is imperative that the finance minister lived up to his Budget promise of capping subsidies at two per cent?
I think the finance minister has said it before and I am sure he believes in what he has said. Therefore, we need to move in the direction of cutting subsidies and maintaining those at a certain proportion of gross domestic product, because that is the only element in the total government expenditure that has some flexibility.
Does the finance minister need to boost investor and entrepreneurial sentiment by pushing ahead with reforms?
We need to push reforms. I would only say that the reform environment has not deteriorated since 2005-06.
But it hasn't advanced either? Yes, so we need to push it further. But, certainly, if we had grown at nine per cent during earlier, we should be able to grow even now. Reform is a continuous process and, therefore, we need to take action in various fields, such as banking, insurance and pension, and get the consent of the people for these reforms.
One of the things that is worrying investors is what is called the combination of the Vodafone amendment, the Supreme Court judgment in the 2G case and the government's proposed GAAR amendments and proposals...
Well, the pressure we have seen on the rupee in recent times has been because of the inadequate capital flows to cover the current account deficit. There, we must encourage capital flows, and if the sentiment for that has to be created, we must do that. And, we should critically examine factors that might come in the way of the perception of investors and remove them. Some of the things that we are doing have been done by other countries too. But, perhaps they are not being viewed in the same way. So, there is some misconception there. But, certainly, we need to act to remove the impediments and encourage capital forces.
Does this government have the courage to take tough decisions?
I think the government has the courage. I mean, I think there are a number of problems that have come in the way of the government in taking economic decisions.
But, it has the courage to do it?
I think it has the willingness to do it.
Click here for the original transcript
How Veterans can beat the inflation?
  • Prepare For The Worst And Hope For The Best
    Stocking up on long term storage food isn't just for emergency survival. It's also your insurance against inflation and harder times. Its always a good idea to have at least a months worth of food on hand but I recommend 3 or more depending on your budget.
  • Why Prepare
    Take it from someone who as been through disasters, preparing is something everyone should be doing. Besides disasters, there is always the certainty of rising costs and real possibility of economic collapse. Preparing for these kinds of events is no different than buying insurance. We buy insurance to protect us from things we hope do not happen. Well this is no different except you get something for your money.
  • Be a realist – accept the inevitability of inflation.
    Let me reiterate: there is no going around inflation. It is the scheme of things, and even if you behave like an ostrich hiding its head in the sand, the world will continue to revolve as it does. There will be inflation, and you will feel it. The sooner that you accept this, the sooner you can take steps to deal with inflation.
  • Monitor inflation rates.
    That stark truth having been stated, there is no need to slump your shoulders and feel depressed. The good thing is that we have all the information we need at our fingertips. You can monitor inflation rates via various media. If you really want to beat inflation at its own game, you ought to keep close tabs on the rate of inflation. With this information on hand, you will be able to adjust your strategy accordingly.
  • Tips
    1. Go Green, reduce use of electricity, gas and petrol. Travel less. Recycle.
    2. Use induction cooking devices. Replace incandescent bulbs with CFL or LED lighting.
    3. Change food habits to reduce the 100% rise in cost of vegetables, meat, fish and fruits.
    4. Buy from wholesale dealers in bulk like rice, dal...
    5. Budget expenses to within your mothly pension. Do not deplete your savings. Invest wisely if you wish to do so. Declining bank interests will heighten inflation.
    6. Do away with servants as veterans can manage without them. You can save substantially.
    7. Learn plumbing repairs and simple maintenance of household gadgets and avoid costly repairs.
    8. Tools are cheap get all the handyman stuff and get working in the house.
    9. Maintain your transport vehicle and avoid costly repairs. A bicycle is a must for the Veterans. Riding improves health and reduces travel expenses. Plan ahead and limit shopping to once a week.
    Advice to Officers who have made a windfall from weapons deals and Adarsh like scams.
  • Squander the laundered black money to beat the inflation.
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