Demand curbs are necessary: C Rangarajan

The UPA government is currently facing its toughest challenge yet as it looks to rein in inflation without affecting the growth momentum. C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, is among the leading policymakers performing this difficult balancing act. The former RBI governor justifies the government’s social sector schemes, but cautions against the growing demand on public exchequer. He parries a volley of questions on topics such as interest rates, industrial growth and a perceived governance deficit in an interview with ET’s Deepshikha Sikarwar and Vinay Pandey.

The India growth story does not seem so rosy suddenly. How do you read the economy?

There are concerns. The immediate concern is inflation. There is some slowing down in industrial production as shown by the latest data, but this could be partly due to some data problems. As we look ahead, growth rate will be around 9% in 2011-12 . Immediate or short-term concern would be to tame inflation. This also has implications for what we need to do over medium term. We have had two years of high inflation and in both the years it was triggered by food prices. Last year, it was largely due to a rise in the prices of food articles. In the current year, it is because of prices of vegetables.

However, it clearly shows we need to look after our agriculture and any shortfall in farm produce could lead to serious distortions in the economy. The two areas that require attention in the medium term are agriculture and infrastructure and power within infrastructure. If the economy is to grow at 8-9 % then generation of the power has to increase.

Some analysts have called for strong monetary action. Do you agree?

It is true that supplyside management is more important, but it is necessary to manage the demand side too. Therefore, monetary policy will play an important part. I think action is called for. And, if there is no discernible decline in prices, then a stronger action may be required.

What is the way forward on farm front?

Many things are needed to increase agricultural productivity. Land availability in going to become a serious issue. We need better variety of seeds and technology. We need to see that inflation has largely come from fruit and vegetables. Therefore, diversification of agriculture is important. We need to take care of storage and supply chain. On the whole, we need to increase agriculture productivity.

There is a view that multi-brand retail should be opened up for foreign investment to facilitate flow of technology into back-end food infrastructure.

We need not go into the question of FDI in retail for this reason. What we really need is modernisation of arrangements. This can happen if domestic companies come into operation in a big way.


Subsidy pressures are increasing. Do you think this is coming in the way of country’s competitiveness?

The whole question of subsidies is related to the issue of fiscal consolidation. In the wake of crisis, we adopted expansionary fiscal policy like every other country. But we are one of the countries that put in place an arrangement by which fiscal deficit will come down. We need to ensure that buoyancy in revenues is maintained and we should act on expenditure side.

With the industry slowing down, is there a case for going ahead with subsidy withdrawal ?

We should certainly rationalise excise duties . What we do with the excise duty should be a prelude to the introduction of GST. I would say we should move towards a budget that shows lower fiscal deficit than in the current year.

The recovery in developed economies could lead to thinner flows, making it difficult for us to finance our current account deficit?

We need to focus on a sustainable level of current account deficit. Current account deficit this year would be 3%. Going ahead it could also be 3%. But I would think a level of deficit of this year cannot be maintained over many years.

There is rising concern that investments are getting delayed because of land and environment issues.

These are concerns that arise because we have multiple objectives. Had industrial growth been the only objective, we could do a number of things, but environmental considerations are equally important. At the same time, land issue has many other dimensions. The only thing that is required is to settle issues very quickly. We need to strike a balance.

Policy paralysis is also another serious concern cited by analysts...

Some of the issues such a labour have been hanging fire for many years and it is not as if suddenly that we are not taking decisions on these issues. These issues are inherently difficult. Wherever decisions can be pushed forward through administrative action, it is being done. Delay is happening in areas where legislative changes are required. So long as there is no political consensus on those issues, it becomes difficult to push them forward.

Do you agree that corruption has become a become a big concern?

Perception is important and therefore if wrong impression is being created then it will have some impact. But people will also see the issue of corruption and governance in the overall growth prospects of the economy and if overall growth prospects of the economy are strong then that perception will dominate over anything else.

What should be the focus areas for the government for next level of reforms to boost growth?

There have been some pending legislation . We have been trying to introduce some reforms in the financial sector. One of the issues also relates to FDI in insurance . There are other issues as well relating to pension sector. We also need to focus on issues of governance much more strongly. This is basically improving the efficiency of administration from policymaking to policy implementation.

Are we not overstretching ourselves in the key schemes such as right to education , food security law and NREGA?

Many of these schemes have been introduced in stages and not at one go. And, many of these schemes are important from the social development point.

Social cohesion is important and we need to pay attention some of these things. But it is also extremely important to see that the demand on public exchequer is also kept within limits. We need to grow at a faster pace and raise more revenues to fund some of these items.