An officer of the Indian Administrative Services, Dr Yaga Venugopal Reddy, has spent most of his career working in the areas of finance and planning both at the State and Central level. Dr Reddy, who has keenly pursued his interest in economic research, has been a Deputy Governor at the Reserve Bank of India since 1996.
In an interview with Equitymaster, Dr Reddy, Deputy Governor, RBI, spoke about the Indian economy and why he thinks this was a ‘realistic budget’.
EQTM: One of the developments in the budget has been pertaining to the NRIs and the capital account. How do you see this impacting the flow of foreign capital into the country?
Dr. Reddy: I think basically the issue is that the Non Resident Indians (NRIs) had the facility of putting deposits in Indian banks, which is a foreign currency deposit. And historically there was a preference to have a non-repatriable component also. So there was a non-repatriable component both on capital and current account and there was a scheme, which was non-repatriable only on capital but repatriable on current. These types of things were there.
But it was felt that the process of capital account convertibility in India should happen gradually by segments or institutions. We found that true capital account convertibility in regard to NRI deposits into the banking system from abroad would be a good starting point, as far as the full convertibility capital and current accounts for certain types of individuals is concerned.
What this means is that today an NRI, if he is in UK or USA for example, and if he wants to make a dollar or a pound deposit, he has a choice of either taking the foreign currency risk or not taking it. If he does not take the foreign currency risk he can invest in FCNRB (Foreign Currency Non Resident Banks Deposit) and he can go for another type of an account in case he wishes to take the risk. If it is Rupees, he has just one scheme – NRE (Non Resident External - Rupee), which means that he puts it here and any time he wants his money, depending on the deposit rules, he can take the interest on the capital or both. But that is a simplification.
But there is another thing that people have not taken note of. There is a scheme NR (NR) (Non Resident Non Repatriable), under which your principal is not convertible, only your interest is. Now what we have said is that when the NR (NR) matures, we have allowed them to put this in the NRE deposit account. Now what this means is that what is presently the non convertible stock of capital in the NR (NR) has been made convertible in one stroke.
And that shows the confidence we have in one, that the NRIs have a link with India and they will find India as a place to invest. Two, there has also been a convergence in interest rates, between convertible and non-convertible deposits, which is a reflection of India's integration into the global markets.
And another thing that is important for the NRIs. They have ancestral property here and they have got incomes in the form of rent, interest etc. and now the repatriation of this income has been made very easy. All that they have to prove is that they are NRIs, it is their income and that they have paid the due taxes on it.
EQTM: What is your view on public finances? We have again slipped on the fiscal deficit. The Finance Minister has proposed only a very marginal reduction from 5.7% to 5.3% of GDP in FY03. So, how do you see the macro scenario now?
Dr. Reddy: As you know, the Reserve Bank's position with regards to fiscal situation is fairly clear. We would like to see fiscal empowerment, a broadened tax base, reduction in subsidies, significant user charges, quality of expenditure particularly for social services. That's the fiscal package we would like to see. And if you read the economic survey as well as the budget speech of the finance minister, there is no difference in view about what is desirable.
How to go there and when to go there is a matter on which the Parliament and the State Legislatures will have to take a view.
Actual numberwise, the fiscal adjustment that has taken place in the last two to three years has not been less than expected from the RBI’s point of view and probably from the ministry’s point of view. The concern regarding fiscal situation continues to be what it was. But the recognition is more now and this is one hopeful fact.
But in terms of the macro economic impact, from the operation side, the borrowing program will have to be handled by the Reserve Bank so that will continue to be a complex task but so far we have been able to manage it reasonably successfully without serious threat to macro or financial stability. But it continues to be a complex task.
EQTM: The government has reduced deductions, raised taxes and reduced administered rates. Therefore, the taxpayer will retain lesser income in his hand. On the other hand the government has given incentives for buying capital goods. And then interest rates have been reduced to encourage investments by the industry.
Now given that the consumer has lesser income, he is likely to buy fewer goods, which is a logical deduction. And therefore, given the impact on demand, why should industry invest? This leaves us where we have been for a few years now – very little capital investment.
Dr. Reddy: It is very difficult to assess on the basis of data available so far on what will be the incidence of tax. So, how the financial savings will flow into different segments will depend on complex factors. Now when you decompose the aggregate demand, from whatever the numbers that we see, the total tax mobilization does not seem to be having any significant impact on disposable personal income. But this is subject to verification.
It may appear to be hitting some segments of the taxpayer. If you see the total numbers and the total number of mobilization from the household savers, in the totality of the budget, one does not see any significant increase. But I am subject to correction once you make a more detailed analysis.
But there is no blunt, large figure to hit you in the face to think that personal disposable income will come down.
As far as the tax concessions for investments in capital goods are concerned, the budget was actually addressing two types of issues in a given context. One is that there are structural problems, which are to be addressed. Second, is the cyclical, there are again can be divided into two parts – global and domestic. The global aspect is ofcourse not easy to handle. But fortunately, in the domestic cycle, in the last couple of months, one is seeing some signs of improvement. Our non-food credit is picking up, the exports are picking up, the non-oil-non-gold imports are picking up indicating some domestic economic activity. And then there are some sectors like cement and steel where there is a noticeable pick up. So one can say that at this point in time, there is a possibility that the revival has started or there may not be much slowdown.
One has to keep this in mind and prepare a mix of measures of structural nature and cyclically relevant measures. It appears that significant distortions have been removed, like the dividends not being taxed so far. I think in that sense the dividend income and the interest income has been put at par, which is a significant improvement.
Some bold steps have been taken. To sum up, in my view, it is a realistic budget, it carries forward the reform and as the realism of the structural measures seeps in, there could be a better appreciation of this budget.
EQTM: What is the most striking feature of this budget?
Dr. Reddy: I think in terms of the combination of measures relevant for financial markets, banking & financial sector, external sector and interest rate flexibility. On all these four the budget has provided a very good critical package. And once these things are through some important reform measures are in place.
EQTM: The government has finally stated that it will introduce a Government Securities Bill. What are your views on this?
Dr. Reddy: See in the Government Securities Bill the most important thing is that it cleans off all procedural problems we face and makes transactions in government securities easier.
In reality, to further this, we need to do three more things. One is the technological infrastructure, which we are doing. Second is the procedural aspect, which includes the Clearing Corporation establishment and electronic fund transfer etc. In the final analysis, if one were to look at the very long-term view, then one is looking at a situation where the retail investor will come in a big way, which would require measures over time.
EQTM: The global economy has been wobbling even as the Indian economy has disappointed once again. When do you think the global economy and India will get back on track?
Dr. Reddy: As far as the global economy is concerned one does not know – the UK is a question mark, US seems to be coming up, Japan is a big question mark. But one does not see a quick turnaround in the global situation, atleast not in the near term. It can be a medium term improvement.
And therefore we have to build in an assumption that a significant part of our outward growth will have to be domestically driven. And maybe even in spite of global uncertainty. That means the challenge is even more.
If you are implying that we are off track, one would not say that. In fact we were accelerating and that accelerated growth is not happening. It seems as if we have plateaued. In that sense you require another push to move into a higher trajectory. And that push from an analytical point of view has something to do with fiscal empowerment, structural aspects particularly like infrastructure and giving priority to agriculture. And one good thing is that the current budget has recognised the importance of agriculture more than any other budget in the past. So to that extent there is convergence.
So on the whole, if one were to look at the medium term prospects, I think if we are in a position to handle the fiscal deficit and the infrastructure we should be in a position to move to a higher trajectory.