In an interview with Equitymaster, Dr. Rakesh Mohan, Deputy Governor, RBI shared his views on the global economy and key objectives of the Monetary Policy 2003-04.
EQTM: How do you perceive the global economic environment today?
Dr. Mohan: The global environment is in a great deal of uncertainty. In the US, great deal of uncertainty is prevalent regarding the recovery from recession and, so far, we are getting no encouraging indicators. Also, the tax plan of Mr. Bush designed to stimulate the recovery is facing two problems – one, the political opposition and two, substantial criticism that the kind of tax cuts that are proposed are not likely to stimulate recovery. There are not many indicators that signify an upturn. And, now there is a new element of uncertainty on account of SARS. However, it is too early to say what kind of an effect it will have. The only positive factor is the likelihood of oil prices coming down to US$ 22-25 per barrel. The IMF has also scaled down its growth projections for 2002-03, thus indicating the level of uncertainty.
EQTM: What are your macroeconomic views on India?
Dr. Mohan: As for the internal environment, first regarding agriculture, the meteorological department has projected monsoons that will be 96% of long period average monsoon in FY04. If you look at the records on agricultural growth, if monsoons actually turn out to be 96%, and if there’s no problem of distribution, then we will actually have a strong recovery in agricultural output from a very large fall last year. This is because last year the actual rainfall was only 82% of the long period average. The previous 3-4 years also have had, on an average, 98% or below rainfall, and it was only in 1992-97 that we had more than 100% rainfall.
On the industrial side, we have had a pretty strong growth in the previous year, and the minimum one expects is a similar growth this year. One major encouraging point is that Indian exports have grown by 18% this fiscal and it is for the first time that Indian exports have crossed the $50 billion mark. Also, the major components of exports, i.e., core items like engineering goods recorded a growth in excess of 15%. One specific thing that is such a good indicator is the export of over 70,000-80,000 cars in the past fiscal. It is a good indicator because you cannot export this number of cars unless you are competitive. This means that we are producing high quality components and we have climbed the quality ladder. People are confident that a car ‘Made in India’ is something that can sell abroad.
These are indicators of some kind of competitiveness being achieved by the Indian industry. Secondly, the recovery in corporate profits is another positive sign. In most recent results, profit growth has been much higher that the revenue growth, which indicates that the cost-cutting measures applied by these companies are giving the benefits, and if higher profit growth continues, then investment will also come about. If you look at the industrial production data as well as the import data, highest growth is achieved in capital goods. As for the services sector, it will continue to do well. The only concern is a slowdown in IT exports.
EQTM: How important is infrastructure as a driver for growth? How much of an impact does it have? Will the infrastructure sector continue to grow? Will financing be available for this purpose?
Dr. Mohan: I think that the experience has been that if you have projects that you can bank upon then there will be no problems in financing.
EQTM: Is the hype around road construction justified? People are factoring in the linking of the river projects in the projections going forward? Does it, or will it, have a very tangible impact on an economy like India?
Dr. Mohan: Looking at it broadly, for industry to be competitive, it will need an efficient infrastructure. The reason being that with the ongoing liberalization process and the lowering of tariffs, you can get tradable goods world prices. So in industry, as far as exports are concerned, there is not any disadvantage. And therefore the prices of non-tradables become very important for competitiveness. Therefore, any kind of infrastructure investment has a very positive impact on competitiveness as a whole. You can also see from companies’ results that there has been a significant decline in the share of interest costs in total costs.
EQTM: What, in your view, will drive the Indian economy going forward? How is RBI placing itself to support that growth?
Dr. Mohan: Our policy measures are to do with the efficiency in the financial sector. And this policy, and the previous ones are all in that direction. Another important function is to manage liquidity, so that all legitimate credit requirements are met at the lowest interest possible.
EQTM: How far ahead has RBI come to achieving its objective of flexibility in the interest rate market?
Dr. Mohan: The statement of the Governor would suggest that we are still not totally there in achieving flexibility of interest rates. He has again talked about using floating rates both for deposits and lending. As such, we still have some way to go in terms of the kind of flexibility we would like to see in the interest rate structure.
EQTM: Coming back to the issue of SSIs, and the availability of credit to them and the cost at which it is available, there continues to be a large disparity in terms of what AAA rated companies are able to mobilize money at, and what these SSIs are able to do. What are your views regarding this issue?
Dr. Mohan: One issue that has been addressed in the policy statement is to do with the determination of PLR. We felt that it still is not clear at all as to how PLR is to be determined and that there was a sort of multiplicity of PLRs. What we have advised banks in this policy are certain guidelines as to how the PLRs have to be calculated. If that is followed or implemented, we expect to see some compression of rates between the lowest cost borrower and the highest cost borrower. However, this is an open issue and it remains to be seen how credit appraisal of these SMEs can be more efficient. We do not want bad SME creditors to get low interest rates, but what we do want is good creditors to get credit at good costs.
EQTM: One thing that definitely contributes to the cost of money and lending is NPAs. We have not seen explicit statements coming in terms of what banks should do to tackle the problem. Is that an issue that is not going to raise its head again?
Dr. Mohan: Well, you can’t shout ‘murder’ on the rooftop everyday! All the recent measures like the Debt Recovery Tribunals and the Securitisation Act ought to make it easier for the banks to address the issue of NPAs. And as ARCs are coming into action, you will start seeing NPA’s getting removed from banks’ books. Also the debt-swap initiative, depending on how it works and how successful it is, is also providing the banks a window to check this menace.
EQTM: The reason we asked this question was that directly the NPAs were driven by term loans going bad or working capital given to large firms turning sour. Now the issue is that there is a huge rush to give loans to retailers? Banks are actually debating and bargaining the rates with the customers? How will banks factor that in going forward?
Dr. Mohan: So far the experience has been of low NPAs in terms of retail loans. And as the weight of these loans increase, the banks' management would have to tackle this issue for themselves.
EQTM: What would be your main concern as far as the Indian economy is concerned?
Dr. Mohan: The biggest concern right now is the high fiscal deficit of the states and the central governments.
EQTM: What steps have you taken to counter this problem?
Dr. Mohan: Well, it is very clear that there is no free lunch. The government has to be willing to collect and the citizens have to be willing to pay.