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  • : "I do not see inflation and interest rate problem really creeping..."

    "I do not see inflation and interest rate problem really creeping..."

    Mahesh Vyas began his professional career as a research assistant with Centre for Monitoring Indian Economy (CMIE) in 1980. He did his graduation in science and post graduation in Economics & Statistics. He then moved to International Economics to research the economics of East Asia and China between 1982 and 1985. Besides, he has worked on several sectoral studies and developed new systems at the CMIE.

    In an interview with Equitymaster, Mr. Mahesh Vyas spoke in length about the implications of higher crude prices on the Indian economy. He also expressed that 'he is impressed' by the current government.

    Eqtm: What will the impact of the sharp rise in crude prices over the last one-year on the Indian economy in terms of consumer spending, inflation, interest rates?

    Mr. Vyas: I think on inflation we have the worst already. So, I think we should not worry much on the inflation front. We have gone through a phase in this year that the agricultural stock will be extremely bad because the monsoon was not good. There were fears that agricultural production will be down by 2% to 3% or even more in this year, and that prices of agricultural commodities would rise. But none of that happened. Agricultural production is expected to grow by 1.1%, as per our estimates. Inflation in agricultural commodities, essentially the food crops and certain other non-food crops, have largely remained stable. There is seasonal crop inflation (like fruits and vegetables). Part of the inflation in August was also because of the truckers’ strike. Things like truckers’ strike have a larger impact than many other factors, which are of international importance like crude price. So, I think if we can take care of our supply bottlenecks, if we address the supply bottleneck problems, inflation is well taken care of. And that is what the government did.

    So, we did see the government actually reduce the tariff and non-tariffs barriers in the way of importing sugar, edible oil and it did reduce the tariffs on several other commodities to aid the process of inflation coming down or atleast not rising. So, it did take care to a large extent the problem that we could have faced because of high crude oil prices. I think we can still do a lot more by reducing the customs duty on petroleum products. I think it is necessary for us to do that to bring down prices and not make the Indian public pay for it because of high crude prices. It is a way of protecting our petroleum companies, mostly the public sector enterprises. Whether it is public sector or private sector, it is important for us not to let Indian enterprise demand a high price from the Indian consumer by way of protection. So, I think the fear of inflation is well passed away.

    There has been very sad fallout of the fears of inflation being high. And that is interest rate look like they will increase and rise quite substantially and since the market misread the rise in inflation, they were too tied up and many commentators were tied up with the wholesale price index whereas the correct measure of inflation is the consumer price index. The CPI has grown only by 4 or 4.5% compared to 8% or so in WPI. But this is global phenomenon that the commodity prices have gone up at a much higher pace than the consumer price. Since the markets misread inflation, they mispriced securities. I also believe that it would be better if the policy stance of the RBI were more inclined towards easing up liquidity than to mop-up liquidity. This would see both inflation and interest rates go down given that we are already addressing the supply side for inflation correction.

    So, I do not see inflation and interest rate problem really creeping for the economy.

    EQTM: On the government’s finances side, what will the impact of higher crude prices?

    Mr. Vyas: The fiscal deficit of both the central and the state governments put together is roughly of the order of 10% of GDP and this has remained more or less consistent for last several years. And if we take a reasonably long period, if we take 1991-92, the ratio has actually come down. But it has not come down much. And yet, in spite of this high fiscal deficit, both the evils of the fiscal deficit, which are interest rates and inflation, have actually come down. So, I don’t think there is need for much worry on the level of the fiscal deficit particularly because we are, as a nation, quite aware of the need to keep the fiscal deficit within reasonable limits. The implication of this is that we do not let the fiscal deficit increase any further. It is high. But it is not getting worse. And at this level, it is not causing any damage and so long as it remains that way it is fine.

    If the economy heats up and the demand for money increases, then the fiscal deficit will become a bottleneck in so far as it either causes inflation or it causes interest rates. But when we reach there, we can address the issue of having to reduce the fiscal deficit further. But if the GDP itself grows faster, it will enable us to mange it. So, the growth is what is most important.

    EQTM: How do you see rising interest rates scenario in the US impacting money flow into the country and on exchange rates?

    Mr. Vyas: Increasingly we are getting tied in into the global economic scenario and it is not possible anymore to say that changes in interest rates globally will not have any impact on the Indian economy. It is increasingly having an impact on us. India still has higher interest rates than the global level. So there is scope for us to still absorb it. It does have an impact upon the currency and that depends much on the kind of inflows, which come into the country. See, the higher interest rates in India attracted more resources into India. If the interest rates overseas rise, then the flow of resources into India can reduce or it can reduce in magnitude. If that happens, it will have impact on the currency, which will stop appreciating at the pace at which it is appreciating. But this is a complex thing. It is only the capital flow side of the story. You still have the trade deficit and the current account balance. You need to balance these issues to find out where the rupee will go. And the rupee, mind you, is not to be viewed only with respect to the dollar. As compared to the dollar, the rupee may be appreciating, but against the Euro, we may be depreciating. So, it is a more complex to look at.

    EQTM: The rupee appreciation could benefit for the country as a whole. Will it be right to assume that way?

    Mr. Vyas: It depends on which way you would like to see i.e. you are an importer, exporter, you are an investor into India, and so on and so forth. So, I do not think there is any point in saying that it is good for the country if the rupee is appreciating or depreciating. Obviously, as an exporter, you will be happy if the rupee depreciates. So, you do not have to take a call on that. The rupee should be left free to find its level. The best that we can do is to ensure that the movement of the rupee is not volatile. The management of the volatility of the exchange rate is more important than managing the level of the rupee. And traditionally, the RBI is more focused on managing the volatility in the rupee. So, I think we are quite ok.

    EQTM: Though too short to judge, what your assessment of the current government in light of taking forward economic policies?

    Mr. Vyas: Let me flag off by saying I am not political analyst. It will not be fair to comment upon the political party or the performance of the political party. And with this caveat, I will go on to say that I am impressed.

    I am impressed for several reasons. Most importantly, with respect to the reaction of the government to the markets, for example. When there was a stock market crash, the Finance Minister did not say that he is going to set up an investigation to figure out who did this and punish the culprit. The Finance Ministry, on the contrary, was extremely balanced, very well poised. The statements that emanated from there were partly to build confidence and partly to show that the institutional framework today in India is so good that in spite of such a severe stock market crash, there was no payment crisis. So, the Finance Minister did not come out to find who the culprits are and what the motivations are and the government is being bad mouthed or some such thing. There were no such statements made by the Finance Minister or by any part of the government, which is remarkable. Not many have compared this to previous occasions when whenever there was a stock market crash, immediately the SEBI was asked to carry out an investigation. It looked as if all falls in the markets because of culprits. It also goes to the credit of all those people who are engaged in the building of new institutions in the country such as the National Stock Exchange and so on and so forth. I was very impressed with the Finance Minister on the day on which the crash happened and watched with great interest.

    The second thing that impressed me a great deal is the Finance Minister saying that he is not a Finance Minister as much as he is an Investments Minister. And without bending backwards to give additional sops and talking about reducing tax rates to attract investments, there is enormous belief that there needs to be more private investment. So, that is the second thing where I believe that the government is held in the right direction.

    The third is there are too many, now you can very clearly say, unnecessary speculative remarks about Sonia Gandhi holding the strings and Dr. Manmohan Singh being a puppet and so on and so forth. It is totally impressive for both the Prime Minister categorically saying that he is the Prime Minister of the country and he is here to stay and for Sonia Gandhi later on to independently say that she does not run the government. She does not ask for files. So, these statements coming out without dramatization, but coming out to build confidence in the government is absolutely remarkable.

    I am also impressed with the way the government is able to consider several options and take its time to think out the right strategy. There has been no hurry in trying to make headlines and prove that you are better than the best when it comes to reforms and I think it is good for democracy by bringing in a bigger and a larger dialogue with respect to what the reforms should be and it should be conducted. So, once again I am impressed.

    EQTM: In one of our previous interviews, you had mentioned that there is a ‘mind-set’ problem with Indian corporates as far as competition is concerned. Do you think it is slowly changing and corporates are feeling more confident about the post 2005 challenges?

    Mr. Vyas: See there certainly is a change in the mindset of the Indian corporate sector. They have understood that liberalisation is not a cakewalk. They have clearly understood that the fancy profit margins that they were getting in the mid 1990s are not a long story of liberalisation. Liberalisation is hard work. From the frenzy of the mid 1990s, the mindset went to saying let us have equal frenzy in asking for protection. They have learnt by now that you cannot do that. And the Bombay Club or whatever it stood for is now happily dead. The corporate sector is gearing itself up after 10 to 12 odious years with a reality of liberalisation. The reality of liberalisation means more intense competition, which mean lower margins, which can only be offset by higher volumes. Yes, the mindset has changed for sure.

    That has also meant a large number of population have just given up in terms of trying to be entrepreneurial. So there are fewer industrialists who are capable and who are willing to take the risk and challenges for liberalisation. It has been a pretty long time. But the liberalisation process has distinguished the men from the boys.

    EQTM: What about the smaller players, especially the small-scale industries? What is required on that side?

    Mr. Vyas: Consolidation. The small-scale cannot survive and there is no need to protect the small-scale industries any more. The small requires to become big or it should become extinct. But I do not think there is any point in trying to support. Nothing needs to be done about them. If anything should be done it should be to help them consolidate, to help them put their resources together to form some kind of a conglomerate and to face the challenges of globalisation.

    EQTM: Are we helping people to come and invest in India by providing them the right environment say, approvals, regulations or…

    Mr. Vyas: I think we have done enough of this pandering. And I think we should stop and we should not be doing this anymore. The economy should solve other problems, should solve the environment. For example, I would say the judicial system need to be improved. There needs to be more confidence in the judicial system. There should be an institutional arrangement to ensure that contracts are enforced. You should not be able to pull strings and get away with murder. It is not anymore important to throw a red carpet at foreign industrialists without solving these issues because if we do that, they will say, “you have got a rotten judiciary and you have got a rotten enforcement system over here. So, you assure us that we will not be harmed by these poor things over here.” And that would be completely unfair. We would again create a skewed environment. We have created good institutions like the National Stock Exchange, such as the SEBI and many other regulatory bodies are falling into place. We need to ensure that the institutions are strengthened. And if these institutions become credible and become quick in their delivery, I think we will get tremendous amount of investment. And it will be a route very different from what China has taken.

    EQTM: Another area that has attracted lot of attention is the population mix of India that we will have more young people, which is a great growth opportunity. What are the pitfalls of the same? Is ‘services’ the answer?

    Mr. Vyas: Yes, the larger number of younger population means that there is going to be a bigger challenge in terms of providing them the jobs. I think the services sector does hold promise but that is not all. We certainly need to grow on all fronts, on agriculture, industry as well as on services. I do not think services can handle the problem of employment entirely.

    EQTM: Despite the India story of strong services sector and good industrial sector performance, the agricultural leg continues to lag. What are the ground realities as far as the farmers are concerned?

    Mr. Vyas: The ground reality is very tough. Agriculture is the riskiest business in India. Every alternative year, you have a crop failure. Income growth is not more than 1.5% to 2.0% per annum. So, if you see this kind of growth rate continuing and you have 60% of the population dependent on agriculture, obviously you are tying yourselves in a sector that is not growing. So, the way out is to invest in agriculture and help overcome the problems of poverty, employment and growth. So, there is a big need to invest there in a big way.

    EQTM: Post WTO impact on the agricultural sector? Are we competitive?

    Mr. Vyas: We don’t have much of an issue with respect to WTO on agriculture. It is less of a problem, as agriculture world over is a consorted market.

    The WTO hits us more and more directly on the manufacturing sector. And you will see the garments sector getting into a lot of challenges post the WTO. We have already seen the capital goods industry taking a beating. There is high protection in the intermediate sectors, particularly chemicals. The petrochemical sector is highly protected in India. As these protection levels go down, thanks to the WTO and thanks to whatever else, these sectors will get more severally challenged.

    EQTM: What is your view on the Indian economy with respect to say, other developing nations? Lot of hype with regard to the prospects of the BRIC nations. How would you compare India with other developing economies when it comes to macroeconomic stability, growth prospects and the strength of the financial system, to name a few?

    Mr. Vyas: India is substantially different from many of the others. It is big like Brazil and China. But it has a stronger foundation on democracy. It has better institutions in place and it will grow by these institutions. And therefore, if we don’t strengthen these institutions like I mentioned before the judiciary, we will be handicapped. So, if we can get our institutions in a stronger position, and I will go back to the case of the NSE, it is wonderful exchange and now the BSE having learned from the NSE. If we can create credible institutions like these in the areas of public policy, whether it is the CERC for electricity or it is the IRDA for insurance or it is something for roads or something for telecommunication and the judiciary, I think we will get far better growth rate than any other country. Then the investment will be right kind. They will not come here to merely exploit.

    EQTM: What is your long-term outlook for the Indian economy with respect to its strengths and weaknesses?

    Mr. Vyas: The opportunities are huge. India is still a highly under-invested economy. Our natural resources are huge; the markets over here are large. You can leverage both these to take on the world. And all that it requires is for Indian enterprise to seize the opportunity.

    It is not so important to look at FDI, as it is important to look at our own investment capabilities. The banks are flush with funds. But there is bankruptcy of ideas. So, if we can get entrepreneurs to come with ideas, money is available. The markets are still waiting to get better goods and the natural resources are still waiting to be deployed. It is the classic kick-start problem. The government needs to fix its own machinery. It does not have to go and call FDI yet. If it can fix its own machinery and say it will deliver governance in the right way, I think we are home.

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