If you think the Reserve Bank of India will start reducing repo rates in its March 15 policy review without giving credence to the fiscal deficit situation, think again. For the way long-term interest rates would move will depend largely on the fiscal deficit and the flow of funds from abroad, said Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia.
“There must be no doubt that interest rates are going to be determined by what happens to fiscal deficit and what would happen to flow of funds from abroad. The industry is convinced that, no matter what happens to fiscal deficit, the RBI should reduce the repo rate to promote growth. That is not going to be true”, Mr Ahluwalia said, at a national conference on infrastructure finance, organised by Assocham here on Friday.
India's fiscal deficit for 2011-12 is expected to exceed the targeted 4.6 per cent of GDP by a wide margin. Indications are it would be 5.6-6 per cent of GDP.
Mr Ahluwalia said it was difficult to judge the prospects of fund flows from abroad right now simply because of huge uncertainty internationally. He said India can return to 9 per cent growth levels if it can get its act together and finance its current account deficit (CAD), which is expected to exceed 3 per cent of GDP in 2011-12. He said there has to be a net foreign inflow to finance the CAD.
Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister (PMEAC), had recently said that efforts should be made to bring the CAD down to 2-2.5 per cent of GDP.
“While the position in regard to capital flows has greatly improved, it will, however, be judicious to try and limit the CAD…especially as long as the international financial markets continue to be adversely affected by the troubles in Eurozone”, Dr Rangarajan had said this week. The PMEAC has projected a CAD of 3.6 per cent for 2011-12 and 3 per cent for 2012-13. The Finance Minister, Mr Pranab Mukherjee, has expressed optimism over managing the widening CAD, given that the country's export basket and destinations are getting diversified.
With the new manufacturing policy, India's exports should get a boost, Mr Mukherjee had said.
Meanwhile, on infrastructure development, Mr Ahluwalia said that the Government should focus on getting rid of implementation bottlenecks such as land acquisition, fuel supply issues and environmental clearances.
Financing of infrastructure will not be a constraint at the present level of investments, but may turn out to be a problem in the next five years, when the aim would be to double the level of investments, he added.