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ndia is currently facing challenges in the management of its external account, reflected in worries about rupee depreciation, and concerns about the current account deficit (CAD),” Rathin Roy, Director of National Institute of Public Finance and Policy (NIPFP), wrote in his blog on September 14. Roy, who is also member of the Prime Minister’s Economic Advisory Council, is an economist who does not mince words when laying down facts and bringing out the economic challenges that the policy-makers have to tackle.

In conversation with BusinessLine on issues such as fuel price, rupee depreciation, fiscal deficit targets, and tackling CAD, he said that what the current challenges show is that the Indian economy remains vulnerable to external shocks. While maintaining that the government does not need to shift goal posts as far as fiscal deficit target is concerned, Roy says that he remains confident that by careful vigilance, effective communication and continuing with explicit policy stance, the present challenge can be dealt with. Excerpts:

Do you think the government should shift its goal posts as far as fiscal deficit target (3.3 per cent of the GDP)?

No I don’t think so. The fiscal deficit target is a commitment by the government, the fulfilment of which is key to the credibility of the government. Fiscal policy is one policy which is fully within the control of the Central government.

This government until last year has had an exemplary track record in securing the fiscal deficit target and that improved its credibility hugely. Last year, there was a minor slippage. This year the Finance Minister has asserted that the fiscal deficit target will be achieved. I see no compelling reason for the fiscal deficit target to be shifted. I am confident that in the aggregate tax revenues will be on target and there is no impending need for the government to upwardly revise its expenditure commitments because something has happened in the economy.

Oil prices are a cause of concern. They tend to have an adverse impact on the economy. It is inflationary…

Inflation due to oil prices, if it happens, will be reflected in the consumer price inflation index, which is the RBI’s job to target. The RBI will then use such instruments that are at its disposal and take a view on what to do about inflation. It would be wrong, given that this framework exists, to take action on a component of inflation.

Spike in retail prices of petrol and diesel has once again led to the debate on excise duty and local taxes component. What is your take on excise duty — States and Centre — component on petroleum products?

The demand for petroleum product is highly inelastic. An important component of this demand is to meet the personal transport needs of the rich. So, it is by no means clear that the entire impact of the changes in oil price will be on, what people call, the common man. A calibrated approach needs to be taken.

If consumption does not reduce when prices increase, then lowering taxes would further increase consumption and adversely impact the current account. Only if there were a decline in demand for petroleum products when prices rise, would there be a case for looking at whether taxes should be trimmed. As of today, I do not see this case.

Of course, this is not something that can be applied in a cookie cutter way across the economy. Different States have different circumstances and they may in their own wisdom decide that the impact of this should be calibrated by reducing taxes, as some States have done.

The rupee is charting its own path…

In my view, in a situation where you are running a structural CAD you would expect the rupee to depreciate. Therefore, the focus of the policy should be to see that the depreciation is not volatile.

And my own personal calculation is that 4-6 per cent depreciation is something that markets factor in given the size of our CAD — it will be on the lower side if the CAD falls and on the higher side if the CAD rises.

But, when the rupee depreciates beyond that, as happened for a very brief while recently, then we have to ask why? Whether the causes are external or internal?

One reason is that the CAD has widened but that was already expected and this impact on depreciation is within the 4-6 per cent range. Then you have to ask whether there are some external factors on why the rupee is depreciating.

If you do a cross-country comparison of CAD, you will find that we are well within the average band of emerging economies. So, the rupee or emerging economies may depreciate against the dollar due to the strengthening of the US economy and/or speculative efforts to “short” the rupee. If this is the case, then action has to be taken.

On the economic front what are the structural reforms you think we still need to do given that elections are ahead.

Structural reforms are not things you do with an eye on the electoral cycle. They are things you do because you think they are good for the economy. I have seen no indication on the part of this government that they are thinking of any structural reforms just because of the elections.

If I were to list the structural reforms we require at the execution level we would be writing a book rather than doing an interview. I think the major problem which India faces is that the sources of growth rest on an extremely narrow domestic consumption base. In the modern environment where export-led growth is not going to be the leading reason for growth, this is dangerous.

Domestically-driven growth is sustainable and inclusive when it comes from producing what all (the rich and the poor) Indians consume at affordable prices.

I can think of five things: a decent home, clothes to wear, food to eat, education, and healthcare. Unfortunately, none of these is available without subsidy at affordable prices even to those earning the minimum wage. These are not, therefore, drivers of growth. What drives the growth is demand for cars, two-wheelers, FMCG, recreational services — things that only rich Indians consume. I am not saying those below the poverty line should not be subsidised, but in an economy where I am forced to subsidise those who live at or above the minimum wage, something is seriously wrong. I need structural reforms. This is the root of the problem.

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