Stresses the need for aligning domestic petroleum prices with global rates

Cautioning against over-dependence on FIIs (foreign institutional investors), who bring in hot money, Chief Economic Adviser Raghuram Rajan, on Tuesday, said the government should focus on foreign direct investment (FDI) and open more sectors to such inflows.

“We have to be careful that we are not overtly dependent on external investors… that this is an environment when the external investor is quite fickle...,” Dr. Rajan said in his first media interaction.

Betting high on India’s reform initiatives, foreign investors had pumped in more than Rs.9,000 crore (about $1.67 billion) in the country’s equity market this month.

“The safest form of financing is through FDI, without any doubt because it is long-term... If you can make more financing through FDI, you are safer and so to that extent we can open up more to FDI... There will be efficiency, because there will be more competition in local economy,” Dr. Rajan said.

Recently, the government has taken a number of reform initiatives such as opening the multi-brand retail chain to FDI, hiking diesel prices by over Rs.5 a litre, capping the number of subsidised LPG cylinders to six a family a year, allowing foreign carriers to pick up stake in domestic airlines and liberalising FDI rules for the broadcasting sector.

Besides, talks are on to increase the FDI cap in the insurance sector to 49 per cent from the existing 26 per cent.

“More FDI is a good thing at this point, not in every sector but in many sectors ... So, in general, there is scope for more FDI in many sectors such as insurance,” he added.

Dr. Rajan also underlined the need for aligning domestic petroleum prices with international rates with a view to reducing subsidies and containing the fiscal deficit.

“The more we reduce our current account deficit (CAD), which means the more we reduce our overall spending, including the fiscal deficit, the safer we are. So, the move to narrow the fiscal deficit, by reducing subsidies, is important,” Dr. Rajan said.

The fiscal deficit was 5.76 per cent of GDP in 2011-12. The Centre aims to bring it down to 5.1 per cent in the current fiscal.

Besides, CAD had touched a record high of 4.2 per cent last fiscal.

“The best policy is to move towards the true cost of the fuel rather than go through second or third option. The problem with diesel versus petrol is not about vehicle, it is about fuel cost. If we can bring both to international prices or market prices, then people would make a choice,” Dr. Rajan said.

Referring to the proposal of hiking excise duty on diesel cars to check consumption of the subsidised fuel, Dr. Rajan said, “creating a new distortion by changing the price of diesel vehicle is a sort of the second best solution. If you cannot move prices towards the international level, then you may resort to differential tax on vehicle.’’

Replying to questions on inflation, Dr. Rajan attributed the high food prices to rising purchasing power, driven mainly by rapid economic growth in the recent past.

“One of the concerns of the last few years has been food inflation ... (mainly) because our population has become richer, and, therefore, demand for high-end food products such as milk, egg, meat, rather than old cereals. So, to rebalance or reduce food inflation, we have to produce more of that,” he said.

Dr. Rajan said the lower sowing of Kharif crops would put pressure on inflation.

On the global economic situation, Dr. Rajan said there was gloom in the world economy and India should try to bring in more investments, create jobs to set the growth path for the economy in the medium-term.

“We are certainly experiencing what the world is experiencing in terms of downturn. But of course we have home-grown problems also... I think getting just a few things right can stabilise the growth and also move it on the way up,” Dr. Rajan said.

Economic growth slipped to a nine-year low of 6.5 per cent in 2011-12 after recording an over 8 per cent growth in the previous two fiscals.

More In: Economy | Business