Hiking interest rates is the right step for taming inflation
At a time when India Inc. is saddled with the twin problem of high inflation and low industrial growth, Prime Minister's Economic Advisory Council (PMEAC) Chairman C. Rangarajan on Thursday pitched for roll back of the excise duty stimulus that was provided to the industry to combat the slowdown in the wake of the global meltdown in 2008.
At an interactive session at the Economic Editors' Conference here, Dr. Rangarajan made out a case for urgent rationalisation of subsidies along with roll-back of excise duties to the pre-crisis levels if the budgeted fiscal deficit target for 2011-12 is to be met. “Adjustment in subsidies will have to be done as early as possible. Otherwise, we will not be in a position to contain [the] fiscal deficit,” he said.
As things stand, Dr. Rangarajan maintained that it would be a Herculean task for the government to retain the fiscal deficit at 4.6 per cent of the GDP (gross domestic product) as estimated in the budget for 2011-12, a point that was highlighted by Finance Minister Pranab Mukherjee himself during the inaugural session of the conference on Wednesday. “It could be slightly higher than 4.6 per cent. I think it is very difficult to talk about number. It could exceed by a small margin,” Dr. Rangarajan said.
In this regard, the PMEAC chief also stressed the need for ending the “accommodatory” fiscal policy measures by raising the excise duty rates to pre-crisis levels. “I would suggest that we really need to raise the excise rates to the level at which they were prior to the crisis. But during the year, I do not know whether it is possible or wise, because normally, we don't raise excise duty within the year... Going ahead next year [Budget for 2012-13], it is something that one can do,” he said. It may be recalled that to help the manufacturing sector in tackling the global crisis impact, the government had provided three fiscal stimulus packages starting from December 2008 which included reduced excise duties among other sops. Accordingly, the three major ad valorem excise rates (14 per cent, 12 per cent and 8 per cent) applicable on non-petroleum products were slashed by four percentage points and later, following economic recovery, the duty cuts were partially rolled back a couple of years later.
In the current uncertain environment, high inflation had led to a squeeze on investment coupled with a fall in demand leading to a slowdown in industrial and overall growth. A former RBI Governor himself, Dr. Rangarajan felt that hiking interest rates was the right step for taming inflation and the repo rate was not at the pre-crisis levels as yet.
“The RBI has been raising rates... in baby steps. Therefore, the present repo rate is still lower than at the pre-crisis level. But with inflation rising, the responsibility of the central bank becomes greater … Inflation is remaining at a level way above what I would call the comfort zone. Therefore, it becomes absolutely essential for the RBI to act,” he said.
As for the GDP growth prospects for the current fiscal, Dr. Rangarajan said that owing to various factors, the PMEAC has lowered its projection to close to 8 per cent from its July estimate of 8.2 per cent. “The PMEAC had projected a growth rate of 8.2 per cent in July. There are many factors which will require us to adjust it downwards. I expect that the growth rate in the current year will be close to 8 per cent,” he said.
The PMEAC chief pointed out that while farm sector growth would be stronger than what was projected earlier, “the industrial growth rate will be lower, while the services sector growth rate will remain more or less the same” as anticipated.
Dr. Rangarajan also cautioned that although the overall savings and investment parameters were “conducive” for 9 per cent GDP growth, but “if we try to push economy to grow beyond 9 per cent, it will impact the balance of payments (BoP) and create inflationary pressure”.