Chairman of the Prime Minister’s Economic Advisory Council Dr. C. Rangarajan tells M.K. Venu that India could explore an NRI bond issue of the kind done in 1998 after the Asian financial crisis, to meet the potential shortfall in capital flows in the short run. However, the high current account deficit will have to be addressed in the medium to long term. Excerpts:

You said after the Union Budget presentation in end-February that the economy can quickly come back to about 6.5 per cent growth if big investments, already in the pipeline, are pushed in railways, roads, ports and coal mining and power sectors. Are we anywhere near realising that objective?

There are no definite signs that private investment has picked up. Recent data on industrial production and more particularly on capital goods seem to confirm this. However, according to the latest data on national income, even in 2012-13, the Gross Fixed Capital Formation rate was 30 per cent of GDP. This, under normal circumstances, should have given us a growth rate of 7 to 7.5 per cent but the actual growth rate turned out to be five per cent. The rise in the incremental capital output ratio may be because projects have not been completed in time or complementary investments have not been forthcoming. In some cases, this can also be due to non-availability of critical inputs such as coal and power. The high level of the current investment rate gives us hope that if we take actions to speedily complete the projects, we can get a higher growth rate even in the short term. The Cabinet Committee on Investments will help.

Focussed attention is being given to achieving the production and capacity creation targets in coal, power, road and railways. Frequent meetings are being held to overcome the obstacles and constraints. In my view, the public sector will act as the driver of economic growth which will also act as a stimulant to private economic activities. Taking all factors into account, the growth rate will be higher than last year, perhaps, at around six per cent.

On completion of projects, I must also mention that in the most recent period, environmental and land acquisition concerns have very much come to the forefront. Setting up of every power plant is facing difficulties. The nuclear power plant in Tamil Nadu has remained idle after having made an investment of more than a few thousand crores of rupees. Over the medium term, we need to resolve these issues if we have to sustain high growth. We cannot sacrifice environmental issues but at the same time growth is important. We need to work out a suitable compromise between compulsions of growth and concerns for the environment.

You have said an otherwise manageable CAD now looks vulnerable with the U.S. Federal Reserve hinting at a tightening of its easy money policy of the last four years due to improvement in U.S. job market conditions. How do you see the next six months in this context?

The remarks relating to the tapering of quantitative easing (QE) in the U.S. have had a sharp impact on the markets. In many ways, it was an over-reaction. We have a high current account deficit and in the short run, we need capital flows to cover this deficit. We require a short term as well as a medium-term strategy to overcome the problems. In the immediate short term, we should explore all avenues to increase capital flows. Over the medium term, we must bring down the current account deficit to more manageable levels. In fact, we should start doing this right away. While the U.S. economy has shown improvement which is good over the medium term for all countries, it has still a long way to go. I do not see QE tapering in the next six months. I expect capital flows to resume soon.

Going forward, will capital flows get disrupted in the backdrop of the U.S. monetary stance? All emerging economies are feeling the heat. India has $172 billion of external debt to be paid by March 2014. Is that a source of worry given the prospect of liquidity withdrawal at the global level?

There was a big capital outflow in the month of June 2013. FIIs withdrew almost U.S.$7.5 billion as against the inflow of U.S.$5.2 billion in May 2013. This is a turn around of U.S.$12.7 billion. Besides the current account deficit, we also need to take care of other obligations such as the repayment of debt. As I mentioned earlier, I expect capital flows to resume shortly. Relative to most other countries, India’s growth rate is still high. This should be an attractive factor for investors.

What strategies can India adopt to insulate itself from the disruption that may be caused by the global finance capital play?

As far as capital flows are concerned, we have seen the worst. Federal Reserve has clarified that there are no immediate possibilities of QE tapering. In the short run, we should raise more funds. In the past, we have raised foreign exchange through the issue of NRI bonds. This is an option we must explore. We must, however, choose the right time. Over the next few years, we must reduce the current account deficit so that our dependency on capital flows is reduced.

You mean the kind of NRI bonds issue after the 1998 Asian financial crisis?

Yes, something similar to that. However, we need to overcome some regulatory concerns at the U.S. end for making such a bond issue today.

The government has recently announced several measures to encourage capital inflows. Are they working?

The measures announced to encourage capital inflows are appropriate. These measures are mainly focused on increasing the flows under FDI as well as FII portfolio investment. They will have a much bigger impact after the current phase of reaction to the FED statement fades away.

Where is the rupee headed in the current circumstances? What should be the strategy for management of the rupee?

The rupee is under pressure for two reasons. One reason is that the CAD is high, and the other is that capital flows have slowed. As capital inflows resume, this pressure will ease. Till that time, one could see some volatility in the value of rupee. However, the Real Effective Exchange Rate on a 6 currency basket as well as a 36 current currency basket seems well adjusted. As of now, there is no appreciation of the rupee in real terms.