Earlier this month, Reserve Bank’s Deputy Governor Urjit Patel spoke about the impact the US Federal Reserve’s Taper would have on India to The Hindu . The interview was conducted before the Fed’s vote on Wednesday to end its bond buying stimulus, or Quantitative Easing (QE) and at the same time leave unchanged its pledge to keep interest rates in the US at near-zero levels ‘for a considerable time’. When contacted on Thursday, Dr Patel confirmed his views remain unchanged after the Fed’s decision to end the QE.
Q: What will be the impact of the US Fed’s decision to end the QE programme?
India will have to prepare for this normalisation due to which there will be some movement of capital back home to the US. We got a taste of this last year. Since then we have higher reserves, lower current account deficit, easing inflation and we are on a path of fiscal consolidation. There is good news that prices of commodities such as crude, fertilisers, gold and coal , of which India is a big importer, are easing.. There is bad news too if global economy forecasts keep coming down and if the global economy does not break out of the ‘mediocre growth’ that has been talked about.
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The Fed will inevitably be raising interest rates because the US domestic policy goals that inform monetary policy will warrant exit from unconventional policies that have been pursued all along. Asset sales will have to stop which means interest rates cannot remain zero. This was inevitable and at some point had to happen. The US unemployment rates are dropping which is likely to put upward pressure on wages and therefore to keep inflation down to the 2-per cent objective, interest rates will have to rise and monetary policy will have to be normalised.
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For India, the taper will thus imply that the funding for infrastructure will have to be domestic. And, if [Government] policies are aligned—especially on the energy side—we could be surprised by the uptick [in growth]. Policy changes will produce cash flows from projects in the pipeline and that will also crowd in more private investments.
Q: The Reserve Bank’s annual report had flagged the record high in non-performing assets (NPAs) in the infrastrcuture sector and stressed the need for the Government to smoothen out the policy hurdles holding up these projects. What can the Modi Government do?
Also, if one goes behind the numbers on NPAs of the banking system in the infrastructure sector, it is important to note that these assets are real and can quickly bring in cash for the banking system if we just fix two-three thingssuch as power purchase agreements, fuel supply agreements. This should be the main task - to square that circle.
Q: While the US Fed is ending its monetary stimulus -- of ultra low interest rates and supply of funds under the QE programme -- to the US economy, the US Government is said to be considering a fiscal spending push to infrastructure to perk up the gradually recovering American economy. Will it work?
A: We understand that people are talking about the bazooka of increased fiscal spending to fund infrastructure investments and have two comments to make on that: When you are planning on beginning a cycle of raising interest rates it is not a good time for starting publicly driven infrastructure investments. Five to six years ago in 2009 when interest rates were going to be lowered was the right time to do that. That is because when you are exiting from unconventional monetary policy and will be raising interest rates the cost of publicly funded infrastructure projects will rise. We don't think the developed countries have the fiscal room to do this. The US debt to GDP [Gross Domestic Product] ratio is already more than 100 per cent and in addition, they have public spending commitments for healthcare, old age pensions and social security.