Is the worst over for the economy?: Pronab Sen

Last Updated: Sun, Jan 06, 2013 04:43 hrs

Pronab Sen, country head of International Growth Centre and former principal advisor (Planning Commission) tells Dilasha Seth that though the economy seems to have bottomed out, it would require active government intervention to come out of the low growth phase

Do you feel that the worst is over for the economy?
That's a bit difficult to say. In a sense the figures suggest that we have bottomed out. But bottoming out can be like an L', so you can hang around there for a while. If you remember, between 1999 and 2002, we just hung around at 4.5-5 per cent. To bring the system out of the low level situation, we may need to have a very active government intervention. During the 1997-2003 slowdown in India, what really kickstarted it was the highway programme which kicked off the recovery. We need to have something similar. In the last couple of years, infrastructure investments have been in doldrums. All the dynamism we had earlier pretty much went away - in the road sector because of problems with the public-private partnership and also because of problems in the power sector.

Finance Minister P Chidambaram said gold imports could be made expensive if other alternatives to curb its huge imports do not work. Will making gold imports expensive not lead to smuggling?
Yes it could, but they are talking about just 4-6 per cent duty which is not large enough to attract smugglers. Smugglers need much larger margin - 30-35 per cent. But, there is an expectation issue. If people who are buying gold today get this feeling that the government will increase the duty, then they can expect capital gains if they import today as the domestic price will go up.

How far will the Cabinet Committee on Investment (CCI) go in accelerating investments and implementing large projects?
There is technically nothing that the CCI will be doing which the Cabinet Committee on Infrastructure, which existed earlier, wouldn't do. This just broadens the horizons, as this is not just infrastructure, it is investment. But when you are talking specifically about public investment in infrastructure, I don't see it making much difference. It would only make a difference to large private sector projects.

Will the deal to avert fiscal cliff in United States help the Indian economy recover through a boost in exports?
I am not very clear as I have not seen any analytical work done on the reason for the export slowdown. We immediately point our fingers at the demand side saying that since the world economy is not growing, nobody is buying from India. I am not sure if that is entirely the case. I suspect that because of very little investment from the corporate sector in the last two years, we may be looking at a supply constraint than demand.

Do you think slowing exports is more of a domestic issue?
Our imports are not slowing down. A fast rise in imports suggests that there is a demand which the domestic supply is unable to meet. If that is the case, then it is quite likely that the domestic supply is unlikely to meet the export demand as well. This would be particularly true in a situation when you have relatively high inflation in India. Even if you take the rupee depreciation, the fact is that the inflation-adjusted price is pretty much stable. So, there may be supply constraints, which may be released once domestic investment and capacity creation gathers momentum again.

When diesel prices were increased, economists estimated inflation to go up by 1.5 percentage points. But that hasn't happened.
I don't know where they came up with these figures. It is 0.3 percentage points. Food inflation is going to sway a bit. The negative last year was due to high inflation the year before. We need to start averaging these things rather that looking at it month-on-month.

Do you think that RBI will start with the expansionary policy from January?
If policy rates start going way out of line with market rates, then you have a problem. Then policy rates no longer become effective signals. They must be close enough so that market rates follow policy rates, rather than the other way round. I feel that in January, RBI is going to do a downward adjustment on the policy rate - just to keep policy rates relevant and not for any other reason.

Two crucial years of the five-year plan will see slow growth. This fiscal will be about 5.7-5.9 per cent and next year will be about 6.5 per cent. Isn't 8 per cent an ambitious target?
Next year can be 8 per cent. You never know. Things can turn around very fast. Today, as far as corporates are concerned, financing is not an issue. The moment they regain confidence, you would see corporate investment zooming up in a very short span of time - in 6-8 months. But we also know the external issue. It is because of external issues that we were seeing 8.2 per cent. I am an optimist; the current situation will start looking up in 2013.

There are others who say we are in deep trouble. That's a sentiment thing.

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