In the past few weeks, the rupee has been falling and crude oil prices have been on the boil. ASHIMA GOYAL, professor, Indira Gandhi Institute of Development Research, Mumbai, and member of the Prime Minister’s Economic Advisory Council, tells Joydeep Ghosh the Reserve Bank of India (RBI) will have to consider a number of factors, including fluctuating commodity prices and revival in investment cycle, before taking a call on interest rates. Edited excerpts:
India is facing rising crude oil prices and a falling rupee. How will this affect the current account and fiscal deficits?
Both have a negative impact on the deficits but the final effect depends on countervailing forces and possible policy action. For example, the latest data shows some rise in Indian export growth. It might be that Goods and Services Tax-related issues are finally moderating. Our exports usually do well when world demand rises or oil prices rise. Tax buoyancy due to reform and improvement in growth, together with economy in expenditure, could help reduce any impact on the deficit.
With crude oil rising above $80 a barrel, will the impact on inflation be marginal or significant?
It depends on the rise’s persistency and on possible substitution away from the use of oil.
If crude oil continues to stay high, the RBI will feel pressure to raise rates. Do you see this happening, if not in June, in the August policy review?
The RBI looked through a sharp fall in food price inflation in 2016-17 and did not lower rates. This implies they want to be forward-looking and look through sharp commodity price fluctuations, unless these are expected to be persistent and have second-round effects. There are also current temporary base effects on inflation. The taper-on tantrum of 2013 showed that raising of interest rates to reduce outflows did not work, while many kinds of intervention were successful in reducing the rupee’s excess volatility.
Foreign inflows to India are driven more by its growth prospects and unique status as the highest growing large economy. Given global vulnerabilities, domestic demand and the beginning of an Indian investment revival need to be protected. RBI will have to assess all these.
The government has announced a massive public sector bank (PSB) recapitalisation, of over Rs 2 trillion. However, these banks’ problems do not seem to be receding. Will the government have to put in much more to revive the sector?
The problem of non-performing assets (NPA) seems to have peaked. The demand-led slowdown in credit growth that was adversely affecting PSBs seems to have moderated and there is some growth in credit. Also, the first large NPA case (Bhushan Steel) has been resolved under the insolvency code and National Company Law Tribunal. While there is a case for further strengthening of bank balance sheets, it should be only as much as required and conditional on effort to improve governance and profitability.
Given the state of PSBs, with 11 of these under RBI’s Prompt Corrective Action and others are under threat, how will small and medium-scale enterprises (SMEs) get the needed capital to grow?
Non-banking finance companies and financial technology companies are able to give non-collateralised loans, based on cash flow and other current big data. There are healthy signs of diversification and alternative sources of funds in the financial sector. PSBs, however, will continue to be a major source of funds for SMEs. The government has made their recapitalisation conditional on an expansion of Mudra loans. Since these are of small denomination and diversified, they are less likely to create large NPAs and be tied to efforts on improving the risk-assessment capabilities of PSBs.