The current crisis in the US economy will affect capital flows, but India’s long-term growth story remains robust, C Rangarajan, chairman, Prime Minister’s Economic Advisory Council tells HT. Excerpts.
How would the crisis in the US affect the world
The slow pace of growth of the American economy has implications for developing economies in terms of trade and capital flows. If the growth rate is very low in developed countries such as the US, it will affect the export of goods and services from developing countries such as India.
One of the immediate questions that arise is whether the dollar has lost its strength to be the world economy’s reserve currency. Your comments...
I think at the present moment, there is no clear alternative to the dollar as a reserve currency. There will be no shift from the dollar to other currencies. I think the price of gold will remain strong and rise over the next few months.
In an uncertain situation in the past, the safe haven was the US and entities moved into dollar. But now since the dollar itself is under attack, gold becomes the most attractive asset.
It is not all to do with the US alone. The eurozone is also in crisis and manufacturing appears to be slowing down...
In the US, the problem is of fiscal consolidation. In Europe there are several countries that are facing severe debt problems. The euro as a currency is also getting affected.
What are the major policy prescriptions that policy makers can resort to in India?
The downgrade itself is a reflection of the lack of credibility in the debt reduction plan that has been approved by the Congress and the Senate in the US. They are caught in a dilemma because of the immediate crisis. They need to provide some stimulus to the economy.
On the other hand, the expansionary fiscal policy over the last few years has resulted in a huge fiscal deficit and rising debt-to-GDP ratio. So the course of action for the US is to provide some stimulus in the short-run, but also provide a credible medium term fiscal consolidation programme.
Are we looking at the possibility another quantitative easing programme?
It may not necessarily be of the order that was there earlier. Some easing may be there in the aftermath of the current crisis. But this is something they cannot carry it too far for too long.
What is the impact on the Indian economy?
The immediate impact is on the stock market. This is a reflection of the fact that foreign institutional investors (FIIs) operate in several markets in the world and they carry with them the same sentiments. India’s growth story remains strong and investors will recognise that in the current world situation, India is among the major growth areas.
This will ensure that capital flows back into India. I don’t think we have a liquidity problem. I still think the growth rate in Indian economy will be close to 8.2% in the current fiscal (2011-12).
Have we seen the end of the interest rate hike cycle?
There are still four more weeks before the RBI can act. I believe the RBI’s actions will be guided by the behaviour of inflation over the course of the next few weeks. International commodity prices may come down and this may have favourable effect on domestic inflation.
How will our exports get affected in wake of the crisis in the US given the fact that more than two-thirds of our exports are to the US and Europe?
To some extent, our export performance will be affected, but I still expect export growth to be reasonably high.