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'RBI can only print rupees, not foreign exchange'

india Updated: Sep 30, 2012 21:44 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
Gaurav Choudhury


The government has given a lukewarm response to the Vijay Kelkar committee report on fiscal consolidation. A day after the report was made public, the former finance secretary spoke to HT over telephone from Bangalore on India’s fiscal health. Excerpts:

In your report, you have warned that India is on the edge of a “fiscal precipice” and should urgently slash fuel, food and fertiliser subsidies to curb fiscal deficit. What prompted such a strong observation?

In macro-economics, the twin deficits — current account deficit (the gap between export earnings and import payments) and the fiscal deficit (shorthand for the amount of money the government borrows to fund its expenses) — are of paramount importance. At present, Our current account deficit is at 4.2% of the gross domestic product (GDP), which is very high. At this rate, if no action is taken, we have to either earn about $80-100 billion every year through the capital account or meet the deficit by depleting our foreign exchange reserves. Clearly, both the options are not realistic and, therefore, we have recommended the measures, which we feel, need to immediate and urgent attention.

You have also cautioned that the Indian economy may slip into a pre-1991 type of a situation if immediate steps were not taken...

If urgent action is not taken, it could give rise to macro-economic instability and on the on balance of payments front, may start to look like the crisis of 1991. Last year (2011-12), the current account deficit was 4.2% and it could be even larger if no correction takes place. We also need to take into account that, unlike 1991, the rest of the world is currently in turmoil. We have also become far more import dependent, particularly in the case of crude oil. Prices of crude oil, in real terms, have multiplied compared to 1991, as also our volume of oil imports. That makes it all the more important to take immediate steps to contain the deficit.

Some critics say the bold measures that the panel has recommended were largely prompted by the risk of a downgrade by the US-credit rating agencies. How worried are you of the risk of do-wngrade of the Indian economy?

The ratings agencies are closely watching the twin deficits in India and a downgrade would, no doubt, result in greater capital outflow. We should also remember that the Reserve Bank of India (RBI) as the country’s central bank can only print rupees to increase domestic money supply. It cannot print foreign currency. If we have to borrow $80-100 billion year after year, and don't do anything about it, the exchange rate will overshoot and reach stratospheric levels. But I am more concerned about measures on the domestic front, rather than what outside agencies are asking us to do.

The government chose to make the report public nearly a month after it was submitted. The initial remarks also suggest that the government may not implement the recommendations in a hurry. Your comments?

We submitted our report to the government on September 3, 2012 and I will not comment on why the government has made the report public now. I would also not comment on remarks that the government does not agree with the recommendations and or is not willing to take steps. Over the last 20 years, there have been a great number of instances where the government has demonstrated willingness and ability to carry out measures that may come with a little bit of short-term pain. I am quite confident the government should and will take the necessary steps.

What makes you confident that the government will implement the recommendations?

The government has already increased diesel prices by Rs 5 a litre, higher than the Rs 4 a litre increase we had recommended. Similarly, it has capped the sale of subsidised cylinders to six a year, whereas we had suggested an increase of Rs 50 per cylinder. Both these decisions show that the government is willing to take steps for fiscal consolidation.

In recent weeks, we have seen a flurry of reformist moves by the government. How, according to you, will these help in fiscal consolidation?

The steps that the government has taken are in the right direction and I don’t think anybody will contest the need for fiscal consolidation and lower fiscal deficit.