Subhash C Garg, DEA Secy, in conversation with Supriya Shrinate of ET Now, on the state of the economy and markets, at
the annual IMF and World Bank meeting on Indonesia’s resort island of Bali.
We all woke up to a market crash of nearly 1000 points. The Dow had crashed overnight. Are you at all nervous with the equity and the currency market action just yet?
Today’s semi meltdown kind of a situation is a global phenomenon. It started with the Dow yesterday in America, which lost quite a bit. Essentially, it seems there was a slight bit of flight to safety. There was perception that the inflation in US would go higher. If it goes higher, then the Fed might raise rates further and that might lead to further hardening of yields. In such a situation, there is some flight from the equity markets to the debt markets and that is what possibly explains yesterday’s Dow behaviour which then got on to Asia and the immediate impact was seen in the morning. I understand now there is some recovery in the market. There is some stabilisation. People will realise that the concern may not be as big and as serious and that is what it is.
The reality is that the US economy is on the upswing, unemployment numbers are coming down, inflation is rising. Adversely, the central bank there is going to raise rates going forward. What can we do to contain the FPI outflows because that is primarily the reason why our markets are crashing?
More than the US economic growth, which possibly is funded more by the debt and the tax payer, it is that little bit of nervousness about inflation which no one likes and therefore the Fed’s decision to take action on the rate front and potential seems to be the driving force. At some point of time, the flows into the US will drive the supply much higher than the demand and that will bring the rates back to more normal level. It cannot continue for long.
On rupee,you are on record saying that there is seemingly nothing to worry because we have got good forex reserves. But the currency markets do not seem to be listening to the government. We are the worst performers as far as our peers is concerned. At what level will the red flags go up? hy are you not looking at NRI bonds or a single window for OMCs?
I do not think this is the correct characterisation that the government has not been worried about the slide in the rupee. It has taken several measures. All the measures in the current account and also in the capital account were taken because there was a perception that the slide is too sudden, too much and therefore we need to take steps.
The NRI bond and all that are further capital account measures which will come when there is an apprehension that we need to buttress the reserves. It has never been said that we will not resort to that. We have always said that this is an option which is the exercise whenever the time comes.
How much of a play is liquidity in the market as far as currency market is concerned? As far as liquidity is concerned, how are you going to assuage the frayed nerves?
By the way, when Reserve Bank sales some reserves to support rupee or to bring orderliness in the market, it drives the liquidity down. It sucks liquidity and therefore you have to do OMO and other things which the RBI is doing. There was a liquidity crunch for the NBFCs and HFCs. There is no liquidity issue for the banks and the other financial market system and that is where we need to address it. The step taken by the State Bank of India to create that facility did have a very good effect yesterday. Some more measures would come. So we have to take measures that address the wider market liquidity as well as the specific segment.
One of the things that we are picking up in the market is that NBFCs may be allowed to borrow money through the ECB route. Is that speculation or is it on the anvil?
Even today, NBFCs are allowed to borrow through the ECB route. There is no buyer on that….
But there is a review of norms that the government is likely to do on NBFCs. Former RBI governor YV Reddy said yesterday that even if the government reviews norms, there needs to be a larger distinction made between deposit taking NBFCs and non-deposit taking. Will you be on board with the view like that?
This is the regulatory aspect which the Reserve Bank has been handling from time to time. Regulations have been strengthened and made more rigorous for the deposit taking NBFCs than for the non-deposit taking NBFCs because they do not pose that much of a systematic risk. I do not think at this moment there is any further regulatory aspect to it. I do not think it is the time for that. I have not heard anything major on this.
On the fiscal front, the government has been very responsible. The one green on your report card is fisc and the fuel reforms. Markets are wary that you are flipping on both. Moody’s now says that oil prices going up and OMCs having to absorb subsidies and government cutting excise, will have a larger implication on fiscal consolidation. 3.3% looks challenging. Is 3.4% likely or are you not going to be overly worried about the last decimal point?
This kind of oil price rise will always be seen as a major threat to the fiscal target and the fiscal management. I do not blame Moody’s or others but I would like you to appreciate that the government has been far more sanguine. The government has been far clearer in handling the oil price and repeatedly reaffirm that as far as the fiscal deficit is concerned, we will not make any compromise. Even after that Rs 2.50 kind of reduction which was brought in last couple of days, our fisc in completely manageable.
But the big fear now is will you go for expenditure cuts. That is the other big fear that is now coming to the fore, especially after you have reduced the borrowing target?
The finance minister has said very clearly there is no move to reduce anything on the expenditure side to meet any potential shortfall on revenue because we do not expect at this stage any significant shortfall in revenue and therefore there is no deliberate attempt or decision to reduce any particular kind of expenditure. Every year there is some natural reduction. Not everyone fully spends the budget allocated quotas that might come in, but that would be not a policy driven or any specific decision.
And that could have happened in any financial year. At levels of nearly 2.8-2.9 or even 3%, how worrying is our external trade situation? It has ceased to be a vulnerability, it looks like it is a fault line once again?
See the current account 2% level is considered absolutely healthy for the developing countries like us. We need global savings to come. Going to 3% will add some cause of worry which we are in a position to manage, a lot of measures have been taken. The problems starts if you are not able to finance the current account deficit, but our FDI flows have been very strong and continue to be very stable. We do not expect the current account financing to be extremely difficult and big and that is what is going on. I do not expect this year to end beyond 3% in any case. I think we have a situation that we would manage.
And is 3% a level that we should be comfortable with?
We would obviously like it to be around 2% but if it goes to 3% still it is manageable for us.
As far as divestment is concerned, very ambitious targets were put on the table. But increasingly, is it looking tougher to achieve those targets. Also revenue from GST is still not what you would want it to be. As far as divestment is concerned, is there some amount of uncertainty there on that front?
The Rs 80,000-crore divetment target was ambitious but reasonable enough to be achieved. We have a plan for achieving it. There is some difficulty, but if we believe that this correction is temporary, we will come back to our path of making divestments using the market as well.
How much of that Rs 80,000 crore is going to be achievable?
We are keeping it at Rs 80,000 crore at this moment, no change in that.
On IL&FS while you are doing all it takes to keep the institution afloat. Why did the government have to step in where you have institutions for risk control?
See IL&FS was in the infrastructure space. Infrastructure space is a bit difficult space. They were doing a lot of good work and lot of progress which India has made in privatisation of infrastructure on PPP mode and all, it is also attributable to the initiatives taken in IL&FS. There have been several changes of very significant import, Land Acquisition Act, other things took place and that affected the IL&FS model, especially the model which comes to the NBFC route and that created some problems in the IL&FS management of assets and liabilities.
I would wonder if the LIC and the SBI and the other board members might have got some sense of the difficulty but they perhaps could not gauge that the problem is becoming serious enough for it requiring some more serious assessment. Since they did not act in that particular way they were as the equity owners as the shareholders could have possibly taken those steps to do it.
But then the problem became somewhat bigger than what they could have handled the government had to come in and bring in via creating a new board. Hopefully, we will resolve this.
You have had a big green on your report card as far as fuel deregulation was concerned, there are now fears that you are turning your back on fuel deregulation?
Not at all.
Will OMCs go back to hiking prices this cycle?
They are already doing, it is not that they are not doing it.
So that Re 1 fall...
At that particular point of time, the reduction was needed but as per the formula, if subsequent increases are required, those would be done and hopefully this hit which they are taking will be absorbed against their valuation gains this time.
But what is the guarantee you will not go back to doing this when oil prices rise again, that is what markets are worried about?
Since we had some idea that there are some valuations gains and they can absorb this, we had taken this step. But the government is committed to not going back on deregulation.