Economist, Deloitte, speaks to virat bahri on the issues facing India Inc. In a slowing economy and how the government needs to manage them
B&E: The industry is peeved by the RBI’s unchanged stance on inflation and refusal to cut rates. Is the RBI right in its assessment?
Anis Chakravarty (AC): When the RBI started increasing interest rates around 14-15 months back, there were some interesting observations. One was that RBI kept increasing repo rates by around 25 basis points and in some cases by 50 basis points. But inflation kept on rising and till a point of time, it was steady. It started as a food inflation issue or it was linked with primary articles. It slowly moved towards secondary articles (manufactured goods) and then reverted back to primary articles. Also, demand in the domestic market was largely intact. Effectively, when you have an economy driven by demand, the only way inflation will rise is when supply isn’t keeping pace. In agriculture, which is largely unorganised, there were lots of inefficiencies in the supply chain. Until we have FDI in retail and more of a market-linked mechanism of looking at supply, we will continue to have this problem. If it remains, it’ll be very difficult for RBI to reduce rates. So what RBI does unilaterally won’t be effective in the long run. Monetary and fiscal policy must go hand in hand.
B&E: In which other key areas is India Inc. facing problems?
AC: A large number of companies that bring up the base are SMEs. The issue there is high borrowing costs. A large number of SMEs, which import raw materials, are also seeing input costs rise due to rupee depreciation. Secondly, our export market is primarily led by engineering goods and services. Here, if you have long term contracts, a number of these contracts are delayed unless some of these issues are sorted out. You will see that despite global crude oil prices being sorted out, the rupee continues to depreciate and feed inflation. Secondly, fiscal deficit is high, so the government needs to float bonds or borrow from the public. This is also crowding out investments, as it becomes difficult for SMEs to borrow. You would have also seen the controversy surrounding GAAR; such uncertainty also affects genuine corporate taxpayers. They don’t know whether or not GAAR is postponed permanently, or when GST will be rolled out.
B&E: The industry is peeved by the RBI’s unchanged stance on inflation and refusal to cut rates. Is the RBI right in its assessment?
Anis Chakravarty (AC): When the RBI started increasing interest rates around 14-15 months back, there were some interesting observations. One was that RBI kept increasing repo rates by around 25 basis points and in some cases by 50 basis points. But inflation kept on rising and till a point of time, it was steady. It started as a food inflation issue or it was linked with primary articles. It slowly moved towards secondary articles (manufactured goods) and then reverted back to primary articles. Also, demand in the domestic market was largely intact. Effectively, when you have an economy driven by demand, the only way inflation will rise is when supply isn’t keeping pace. In agriculture, which is largely unorganised, there were lots of inefficiencies in the supply chain. Until we have FDI in retail and more of a market-linked mechanism of looking at supply, we will continue to have this problem. If it remains, it’ll be very difficult for RBI to reduce rates. So what RBI does unilaterally won’t be effective in the long run. Monetary and fiscal policy must go hand in hand.
B&E: In which other key areas is India Inc. facing problems?
AC: A large number of companies that bring up the base are SMEs. The issue there is high borrowing costs. A large number of SMEs, which import raw materials, are also seeing input costs rise due to rupee depreciation. Secondly, our export market is primarily led by engineering goods and services. Here, if you have long term contracts, a number of these contracts are delayed unless some of these issues are sorted out. You will see that despite global crude oil prices being sorted out, the rupee continues to depreciate and feed inflation. Secondly, fiscal deficit is high, so the government needs to float bonds or borrow from the public. This is also crowding out investments, as it becomes difficult for SMEs to borrow. You would have also seen the controversy surrounding GAAR; such uncertainty also affects genuine corporate taxpayers. They don’t know whether or not GAAR is postponed permanently, or when GST will be rolled out.
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Zee Business Best B-School Survey 2012
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