Taimur Baig, Chief Economist, India Global Markets Research, Deutsche Bank AG says that even a growth rate of 7 per cent would be a challenge for India.

Baig feels that India doesn’t have any God-given right to grow at 7 per cent regardless of how tough the macro-environment domestically or externally is.

As far as the Reserve Bank of India’s monetary policy review is concerned, he told NDTV Profit that the industrial production numbers indicate that there is no drastic need for the RBI action. “The RBI might not take any rate action as there is no systemic liquidity shortage in the market,” he explained.

Below is the complete interview. Don't miss the accompanying video.

We are a day away from the monetary policy. No one is expecting a change in rates and even a CRR (cash reserve ratio) cut seems unlikely. Is there any rationale for the RBI to seriously consider a change in key rates and ratios this time?
 

For the past few days, I have been hearing people saying the Liquidity Adjustment Facility (LAF) is close to 1.5 trillion, which is negative and that should be one reason for the central bank to do something in terms of monetary policy.  As far as liquidity provision is concerned, having heard that in a last couple of months, it’s clear that they don’t see negative LAF being an indication of major system liquidity shortage. 

The central bank’s point remains that as long as the deposit is strong, credit growth is easing and there isn’t as much of accessing going on. As far as the marginal lending facility of the central bank is concerned, there is no reason for the RBI to do any liquidity measure. So, that is also unlikely.  So as far as the rate decision is concerned, ECB can’t take anything in terms of easing measure when core inflation is 7.5 per cent.

 People are worrying that the liquidity deficit has become a structural issue and hence, the RBI needs to address it. What is the counter argument to that?
 

When we saw indications of tight liquidity a year ago, there were reasons that maybe this could be somehow harmful to growth. Well, having had fairly short LAF in the last one year, we haven’t seen any systematic shortage in the market. 

So, the RBI’s point is that if you see any systematic shortage, then you could see other manifestation. For instance, the marginal lending facility being accessed or the banks beginning to bring down their share of SLR securities, one could then make an argument that there is a structural deficit and something needs to be done. However, until those things happen, there is no reason for a monetary action policy to be taken.

 As far as the growth inflation dynamics are concerned, is it clear that core inflation is still a concern? Also the RBI at least does not seem like its panicking about growth?
 

Analysts and the media are guilty of swinging from one extreme to the other as far as the highly volatile IP numbers are concerned. Neither the 6 per cent or so decline for the month of October nor the 5.9 per cent increase in November tells you any story. 

I think that’s where the truth lies, the IIP is weak but again it’s not so weak that there's a drastic need to do something. In recent weeks, we have heard again and again that the central bank will not be in a hurry to cut rates. They see some scope for easing monetary policy at some point during this year but there's no reason to hurry. Also, the recent trend in IIP is one more reason why there's no reason to hurry. 

 There are many in India who feel that 7 per cent growth is almost guaranteed given the relative strength in the services sector and hence, the worries around growth are overdone. Would you agree or disagree with that?
 

I think 7 per cent might have to be sacrificed. I don't think India has any God-given right to grow at 7 per cent regardless of how tough the macro-environment domestically or externally is. This country is opening up, it is susceptible to external shocks and there are negative factors as far as the domestic environment is concerned. 

Nothing that happened in the last one month, which caused some sort of bottom in the market, has changed any of those negative issues. So going forward, it'd be heroic for India to grow at 7 per cent. So, let’s not say that is the floor but one can probably hope for it in the coming year or so.

The Finance Minister recently made a comment suggesting that the budget may look at corrective measures. But does the government have fiscal room?
 

Yes and no in my view. I mean you don't have to carry out massive expenditure cuts or massive revenue increasing measures to bring this fiscal under control. India's fiscal deficit which is running at between 5 and 5.5 per cent of GDP in the last few years can easily be brought down by at least 1 per cent of GDP if not a little higher just through some marginal measures. 

A little more efficiency on tax collection, some curtailment of wasteful projects or some adjustment in the subsidy program can easily allow the government to go back on a path of fiscal consolidation. So I disagree with the notion that the room for adjustment is not there or even if it’s there it’s very small. 

There's a considerable room for improvement as far as the fiscal is concerned without harming growth. I think if indeed in the second week of March, we see a budget that takes a serious look at the subsidy program and tries to cut back on wasteful spending; it'll be a win-win for both the growth side as well as the fiscal side. 

Could the government at least re-look at the composition of expenditure and shift it more towards investment and infrastructure? Or is that futile given that the concern on investments and infrastructure is more of implementation?
 

Yes. It is a lot about implementation. The government has all sorts of public and private type projects lined up. Everybody is waiting for execution. On the revenue side, the government is trying to do a few things here and there. We've seen some tax measures in recent months in terms of improving tax administration as well as measures to get state-owned enterprises to invest in infrastructure.

These are not budgetary measures, they're executive measures to make the decision making process more streamlined and the revenue collection mechanism a little more effective. These things do not have to be done all in the context of FY12-13 budget; we expect to see a gradual roll out of this sort of efficiency enhancing measures, which ultimately will certainly be a positive for growth.

How worried are you about the current account deficit? Some measures like the increase in gold import duty could help ease current account deficit fears?

The gold import duty is a classic example of how you don’t have to do a huge amount of heavy lifting to get a decent gain in revenue collection without hurting the economy. So, this move away from specific duty to a percentage tax to gold import is a great idea. It is a win-win situation from all perspectives without hurting growth attributes of the economy. The current account deficit should come down this year. We don’t expect commodity prices to go up any further. The best case for them is to decline a bit or become flattish in the worst case. 

The rupee is beginning to appreciate and that should also help a bit in terms of the import side of the economy. However at the same time, it should not cause viral in import. The rupee’s appreciation is not that sharp as far as the overall economic dynamic is concerned. I think 7 per cent would be a great achievement and under a 7 per cent growth scenario, i can’t see the current deficit remaining at 3.5 per cent or higher as a share of GDP should start coming down this year.

What is your call on the Indian rupee right now, keeping in mind the huge surge in inflows into the debt markets?
 

When the depth auction was placed late last year, we saw that tremendous enthusiasm in investors during that time.  I had mentioned earlier that even when everything seemed doom gloom for India, the international depth investors really remained excited about the Indian yield and overall Indian economic dynamic, which was reflecting in the fact that people were paying as much as 150- 120 basis points just to have the right to bet on Indian bonds. 

Also, the bond market equity side there has seen a revival.  I have heard many money managers in the last few weeks telling me that investment boards are having rather serious debate as to whether the current level of elevation of Indian equity is interesting or not.

Given the way the rupee has corrected and the fact the stock market was looking at lows, i think India became a pretty obvious place for investors in the last few weeks. Also, various capital account measures authorities have taken to attract nonresident Indians as well as foreign investors. So all of those things are rupee positive and we are seeing in the manifestation of those measures as we speak.