Improving investment sentiment top priority for reviving growth: C Rangarajan

New York:
In an interview to NDTV’s Shweta Rajpal Kohli, Dr C Rangarajan, Chairman, Prime Minister's economic advisory council, said that the sharp slowdown in the investment demand over the last 18 months can be attributed to the pre-occupation of the government with non-economic issues.

"The main aim for government will be to take policy decisions that will help clear the uncertainty prevailing in the economy," he added.

He also spoke about diesel price hike, GAAR, interest rate cut, inflation. He confirms that a big infrastructure push is on the anvil.


Below is the complete interview. Also watch the accompanying video here.

It’s a pleasure to have you with us. Dr Rangarajan, the intention of the Prime Minister is very clear. He means business, he wants to go ahead and do whatever it takes to revive the Indian economy. What according to you would be his top priorities? 
 

Well, the top priority is to revive the top investor sentiment in the country. India came out of the international impact crisis fairly fast. We had a growth rate of 8.4 per cent immediately after the crisis, but last year, the growth rate came up to 6.5 per cent. Despite this I believe that the growth rate may be revised upwards later. What is essentially required is the investment rate has come down over the last four years from the peak that we have reached in 2007-08 and therefore, the first priority is to revive the sentiment of the domestic and foreign investors and we need to work towards that.

Reviving the investor sentiment is critical, especially given what we have seen in the past couple of months; after some of those announcements including GAAR and the retrospective tax changes that have completely spooked investors. Dr Singh has made it clear that he intends to remove any arbitrariness in tax matters, but investors are still awaiting clarity on what his intentions are in regard to both GAAR and retrospective tax changes. Let’s first talk about the retrospective tax changes. There seems to be an indication that the PM may move forward and bring about some kind of clarity both foreign and Indian investors have criticized the retrospective tax changes and said that it’s a completely a retrograde move.
 

Well, it is the law at the moment, I don’t want to comment very much on it at this particular stage because this is not the first time that is done. What is really needed is to see that the change that are being made do not come in the way of investor sentiment being picked, being heightened. What is really needed to avoid arbitrariness is the direction in which we will move. And wherever clarity is needed, it will be offered.

Would it be fair that perhaps that the government also underestimated the impact that some of these tax changes could have on the mood and the sentiment of the investors, especially coming at a time when the Indian economy was slowing down?

Well, for example, GAAR was even included as part of the direct tax code and that had been in circulation for a long time and I think not many people noticed it or commented on it and therefore, the original intention of GAAR was to remove uncertainty. It is the opposite of what people are now talking about. I think the original intention was to see that the investors are not in doubt. Therefore, in some sense even the investor community had not understood the implications of GAAR, which had been part of the director’s code. I would only say at this point, as we go ahead, the uncertainties and doubts in the minds of the people will be removed .The guidelines have been put on the website now once the comments come and then the I think they will be modified with a view to align the fear to investors.

There seems to be some talks of perhaps making certain exemptions of owning down some of those GAAR provisions to insure that perhaps investments may be coming from the Mauritius route, do not come under the tax net. We also have the Mauritius FM in town; you will be meeting him also. The intention again coming from him is that he is extremely concerned about those GAAR provisions that they are willing to modify the bilateral tax treaty by saying that no domestic legislation like GAAR should overwrite international tax treaties like the bilateral treaty between India and Mauritius.

I have some hesitation making any direct comment upon what you say. I think this is partly a legal matter and this will have to be discussed with the Mauritius government. As I said that the intention of GAAR was not to curb investment, the intention of GAAR is exactly the opposite.

But do you agree that perhaps it was bad timing?

Well, the intention is not bad.

You talked about the perception and that’s exactly what seems to be harming the economy. The perception of policy paralysis, perception of arbitrariness, uncertainty over tax rules policy, etc. The urgent need in that sense is really to turnaround the mood of the economy. At least the prime minister’s statements right now seem heartening but we need to see more action on the ground. With regard to reforms, which are the critical reforms that the government is prioritizing right now?
 

Let me answer your question in two parts. Firstly, I wanted to know in order to pep up the investor sentiment. Now I personally believe that that one way, by which we can revive the investor sentiment, is by showing that we can continue to grow at a high rate. We did slow down last year but we will grow in the current year at least by 7 per cent and there are several reasons why I believe that. First of all, inflation in the current year will definitely be lower than last year. Also there is a strong effort being made to ensure that the production and capacity creation are being made. Key infrastructures like in the public domain such as coal power roads and railways we will be doing this year. And I think this fulfillment will be important as infrastructure will itself act as a great stimulus for private investors and private economy to act and therefore, I think reviving the growth itself will act as the stimulus for improving the sentiment.

 The industry is also saying that the government needs to postpone the implementations of GAAR by another year. Is that a valid suggestion?
 

I think it is already postponed by one year; we will discuss when the comments come in. If suitable modifications can be made, which satisfy the investors at the same time. Next year, some of the basic principles can be formed and then it can come into effect next year. It is all a matter of responding to the concerns that have been expressed.

The prime minister has been talking about focusing on infrastructure for a long time but there is land acquisition, special environmental clearances have come in the way. Those road blocks still remain. How do you intend to fast-track the infrastructure keeping in mind these constrains?
 

I think again there are short term consensus and medium term consensus. In the short term, for e.g. with respect to the availability of coal, power are very key for kick-starting the economy. An action can be taken which can result in a substantial increase in coal and power. I think you see that change already occurring with coal in the first 6-7 months. In the last year coal production came down and now there has been a pick-up in coal production because these are purely government matters. I think a strong will to increase the production in these areas will work. However, in the medium term, we must address these issues relating to land accusation and environmental condense.

But a short term push to clearly to the areas you are mentioning- coal, power, and roads -this is where we are going to see the PM really focusing his attention on right now? 
 

In the current year or the next one, you can see a production increase happening in all these sectors by improving the tone of the administration, by improving the governance mechanism.