Despite a persistent decline for 11 months now, India's exports are relatively better than some of the other Asian countries, feels RBI Governor Raghuram Rajan, adding that the rupee is not over valued. In an exclusive interview with CNBC-TV18's Latha Venkatesh, Rajan says relying too much on falling prices for growth is not right, and that we need to ask if we have the driving forces for growth. Rajan says a lot of cleaning up has been done to remove some of the legacy issues. He feels power sector reforms and cleaning up of balance sheets will help unclog some sectors. He says capacity utilisation at 70 percent in the economy is still low, but expressed hope of better growth next year. He sees steel as one of the biggest problem areas becauise of over capacity. Rajan says it is hard to forecast the pace at which stressed assets in the economy will reduce, but added that the RBI was working with banks to ensure that stress assets are recognised. He said the slowdown in China has put a lot of Indian industries in a difficult situation, and that credit growth was muted. Below is the interview transcript of Raghuram Rajan with Latha Venkatesh on CNBC-TV18. Q: In the post policy teleconference you all gave a new number for the inflation estimate for March 2017. 5.4 percent was what Michael Patra said March 2017. A: I don't think he said that. Q: He said that because there were several analysts who messaged me back. It was 4.8 percent in September when you gave us a forecast for January 2017 and now Michael said 5.4 percent. What is your estimate of January-March 2017? A: From when we made the estimates in September to now what has generally happened is the information that has come in has caused us to reduce our expectations of inflation. Then there are risks going forward which tend to elevate our estimates, risk such as the pay commission for example and the evolution of food prices post tough monsoons. So, in general I would say that if you look at our curve it is broadly in the same place it was as in September with a slight bias towards the downside, that is what is in the policy statement. Q: The incremental information gives you a sense of lower inflation for what period, along the curve or only for January 2016? A: Certainly for the near term, it gives us a greater sense of where we will be. However what I am also saying is that we had in mind some of these risks that we have highlighted here. To some extent if you think that pulses have been more persistent over the last few months than one thought, that has been offset by the realisation over the last couple of months of inflation slightly below where we expected it to be. So, it is in that sense that some of the information has come in lower. Plus if you look at the oil prices going forward that also gives a certain amount of comfort that it has stayed relatively low. Of course we have to see what OPEC does. Q: If you take your comments on services inflation, non-food, non-fuel inflation as well add to it impulses from GST, 7th pay commission, are you still reiterating 4.8 percent in January 2017? A: It is in the ballpark of that number. I am not sure that I would say exactly 4.8 percent. Q: Not 5.4 percent? A: No, otherwise it would be somewhat off where we intend to be. Of the factors you mentioned such as the pay commission, some of the factors are going to be balanced by government action. Of course the additional outlay has to be balanced by an appropriate finding space so that the fiscal deficit targets aren’t breached. So, that will offset some of the inflationary impulses. Some we will have to look through, as we have said there is some mechanical calculations, we have to be careful we don't overlook what is necessary to look at, so that we will have to work out as we go along. Q: But what is the requirement of the monetary policy agreement? Your clock starts ticking only in January 2018? A: No. January 1st 2016, the clock starts ticking. Q: At six percent? A: At six percent. Q: And the MPFA also says that January of 2017 at five percent? A: No. That is self imposed movement towards the midpoint of the range which would give future monetary policy committees sufficient room to stay within, without violating. That is where we would desire to be over the medium term. Q: Now the six percent looks achieved, so you do not write letters now. The next exam for you is January 2018, the four percent? A: No. There is actually no exam past the six percent. If you look at the details of the monetary policy agreement, we have to stay between two and six percent. That is all that the monetary policy agreement calls for. However, with abundant prudence, and knowing that the whole sort of range was set keeping in mind that it would be better to be around four. We would like to migrate towards four over time. But what is in the agreement, where we start writing letters and doing penance, is if we exceed six percent on average for three quarters. Q: Or undershoot two percent on an average. A: Or undershoot two percent, which is I think is a little distant right now. Q: Do you really believe the 7.4 percent growth number? Everybody will tell you and I guess you feel yourself, that it does not feel like 7.4 percent. A: Well I keep reiterating what Dr. Pronab Sen said about this, which is, the new numbers cannot be compared one to one with the old numbers. His view was that there will be a difference, and therefore, when you say it does not feel like, you are saying it does not feel like 7.4 percent according to the old numbers, and that was perhaps because that put more weight on certain aspects of growth and so on. Q: If nominal growth is six percent, according to the Gross value added (GVA). Look at the corporate profits of that same quarter; it was down by three percent. I can understand the topline. But if you said margins should have improved, then at least bottomline should have been, it is down three percent. A: Well it depends on sector again. Some sectors are down partly because there is global deflation or overcapacity in those sectors, you would expect in those sectors both the topline and the bottomline to go down. But there are some sectors where input costs have come down substantially and output costs have not gone down as much, so profitability has increased. So, it varies. I do not think it is as uniform or as gloomy a picture as you suggest. Nevertheless, when you get into the situations where your deflator is doing a lot of the walking for you, you have to be a little worried. And that is the sense in which I think you are, because we always tend to associate growth with nominal numbers, and it is hard for us to see low nominal growth, but high real growth because in fact we are in deflation. Q: My point is the real growth from clean numbers like corporate is not even reflective of the nominal numbers. That was my point. A: What I would agree with is that relying a lot on deflation for your growth is problematic. It is also there is a real question of are we deflating by the right numbers? And, are we deflating something we should be deflated by CPI by something like WPI? Those are questions that have always been asked. We continue asking, but they assume a lot of importance when the two diverge. Q: Well, I think this debate will not end, so let me get to another question on growth. Where do you see growth coming next year? It does not look like capital expenditure (Capex) is picking up at all and if you insist on the fiscal deficit going down to 3.5 percent in spite of One Rank, One Pension (OROP) and Seventh Pay Commission, even the public investment impulse will not be there. So, next year growth is going to be tougher. A: There is a lot of cleaning up which has been going on to remove some of the legacy issues. Some of it is happening in areas like power. Some of it is happening on bank balance sheets which we are very determined to see through. So, that will unclog some sectors for some growth there. Then, there are massive investment projects which the government has been emphasising over time. Some private public partnerships (PPP), some government focused. Those will start coming on stream as we go on. Those will create demand for some of the goods that the private sector also provides. Now, we have always said capacity utilisation is low, but it is about 70 percent. Now, the norm is not 100 percent, it is 75, so, we need to get up some way before the private sector starts kicking in and investing. The other thing people often forget is, you can have a few years of low investment, but eventually, the capital goods depreciate and so you have got to put in new investment just to keep or replace the old stuff. So, after a few years – we have had a few years already of low investment – you would expect the investment cycle to start picking up itself. So, all these would be positives. And of course, the virtual cycle is then when that creates more jobs, people feel more confident, they go out and buy. The last is one of hope, rather than knowledge. We have had two bad monsoons in a row. Historically, we have not had a third. Of course, in a time of climate change, one could argue anything is possible, but I would say that the odds of a third bad monsoon are probably relatively small. I know we need to think about the structural forces rather than just play the odds, but it is improbable. Q: You are still betting on a better growth next year? A: I am hopeful. I mean, I do not lay bets on growth. Q: I will not come to your estimates simply because it is way far out. Let me come to the other number in the gross domestic product (GDP). A: But, let me also emphasise one thing. We should stop fixating on these precise numbers partly because, as you know, numbers get revised. We saw in 2010-20111 the huge revisions. For example, one of the things we see in our data is when you look at the subsidiaries of foreign corporations which typically do not tend to get picked up in the first things of growth. Sales growth there is significantly higher, then comparable firms in, Indian firms, these things are not small, they are about half in terms of sales or I would say between one third and half of sales as an Indian corporation. The point I am trying to make, for a long time, we did not look at small firms, we got them late again from the annual survey of industry and again, they tended to boost growth. So, let us not fixate on the precise first estimate of growth. Let us instead ask, do we have the underlying forces for strong and sustainable growth. And we are trying to put those building blocks in place. Q: Let me fixate on another number which came on the GDP data. Exports, minus 4.7 percent, not that we needed it. For 11 months it has been contracting. Are you not guilty of keeping the rupee overvalued? 13 percent overvalued even if you argue against the real effective exchange rate (REER) being a bad measure. It is still seriously overvalued, is it not? A: If you say it is overvalued, our exports should be doing terribly compared to our Asian. Q: They are. A: No, we are certainly not. A lot of countries have a lower exports. Q: But, down 20 percent, 19 percent? A: But there you are not taking into account the price effects. Q: But that is affecting even Chinese exports. Everybody is affected by lower prices. Chinese exports fell 6 percent, ours fell 19 percent and what is our base? A: No, do not take China as your only competitor. Look at East Asia in general. Across the board, you will see exports are suffering. I am not saying exports are in a good place. Q: But, are you not admitting that there is an overvaluation of the rupee, a serious overvaluation? A: But, you tell me what are the forces keeping it overvalued. Have we had huge capital inflows over the last few months? Q: Yes, reasonable FDI flows, debt flows up until three four weeks ago were positive. A: About 10 billion is our net accretion to the capital account. It is not anything to knock the exchange rate off tremendously. If you look at real effective exchange rate over the year, you look at nominal effective, it has been about flat. Now, you are making the opposite point to what your newspapers make. Q: That is how you escape because the newspapers say the rupee is falling. A: So, the bottomline here is A] are we in a position of serious overvaluation? How do we measure that? If in some of the more competitive industries, we are still finding fairly strong growth; take autos, one of the most competitive industries, auto exports are still quite strong. Ancillary exports are strong. If you look at something like apparel exports, that is perhaps the most competitive industry in the world. So, it is not as if we are suddenly getting out-competed in areas that are fairly competitive. Where are the biggest problems? Steel, where we have global overcapacity. Q: But that, we are getting killed. I mean the overvaluation is an additional problem for them. A: No, what I am saying is, the fact that our exports have fallen is not a good thing, but is it vastly different from the rest of the world where exports in general, across the world, certainly across the emerging world, have fallen tremendously over the last year. Q: No, you mentioned imports. I think that is the bigger problem. I think exports is not really. It is not such a big contributor, but imports are cheaper imports are killing tyres. You can speak to MRF, the most competent. It is killing them. A: You are absolutely, but is the question the exchange rate or global overcapacity which is killing prices? Q: Both. A: I mean it is not across the board. It is not as though we have been suddenly importing a huge amount of cars. Q: You could make it a little better if you allowed the rupee or you ensured the rupee depreciation. Everyone is doing that to their currency and that is always your grouch against everyone. A: What you are assuming is that we have this magic button that we can press and suddenly the rupee goes to value ‘x’ and then we press something else and it goes to value ‘y’. I mean, what we have always done is ensured that there is limited volatility in the rupee. And that has been our focus. It is very hard in this day and age, to say I want to be thus in such place. Furthermore, if you look at some of our emerging market colleagues, if you will, the one that has had serious depreciation, large depreciation, have not gained significant competitiveness because what has happened is inflation has taken off. And so, what they have got from the depreciation, they have given back from inflation. So, unless you have significant credibility on monetary policy, which for a variety of reasons, industrial countries seem to have, they seem to be able to engineer a depreciation and get some export competitiveness. However, emerging markets find it much harder.
Read more at:
Rupee not overvalued; steel a big problem area: RBI's Rajan - Moneycontrol.com
