Date: 05/09/2018    Platform: Economic Times

Interest rates mechanism won't be used to manage Rupee fall: Sanjeev Sanyal

Sanjeev Sanyal, as principal economic advisor at the ministry of finance, remains the key functionary with a peep into decision making and, as a former Deutsche Bank economist, is a window to the world for the government. In a conversation with ET, he shares his views on a range of issues from the rupee slide to the latest GDP numbers. Edited excerpts: 

The latest GDP growth numbers at 8.2 per cent may be heartening, but some say it is due to low base and can’t be sustained. How do you see it? 
The latest GDP number of 8.2 per cent for the first quarter is clearly a very strong number. It may have been helped a bit by the statistical base from the manufacturing slowdown in the runup to the GST introduction. However, even if you adjust for the base, the run rate for the GDP is somewhere above 7.5 per cent . This makes us easily the fastest growing economy in the world. 

So, to say that it is merely about low base is to miss the point that there is extraordinary momentum in the economy. The next few quarters will show that the economy remains strong.

While growth is strong, the rupee slide has revived fears over the state of fiscal and the current account deficit.
There are a few things you have to remember about the rupee-dollar exchange rate. First, if you take a longer-term perspective, the rupee has been very stable, which is rare in our history. So, what we are seeing is the appreciation of the US dollar. It may not be a good idea for the rupee to be excessively strong when our trading partners, competitors,including the Chinese, are depreciating. 

Secondly, the RBI has a long-standing policy of allowing market adjustment in the medium term, while controlling volatility in the short-term. If other major currencies are falling against the USD, they (RBI) should allow for that adjustment to happen naturally. 

There have been reports of government asking RBI to identify bank merger candidates. What does the government intend to do and what it wants to see a few years ahead? 
The issue of merger and consolidation of public sector banks comes up periodically because it has been argued that there are too many small public sector banks that are unviable and could benefit from mergers. But there are a few important things to remember. First of all, merger is not a first order solution to our banking problems.  
The NPA issue is an independent problem derived from irresponsible lending in the past, and we need to look at it. Mergers and consolidation will not directly solve that problem. Secondly, whenever consolidation is done, we have to look at what are the commercial reasons for doing it.  
It is not the case that we are going to arbitrarily merge a good bank with a bad bank and hope to end up with a good quality larger bank. It is just as likely that a poor quality bank will emerge. Hence, the mergers will be done strictly on a commercial basis, and only after the immediate NPA problem has eased. 

After the latest numbers on currency that returned to the RBI, demonetisation is being questioned even as the government stands by it. Can you explain the benefits that the government sees? 

 
I think demonetisation has to be seen in the larger context of the war on black money. In that context, you have to see demonetisation as one among many other steps such as the Fugitive Economic Offenders Bill, anti-Benami legislation, the Real Estate Regulation Act, transparent auctioning of public resources, the banking clean-up, the effort to increase tax payers and so on. So, there is a larger effort going on and we are already getting benefits from it.
 
As the finance minister has repeatedly mentioned, there is a dramatic increase in the number of registered tax payers, and we are seeing much better tax compliance. But most importantly, the business culture of the country has gone through a significant change. I don’t think that any neutral observer will disagree with this fundamental culture change. 
 
Equity markets are at record highs, but the progress on divestment has been dismal. In fact, after some promise, is it back to square one?  
The equity markets have indeed gone high, but as a policy maker, I am not in a position to comment on valuations. But yes, we do need to move forward on disinvestment. We recently made an effort on Air India, which did not work out, but our intentions remain. We intend to move forward and carry out disinvestment in various ways. 
 
 
The government may not want to divest the companies it founded, but what is the rationale behind it owning the ITC, L&T and Axis Bank stakes? 
These are certainly many options we may consider. Our first intention was to sell off Air India and a major effort was put into it. For a variety of reasons, it did not work out as planned. But we remain committed to privatising it. 
 
With the rupee slide, there is talk about another special deposit schemes for NRIs. Do you recommend one? 
The rupee will be allowed to find its long-term market value, but sudden volatility in either direction will be managed by the central bank using foreign exchange reserves. As far as NRI bonds are concerned, we will consider the option if necessary. But, for the moment, the level of forex reserves is adequate. 
 
Many emerging economies are resorting to sharp interest rate hikes to stem outflows. What are the chances of India doing so if the outflows intensified? 
We have a monetary policy regime which has been given an inflation, and not an exchange-rate target. Of course, the exchange rate does influence the inflation rate, and only to that extent the central bank will take it into account. 
Under most normal circumstances, interest rates will not be used in the framework for defending the rupee in the first instance, but only as an indirect way of managing inflation. The MPC in its current mandate uses monetary policy to manage inflation and that will be its first and direct mandate. 
 
How well are you equipped to handle the impact of sanctions on Iran, as India’s crude imports from the country are significant? 
This is definitely a matter of concern to us. Iran is our third-most important source of crude oil supplies. It is also an important geo-strategic country for us and we have investments in Chabahar port. It is something that we are concerned about and have raised this with the American authorities. Hopefully, some good solutions will come out. 
 
Given our vulnerability to commodity shocks, isn’t it time to revisit proposals to strengthen our strategic oil reserves? 
One can always say that strategic oil reserves should be created. The question is how do we go about it? A large country like us will have to create huge capacities to manage this oil. We could also do this with financial contracts to some extent. It’s an issue we have visited in the past.  
At best, however, these will be marginal short-term solutions. In the end, we have to find a way of making ourselves less dependent on oil, like investing in other sources of energy.