C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, has been a dependable aide of Manmohan Singh for several years. He was RBI governor when Singh announced two rounds of rupee depreciation in July 1991. Now, with the PM taking charge of the finance ministry, Rangarajan is once again busy devising the revival of Asia’s third largest economy. He sounds optimistic about growth prospects this year and says the government is taking steps to revive investor sentiment and growth.

What is your assessment of the economy now?
The economy slowed down last year. According to the CSO the growth rate was only 6.5%. The Indian economy recovered rather fast from the impact of the international crisis. In 2009-10 and 2010-11 the growth rate of the economy was 8.4%. The slowdown in growth has also been accompanied by a high level of inflation and a high level of current account deficit. These are in some ways disturbing signs. The slowdown in growth last year can be attributed to a variety of reasons—the international factors, the international situation has not been very helpful. It had impacted external trade as well capital flows. Second, some of the key infrastructure sectors did not grow fast enough—coal production particularly suffered. It happened to several other mineral products including iron ore. Third, there was a weakening of investment sentiments. Therefore as you look ahead we need to address all these issues. In my own estimate the growth rate of the Indian economy in the current fiscal will be higher than last year. It will be perhaps close to 7 %. This is still a climb down from high growth achieved earlier. But I believe that this is a start of the growth picking up once again moving on to a much higher level.

Are we in a crisis situation?
I do not think it will be right to describe this as a crisis situation. Certainly there are concerns on the economic front. We are accustomed to a much higher rate of growth than what we have seen last year. Now the anxiety is that it should not lead to a situation in which the growth rate comes down on a secular basis on a much lower level. We need to avoid this. And that is why I am saying that pick -up in growth in the current year will be a sign or an indication that we are once again on the higher growth path,. Why do I say that the situation in the current fiscal year can be better than last year? First, inflation which has been running very high for most part of last year will slow down in the current year. It may be around 7%.Therefore, this slowdown in inflation can provide an opportunity for easier stance of monetary policy. I must add that this virtually depends upon how inflation will behave but I have a feeling that inflation will settle down around 7%. Second, there will be a very conscious effort to see that the production and capacity creation targets in some of the key infrastructure sectors which lie in the public domain such as coal, power, roads and railways will be achieved during this year. This itself will act as a stimulant to private economic activity. Third, I believe there will be greater clarification during the year on issues related to land acquisition and environmental concerns. All these three factors taken together can also contribute to an improvement in the investment sentiment.

Apart from reviving sentiment what else needs to be done to get the economy moving again?
I think in even in relation to improving the investment sentiment the larger flow of capital, some action in the area of foreign direct investment will also be helpful. We have talked about FDI in retail as well as a larger scope for FDI in Civil Aviation. These are steps which can be taken during the year which can also contribute to a higher level of investment. But as I mentioned that in the short run what will really induce the economy to grow faster will be the determination to achieve capacity creation targets in the key infrastructure sectors. Without that I believe the economy cannot really grow faster. So in brief, focus attention during this year on coal, power, roads and railways. We will in a sense create an environment for faster growth.

How hopeful of are you that the decision on allowing FDI in multi-brand retail and civil aviation sector will be implemented?
In the case of FDI in retail, apart from some conditions that can be imposed which will be relevant in the Indian context we should also probably make it clear that states can be given the option either to welcome or not to welcome FDI in retail in their respective states. An enabling provision can be made by which FDI in retail can be permitted but if some state governments do not desire that for whatever reason they can be exluded. So we should leave it to the option of the states. Therefore, modifications can be made in such a way that these issues which have remained intractable can be introduced.

On inflation is enough being done to address supply side problems. The impression that one gets is that projects are delayed, investment is not taking place?
As far as new investment is concerned it is largely conditioned by perceptions regarding growth. If the perception regarding growth is somewhat pessimistic then new investments get to be postponed and that is why I believe that we need to kick start growth in the current year and make the entrepreneurs feel that we are once again on the higher growth path. That in fact is a key factor. Yes monetary policy decisions do have impact on investment but largely if you look at the real rate of interest it is still not very high. In fact the nominal rate of interest rate maybe high but if you adjust for inflation it is not that high. Therefore, I think the entrepreneurs need to look at the real rate of interest. We should create an environment where entrepreneurs once again feel that the growth story remains intact. I think that is the message we need to give.

Some of the tax proposals in the budget impacted investment sentiment. Do you share that perception?
Perceptions are important. Some changes have been made as a consequence of certain compulsions within the economy. But all that I can say at this point is that investment sentiment is important. We need to look at all these issues. But actions have been taken along similar lines by other countries as well. It is not new to India. And therefore if there are concerns about some of the changes we have made we will need to address them and that is why even the guidelines relating to GAAR have been put on the website. After the views of entrepreneurs and others are made known, the government will look at them and see that unnecessary apprehensions on the part of investors is removed.

How does the government get out of the Vodafone tax issue?
This is a law at the moment. I have nothing to comment at this stage.

What about the steps to streamline subsidies? Is there a political will to tackle the issue of fuel price deregulation?
To go back to the issue of adjustment of prices of petroleum products such as diesel. It is important that we take action on this. And the timing of it will be determined by a variety of factors including but I believe that we need to maintain the credibility of the government. And the credibility of the government really demands that we take action in this areas. Even in these areas such changing the price of diesel and LPG (cooking gas), there are some solutions which can take care of the burden not being so severe on low income groups. For example in LPG, a proposal that is under discussion relates to allowing a certain number of cylinders to be used by a household at subsidised price and the use of cylinders beyond that will be at the market price. So it may take a little time to work this out but I think these are possible solutions. But to answer your question directly action is required and it is only action that will improve the credibility of the government. But timing will be determined by certain political factors.

There is lot expectation on the economic front after the change in the finance ministry. How do you manage the high expectations?
I think big bang reforms are not the need. Actually what we need is step by step reforms. The days of big bang reforms are over. We did that in the early 1990’s and therefore we cannot expect a repeat of that. But certainly reforms form part of the continuing agenda and therefore we that’s what we should really be doing. But what the economy can expect is a series of small steps which will generate the kind of environment which is favourable for investment and growth.

Do you agree with the view that high interest rates alone cannot be blamed for the slowdown?
Interest rate is certainly a factor in the minds of the entrepreneurs while making the decision to invest. But equally there are other factors which are responsible for the investments to be weak. Therefore if the other factors are very strong then even with a high rate of interest investments will be forthcoming if the economy is buoyant and if the expectation is that the economy will continue to grow at a very high rate. But the problem is that we also have a situation in which inflation remains very high and in one sense the savers and the depositors also need to be protected from high level of inflation. And therefore the rate of interest that is offered has to be positive in real terms. Therefore we have to have balance both—the need to sustain high growth and at the same time the need to tame inflation. I still think that the primary responsibility of the central bank still lies in controlling inflation. And my current view is that if inflation begins to show signs of decline more particularly non-food manufactured inflation shows signs of decline that will give the required space to monetary authorities to take an easier stance.

Is the delayed monsoon a worry?
It is getting to be a worry. But the Met keeps assuring that the rainfall in July will be near normal. Therefore, we have to keep our fingers crossed.