Raghuram Rajan cautions against dependence on FIIs, prefers FDI
New Delhi: Cautioning against over- dependence on FIIs, which brings in hot money, Chief Economic Adviser Raghuram Rajan on Tuesday said the government should focus on Foreign Direct Investment (FDI) and open more sectors to such inflows.
"We have to be careful that we are not overtly dependent on external investors that this is an environment when the external investor is quite fickle...," Rajan said in his first media interaction.
Betting high on India's reform initiatives, foreign investors have pumped in more than Rs 9,000 crore (about USD 1.67 billion) in the country's equity market this month.
"The safest form of financing is through FDI, without any doubt because its long term... If you can make more financing through FDI, you are safer and so to the extent we can open up more to FDI... There will be efficiency, because there will be more competition in local economy," Rajan said.
In the last couple of days, the government has taken a number of reform initiatives, like opening the multi-brand retail chain to FDI, hiking diesel prices by over Rs 5 a litre, capping the number of subsidised LPG cylinders to six per family a year, allowing foreign carriers to pick up stake in domestic airlines and liberalising FDI rules for broadcasting sector.
Besides, talks are on to increase the FDI cap in insurance sector to 49 percent, from the existing 26 percent.
"More FDI is good thing at this point, not in every sector but in many sectors ... So in general there is scope for more FDI in many sector, like insurance," he added.
Rajan also underlined the need for aligning domestic petroleum prices with international rates with a view to reducing subsidies and containing fiscal deficit.
"The more we reduce our CAD, which means the more we reduce our overall spending, including fiscal deficit, the safer we are. So the moves to narrow the fiscal deficit, by reducing subsidies is important," Rajan said.
The fiscal deficit, the gap between expenditure and revenue, was 5.76 percent of GDP in 2011-12.
The Centre aims to bring it down to 5.1 percent in the current fiscal. Besdies, Current Account Deficit (CAD) had touched a record high of 4.2 percent last fiscal.
"The best policy is move towards true cost of the fuel rather than go through second or third option. If do not tackle problem directly... The problem with diesel versus petrol is not vehicle, its fuel cost. If we can bring both to international prices or market prices, then people would make choice," Rajan said.
Referring to the proposal of hiking excise duty on diesel cars to check consumption of the subsidised fuel, Rajan said, "creating a new distortion by changing the price of diesel vehicle is a sort of second best solution. If you can not move prices towards international level then you may resort to differential tax on vehicle".
Replying questions on inflation, Rajan attributed high food prices to rising purchasing power, driven mainly by rapid economic growth in the recent past.
"One of the concerns of the last few years has been food inflation ... (mainly) because our population has become richer and therefore demands high-end food products like, milk, egg, meat, rather than the old cereals. So, in order to rebalance or reduce food inflation we have to produce more of that," he said.
Rajan said the lower sowing of kharif crops would put pressure on inflation.
On the global economic situation, Rajan said there is gloom in the world economy and India should try to bring in more investments, create jobs to set the growth path for the economy in the medium term.
"We are certainly experiencing what the world is experiencing in terms of downturn. But ofcourse we have home grown problems also... I think getting just a few things right can stabilise the growth and also move it on the way up," he said.
Economic growth slipped to a nine-year low of 6.5 percent in 2011-12 fiscal after recording a over 8 percent growth in the previous two fiscals.
In his first media interaction after assuming charge, Rajan also justified the diesel price hike saying there is a need to link domestic fuel prices with international rates to curb fiscal deficit.
"One of the concerns of the last few years has been food inflation, which has been not so much within the control of the government, but which has been sort of because our population has become richer, a good thing and therefore demanded more sort of higher end food products like, milk, egg, meat rather than the old cereals," he said.
Food inflation has hovered above the 10 percent mark for most part of the current fiscal, only to decline to 9.14 percent in August. The overall inflation stood at 7.55 percent.
"In order to rebalance or reduce food inflation we have to produce more of that. Which means more productivity. So productivity is going to be part of the fight against inflation," he said.
Rajan said the less sowing of kharif food grain would put "upward pressure" on prices.
Country's foodgrains production is projected to decline by 10 percent in the kharif season of this year at 117.18 million tonnes due to deficient monsoon and drought in some states.
On the government's recent decision to hike diesel prices by over Rs 5 a litre, Rajan said "the best policy is to move towards true cost of the fuel ... If you can not move prices towards international level then you may resort to differential tax on vehicle".