‘Tax buoyancy, growth may help reduce deficit’

In the past few weeks, the rupee has been falling and crude oil prices have been on the boil. ASHIMA GOYAL, member of the Prime Minister’s Economic Advisory Council, tells Joydeep Ghosh the RBI will have to consider a number of factors before taking a call on interest rates.

IIn the past few weeks, the rupee has been falling and crude oil prices have been on the boil. ASHIMA GOYAL, professor, Indira Gandhi Institute of Development Research, Mumbai, and member of the Prime Minister’s Economic Advisory Council, tells Joydeep Ghosh the Reserve Bank of India (RBI) will have to consider a number of factors, including fluctuating commodity prices and revival in investment cycle, before taking a call on interest rates. Edited excerpts:

India is facing rising crude oil prices and a falling rupee. How will this affect the current account and fiscal deficits?

Both have a negative impact on the deficits but the final effect depends on countervailing forces and possible policy action. For example, the latest data shows some rise in Indian export growth. It might be that Goods and Services Tax-related issues are finally moderating. Our exports usually do well when world demand rises or oil prices rise. Tax buoyancy due to reform and improvement in growth, together with economy in expenditure, could help reduce any impact on the deficit.

With crude oil rising above $80 a barrel, will the impact on inflation be marginal or significant?

It depends on the rise’s persistency and on possible substitution away from the use of oil. The passthrough of oil price shocks has been falling as the economy diversifies. Moreover, inflation targeting might be able to anchor inflation expectations and limit second-round effects. The impact on inflation of an oil price rise this year might be limited to 20-30 basis points.

Analysts think the US government might not be keen to soon end its sanctions on Venezuela -- while its customers are bearing the brunt of higher inflation, oil companies in the US are making money for the first time. Your assessment? There are countervailing forces globally. Companies will not make money for long if alternate sources of supply and renewable energy get a further fillip. Opec, the oil exporting nations’ cartel, should be worried about this.

If crude oil continues to stay high, the RBI will feel pressure to raise rates. Do you see this happening, if not in June, in the August policy review?

The RBI looked through a sharp fall in food price inflation in 201617 and did not lower rates. This implies they want to be forwardlooking and look through sharp commodity price fluctuations, unless these are expected to be persistent and have second-round effects. There are also current temporary base effects on inflation. The taper- on tantrum of 2013 showed that raising of interest rates to reduce outflows did not work, while many kinds of intervention were successful in reducing the rupee’s excess volatility. Foreign inflows to India are driven more by its growth prospects and unique status as the highest growing large economy. Given global vulnerabilities, domestic demand and the beginning of an Indian investment revival need to be protected. RBI will have to assess all these.