Rajan to govt: LPG reform rollback is misdirected subsidy

The United Progressive Alliance government, which yesterday sounded the poll bugle by announcing a partial roll back of LPG reforms, just got a reality check from Reserve Bank of India Governor Raghuram Rajan. Hours after the government announced the decision, made after an impassioned plea made by Congress vice-president Rahul Gandhi, Rajan has reminded that by taking such a step, the government is “expanding misdirected subsidy”. “We need to spend on important things that we are not spending on,” Rajan said in an exclusive interview with CNN-IBN’s Karan Thapar. He also discussed a host of issues including the recent Urjit Patel committee report on monetary policy, which started off a debate on whether inflation targeting should be made the central bank’s mandate, and the Federal Reserve’s decision to scale back its monthly bond-buying for the second time. On the Urjit Patel report: [caption id=“attachment_51824” align=“alignleft” width=“380”] Reuters[/caption] The governor said one of the recommendations in the report recently submitted by a panel led by the central bank’s deputy governor Urjit Patel – to create a dedicated committee to take monetary policy decisions – would enhance the credibility of the RBI. “A monetary policy committee would create an institutional structure that would help take good decisions and would send a signal that the RBI is working on its mandate,” he said. The panel had suggested the central bank should look at inflation as the goalpost around which its decisions on interest rates should centre, rather than its current dual objectives of balancing between growth and inflation, and had recommended setting up an independent monetary policy committee in this regard. However, Rajan also pointed out that there are more detailed recommendations on the structure of monetary policy committee –who sets the inflation goal, what that should be and whether we (RBI) should be moving into inflation targeting need a broader debate, need to be discussed. “Some of these things require political buy-in and we have to have that debate,” he said. On growth: Rajan said growth is stabilising at a low level. “We will be between 4.5 and 5 percent but where precisely depends on so many imponderables,” he said. The RBI governor said he does not think there will be significant further declines at this point. “The hope is that with rest of the world starting to pick up more strongly, with our agriculture doing well and with our big projects starting to slowly come back to life that we will get stronger growth,” he said. However, Rajan pointed out what really is missing is investment. “Investment is based, as you know, on animal spirits. When those animal spirits start picking up I am hopeful the revival of the large projects, which we see some emergence of,” he said. On inflation:  At a time when the US Federal Reserve and perhaps the European Central Bank (ECB) are increasingly focusing on both growth and inflation, Rajan thinks India should only focus on inflation for now. “The reason the US Federal Reserve and the ECB can focus “on growth” is because inflation is very quiet,” he said. Rajan feels inflation should be made the central focus. “Once inflation comes down then in circumstances like the current one when growth is very weak we will have the room to cut interest rates sharply, so as to create the conditions for growth without worrying about inflation,” he said. Rajan said that over the next two years the RBI wants to bring inflation down to 6 percent. Rajan’s advice to the government: The RBI governor said to bring down inflation, it will need the help of the government. “Please go slow on support, but give aid to agriculture so that we have more supply coming in,” he said. “I do not think it is secret that there have been tensions in the past. What is true is that there is constant discussion between the RBI and the Finance Ministry in the same way as the chairman of the Federal Reserve has breakfast with the treasury secretary. There is constant discussion. We talk about a lot of things and there is some give and take in those discussions. We will debate with the government pieces of it and as time goes on and start implementing.” On Fiscal deficit, Rajan said that there has been substantial amount of spending cuts that have been put in place. “I think whether it is 4.8 percent on the nose or not it will be very close, close enough not to matter that much,” he said. However, he pointed out that the government needs to be careful about expanding misdirected subsidies in the system.  “I believe that there is a certain amount of the population that perhaps can benefit from subsidised LPG cylinders. But beyond a certain point you are reaching people who can well afford to pay for it. Whose pocket is that coming from? It is coming from the very pockets of the people who are getting subsidised,” he added.