Friday, February 25, 2011

Crude shock biggest threat to GDP growth: Kaushik Basu

The Economic Survey tabled in Parliament today, pegged the economic growth at 8.75-9.25% for fiscal year 2012. Chief economic advisior to finance ministry Kaushik Basu says India can achieve 10% growth in GDP over the next three years.

However, according to Basu, the biggest threat to GDP is the rapid rise in crude oil prices. "Crude shock is the biggest downside risk to GDP growth and its escalation will be a global shock," he told CNBC-TV18.
Commenting on deregulation of petrol prices, Basu said, "We may decide to regulate petrol prices if the situation warrants itself," before hastening to add that regulation do not mean that prices will not rise. According to him, regulation would mean that the petrol price will be shared by the government and the consumer.

On fiscal consolidation and a gradual withdrawal of the fiscal stimulus package he said a careful balance will be needed to be struck between growth and inflation.

Below is a verbatim transcript of his interview on CNBC-TV18.

Q: Let me start by asking you and this is on the basis of the reactions that we have been getting in through the day on the survey and usually the Economic Survey is now being seen as a big vision document which is not really rooted or connected to the budget or to the political and the economic realities that we find ourself in. Surprisingly or not surprisingly perhaps it was a conscious decision on your part that this survey seems to be more rooted or aligned to the political realities. Was that a conscious decision on your part?

A: No it is a general orientation of our team that we want to talk about the large policy choices that India faces. We want to analyse the past year that India has just lived through. But it is to do with India’s policy options and so the policies that we discuss, part of this happens to be a wishlist, a part of this is something that we are actually expecting to happen.

Q: But even in terms of the wishlist, the sense is that the wishlist is a more realistic one.

A: It is a wishlist where we don’t want to be an academic document where you are talking of something for which there is no hope but things for which there happens to be hope and you want these to be evaluated, analyzed.

Q: Hope and confidence that this wishlist will actually be reality or hope?

A: More hope than confidence I have to confess. Hope is greater than the confidence because political process is a difficult one in a country as noisy and as democratic as ours, all good traits. But that means that very often our hope will not be realized. But it is atleast things which are possible, to bring them into the agenda of discussion is what we wanted to do.

Q: Let me get down to specifics now. Let me start by talking to you about the GDP growth target, and you have said in the survey that you expect the Indian economy to grow between 8.75 to 9.25%, that’s for FY12. What is the downside risk to this 9% growth given the fact that we have seen a crude shock once again and the crisis in the Middle East seems to be worsening. What is the downside risk to this growth?

A: The crude shock is the big downside risk. We can handle this where the shock stands right now. If the shock goes even deeper we will begin to have difficulties and the difficulties will be more than inflation. People very often say that if the crude goes up there is going to be inflation. But beyond a point it is not inflation as much as the fact that our factories, our various operations which need oil will begin to get hit. And that is going to be a downward shock on India’s growth.
If this happens it is going to be a global shock, we will be a part of that and there is going to be some slowing down on growth. There is one plus side I should mention in this. We are still an emerging economy with a lot of slack. We don’t use all the advantages that we have to the hilt and almost by definition we are an emerging economy.

So yes, if we get the oil shock becoming bigger than what we have got till now and that begins to slowdown, if we do have sufficient determination in terms of infrastructure building up, in terms of alternative energy, in terms of loosening up administrative hurdles, that is a big one in India, if we begin to work on that to make the business atmosphere easier, we can then try to compensate for some of the downside that will come with this.
But the final word is that with a growth forecast of 9% we are fully aware that things can go wrong, fully also aware that we may be lucky, nothing goes wrong on the oil front and we begin to manage to achieve those other things which push us to 9.25%.

Q: In the survey you also talk about the fact that the government will cap auto fuel prices if crude spurts. This was the recommendation of the Kirit Parekh Committee as well, but we don’t have a number. When is the government going to intervene, Bret is almost at USD 115, closer to USD 116. Nymex Crude is above USD 100 continue to trade above USD 100. The Indian basket of Crude is now at USD 100, when will the government intervene?

A: I should clarify first of all. The sentence that you gave is not quite right. What the survey says, which is the known government position on the matter is that the price of petrol is on a free float, we did that, that was announced on 25th of June last year, we intended to be that way.

Q: What is a sufficiently high price?

A: We don’t have a number there, it is true. But if it goes sufficiently high we may decide to step in and protect the consumer price at that point. However, I should clarify something that stepping for the government does not necessarily mean that you go back to price control. So cap is not the right word and we never use the word price cap. It could be that we begin to share some of the burden at a higher price, we take part of it on the fisc, and part of it we make the consumers bear. If we keep that share constant then it is not like a cap. If it still rises part of it is taken.

Q: But there is still no number that the government has worked out?

A: There is no number. At times you fix a number then you find that by the time you get there the economy is robust enough to be able to take it. One year ago the kind of FII flows we are getting in now, we would have thought that we would have to step in but the robustness of the economy we are managing to take it. But we don't have a number.

Q: The survey also says that diesel deregulation should be staggered. It has been put on the backburner, and this is publicly known. Is this really going to be the time that the government will even consider a gradual staggering or a gradual deregulation of diesel?
Source: moneycontrol

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