It is ‘the moderate pace of services inflation’ in the last three months, which has made the Reserve Bank of India (RBI) cut repo rates by 50 basis points, says Arvind Subramanian, Chief Economic Advisor.
Speaking to CNBC-TV18, Subramanian says the government will not compromise on meeting the fiscal deficit target and will reassess the growth target going forward.
In addition, he believes government’s efforts to manage the food situation has kept food inflation in control.
Below is the transcript of Arvind Subramanian’s interview with Latha Venkatesh on CNBC-TV18.
Q: What is your comment on the RBI forecasting a 4.8 percent by the fourth quarter? Is it giving you the sense that now there is confidence that food and services inflation are also coming under control especially services which is running at 5.5?
A: In the last three months, the pace of services inflation was moderate and so that is what I think feeds into this forecast going forward. And of course on the food, as the RBI said, it is partly about the monsoon, but much more about how the government will manage the food situation which so far it has done very well in the last 18 months. So, that should give comfort in the food inflation as well.
Q: But they are still looking at a 5.5-5.8 in the first quarter and probably an average of 5.5 for calendar year, 2016. So, would you say therefore if a real return of 1.5 is to be expected, that does not give too much space for rate cuts going forward?
A: The point is that the RBI signalled that they are in an accommodative stance and that going forward it will be data driven and so, if there is room, if inflation comes further under control, then space will open up. But the key point is that there is a scope going forward.
Q: Actually, there is a whole page devoted to arguing that the deflation risk is overstated and they point out to a lot of administered prices, the lack of transmission of several global prices into India and several non-tradables that form the bulk of consumer price index (CPI). It is a whole page, page 16 of the monetary policy statement which is devoted to saying no, no, deflation argument is overstated.
A: I am flattered that the whole page is being devoted to that, but the key point is that the significant moderation of inflationary pressures which is what I was talking about when I said deflation is in fact what imbues the spirit of this monetary policy statement as well. So, in that sense, RBI and we are on the same page with this.
Q: There is also a reduction in the growth forecast to 7.4 percent. You will agree with that along with the arguments being largely global growth being very debilitative?
A: Yes, I think the RBI has made a call on the growth forecast. We will have to, as I said earlier, as the data comes in, we will also have to look at our forecast, but I think the RBI’s thing has been based on the significant deterioration of the external environment as well. So, that is something we will have to watch as we go forward.
Q: So, we may expect you to lower your growth forecast as well? In which case, your tax revenues will be impacted. There could be pressure on fiscal deficit, won’t there?
A: I think the government is committed to meeting its fiscal deficit target as the Finance Minister also said just now. And we have enough comfort and room to meet that. There will be no compromise on meeting the fiscal deficit target.