Financial Management in the view of Low Inflation, Crude Oil price, Industrial Production & Trade Deficit.

16 December 2014(Money Talk)

This is the FM Gold channel of AIR, In the Programme Money Talk now we bring you the dialogue on Financial Management in the view of Low Inflation, Crude Oil price, Industrial Production & Trade deficit. Participants are Aravind Prasad, DG, FICCI and Shushil Sinha, Hindu BL.

Dr. Prasad, we are getting mixed of economic trend, the rupee has gone down, the crude has also gone down, WPI &CPI gone down, and SENSEX & NIFTY has gone down. What do you see in these down trends?

If you overall see, it is except for few items overall it gives a very positive signal. It also talks about what should be the policy directions. Because as you said there are mixed element to that. What is good is the crude price is going down. And India import 80% of Crude, so in fact it affect energy price and therefore affect transport price, it affect almost industrial production. That’s why it is very good news. It is very good signal. Second thing Inflation has gone down, if you remember, this government or this party when they were campaigning for election, they raised two issues, one is Inflation and other is Employment. So the inflation in 6 months, of course they have been supported by some global events as well. Because of their policies, because of some good luck, because of their National International event, whatever the inflation have gone down. WPI is zero last five years; even the retail consumer price index is around 4.3 or something much less than the targeted RBI objective of 6%. So this is a good thing, they have achieved at least one big promise made to the public during the election campaign, that will bring down inflation, and really they achieved.

And the second thing is that one which they have to target is creation of Job. And creation of Job require Growth, the growth require that the dollar price or the rupee also getting weaker requires larger manufacturing and export. So now they need to create an enabling environment where jobs are created, growth takes place and manufacturing happens. So the first thing under that I would say there is a need to reduce the interest rate now. At this low rate of inflation, current rate of interest is not justiciable. That is the first thing they have to target.

Coming to the point of Inflation, the WPI is now zero after 2009 and the CPI/ Retail inflation is 4.38%. Now I worry is when we talk about whole sale price inflation at zero it is in the case we are going towards Deflation which is not good for a developing nations like us. We need some kind of inflation bench between 2.5 to 3%. How do you justify this Zero % inflation?

Combine this figure with that of Index of Industrial Production (IIP) that is -4.2. So it is more than obvious, that we need to give perk to the manufacturing activity, activity we need to give perk to consumer demand and immediate step to reduce the interest rate will have the impact on the demand of cars, automobiles, demand of housing loans. And If these two sectors, forget about other sectors consumer goods, in even capital investment in industries…all these if you reduce the interest the housing sector allow almost 250 industries, iron, cement, all the small manufacturing goods which are used in Housing Industries. So I think, reducing interest rate this time is most important policy decision which emerges from all the data which you have quoted. Except one where the rupee has been little weaker and that is primarily because in the November month the gold import almost five times more than what has happened in Last year Novemeber. So there is a need to keep an eye on this and there is a need that common public has also now to see that there is an economic expert and they should invest in other investment & instruments rather than gold, because the inflation is going down.  So incentive in investing in gold because you primarily invest in gold because you are afraid of Inflation and Gold is the instrument which gives you certain assurance against the inflation. So in the lower rate of inflation, the public should also look other instrument particularly the government has come up with KVP (Kisan Vikas Patra).. So that may be, you know simpler mechanism for quite manipulation.  Government is working in the Jan Dhan scheme which is essential banking sector accessible to larger number of people. I think people should take benefit from these initiatives from the government and try to invest more in the productive assets rather than gold at this time.

But when we talk about cutting of the interest rate, there is one parameter that is inflation. RBI has already clarified that they will take CPI as a consumer Index or retail inflation for revising the repo rate (rate at which you can borrow from RBI).Now the biggest worry is, whether we are talking about inflation or inflationary expectation. The inflationary expectation is still building up, and in that situation RBI need to be hoagies rather than just putting their proposal or their decision in front of popular demand. How do you see that?

It is not the popular demand, I am referring to. I am just referring to objective data set which is the WPI, which is the CPI, which is the IIP and all these clearly indicate even this retail consumer price index which you mentioned earlier, RBI use to look at WPI last year because there used to be lot of gap between WPI and CPI, particularly because of the huge food inflation. So since Food inflation infringes large number of poorer people, the RBI rightly decided that they would look at the CPI. But even CPI, RBI had target to bring lower than 6% in March 2015, it is already 4.3%. Of course, RBI policy decision is not a one time in five year; they review every 2 month, so it is a dynamic process but at this stage all the indicators indicate that there is a need to give a support to the growth through consumer demand so the economics activities moves up.

Another promise, the BJP has made during the election campaign is of creating New jobs are also fulfilled in addition to bringing down the Inflation. 

But Don’t you see Inflationary expectation building up, I mean you feel that inflationary expectation is almost subdued.

There are two three issues. One of course the fuel price and globally, of course it is somewhat unpredictable going from $115 per dollar to $125 now to $60 it can even go down to $50. So of course that keeps on little varying. Second inflation which is regarding Rabi crops, Agricultural Inflation, There are certain view point, that in coming months, the agricultural inflation may not remain as low may be some pressure on that. But even accounting for that this is much below than what is necessary for giving a spark to the growth and giving relief to the consumer. I think this is the time, RBI should take a look and reduce the interest rate giving a spark to the industrial growth and in any case it is a dynamic activity. And I don’t think in month or two the inflation is going to come back to a very higher level.

Coming to the crude prices, crude prices have come down as rightly mentioned it was $115, $125… when budget estimate were made it was made on $107 to $110 per barrel. Currently the rate is $60 a barrel, almost five years low. And when we talk about Indian basket which is the mix of various imported product which is around 60% expected to come down. But at the same time, the Rupee is becoming weaker, that may take away all the benefits of falling crude prices. How do you this situation especially in the terms of CAD?

In view of crude price coming down, and almost 80% of our crude is imported the whole game has been spoiled by the gold import. One single item, I don’t think would have complicated the whole economic which is going on. As one single item Gold import going 5 times more than the last years had spoiled this. Why had this happened? Because see the Govt. had controlled the gold import, they had come up with 80:20 schemes which essentially means certain selective banks were given import opportunity the condition was they will export 20% gold or jewelry. Few months back, they give it to certain authorized traders as well. Those traders, they took this advantage of this selective relaxation. They saw an opportunity for hoarding the gold through this new region. I know the names have great mention for gold, that too during Diwali. In the November, It is the 5 times import of gold, I think it is entirely because of the new scheme and new opportunity given to six or seven traders. Given an opportunity to six or seven traders, were given an opportunity to import. Govt. has done wide things; they just removed all the control all together except the import duty. But the physical restriction, the non-tariff barriers. Because of this physical restriction what giving an opportunity to select few that has been devoid. So the speculative opportunity was gone. Of course what you are saying right, that custom duty has been high that also creates an opportunity for smuggling and coming from unauthorized channel. In fact after the government should keep close eye to this how the market responds to the current policy. And if some point if they move positive direction, they should do away with the gold management at all, it should be left with the market that would create more positive environment.

Now the worry for the Indian market is fed meeting in Wednesday it is expected to take decision in whether they will up check or not. That is why Indian market closes in loss on tuesday. If I just recollect, BSE in that sensitive index SENSEX we call it, it went down by 500 point and Nifty went almost 100 points. Do you see an Apprehension because of the Fed meeting on the change?

Global happening will always have some impact in our Indian market. We are too globalized today, not to have any impact, but what we should focus; both as citizen of India and as government, to look out our inherent strength and how to further extend it. In the policy perspective, we should create an environment where there is policy support manufacturing, entrepreneurship and economic growth. And from individual point of view, we should look at our investment and our on up gradation of skill to enhance our participation in economic activity. So from the consumer/ citizen whoever they have the saving, it is time for saving, there is no reason investing in the gold, one should invest in more productive stock market or bond market or other financial instrument like Kisan vikas Patra whichever suits the individuals risk profile. They should invest in that. They should also try to upgrade and take up entrepreneurship opportunity particularly which government is trying to promote that. So that you have participate in economic activity. On the government side, they should reduce the interest rate, so that more economic activity, you should create enabling environment where people are can take smaller percent who never have done any business, they should not afraid of taking entrepreneurship. So the regulatory environment, control mechanism should be such that everybody should be encouraged to take economic activity in the country.

Do you see some Apprehension from fed meeting, because there is fear, if fed reduces or rather I say if it increases the interest rate, FII money will go out to other country. In that situation our stock market will get affected, our investment from other country will get affected. Do you see these apprehensions have some grounds?

The normal economics, that if fed increase the interest rate, some FII would shift. But government supports the manufacturing scenario here, will have lot of FDI. So it will be the fluctuation, the FII moves out very fast, whereas FDI takes some time to come in. So there will be some fluctuation, if fed increases its interest rate. But in the longer run, the overall manufacturing environment, investment environment remains strong in the country; I don’t think there will be lot of pressure on Indian rupees.

If I just recall, Mr. Narendra Modi’s statement, when He defined FDI as First Develop India, so how industry can do that, in order to curb the impact of higher FDI outflow, if they want to use the domestic factors, if they want to exploit the domestic factor, what are the key two element which the industries would expect from the government?

So now what exactly focusing on the two things, and they are rightly focusing. One is on skill development, because we have to shift larger number of people who are in the agriculture to manufacturing and food processing and all that. Second they are focusing facilitating enabling environment, including easy access of land acquisition but full compensation to the farmer

Thank you Mr. Prasad.

You are listening to a dialogue on Financial Management in the view of Low Inflation, Crude Oil price, Industrial Production & Trade deficit. Participants are Aravind Prasad, DG, FICCI and Shushil Sinha, Hindu BL. This came to you in the program News Analysis produced & presented by News services division on All India Radio.

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GIST: Financial Management in the view of Low Inflation, Crude Oil price, Industrial Production & Trade deficit.

Falling global crude price $115 to $60 per barrel – positive to India – as India import 80% crude ; Inflation reduce; Retail consumer price index reduce to 4.3% (less than & much earlier than RBI objective of 6% by March 2015); Whole sale price inflation at Zero – trending towards Deflation - bad to developing economy; RBI should reduce the interest rate (Eg. Housing sector alone will benefit 250 industries like cement, iron…); but the positive environment spoiled by the single factor – investment option of people, Gold import increased by 5 times – financial instrument need assurance against the inflation; Government introduced KVP (Kisan vikas patra) – Jan Dhan fo Banking penetration; biggest pressure inflationary expectation – it could return within few months at very higher rate; Objective data sets WPI, CPI, IIP indicate;  Gold import 80:20 Scheme; Apprehension of Fed Meeting – too globalized – increase in interest rate – FII money will go out – to counter – govt. impetus to manufacture would attract more FDI- FII out flow faster than FDI inflow – cause some fluctuations – FDI – how First Develop India – Skill development & easy Access of land acquisition;