Arun Jaitley should set a real reforms roadmap

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Dear Mr. Sagar

Please see my article this morning in ET.

Your feedback and response will be truly appreciated.

Best regards

Rajiv Kumar

Arun Jaitley should set a real reforms roadmap for Raghuram Rajan to consider interest-rate cut.

Finance minister Arun Jaitley’s suggestion to the RBI to cut interest rates is well-timed. It follows some key decisions that have signalled the government’s reformist intentions. Also, perhaps more importantly, both the wholesale and retail price inflation have not only stabilised but are on a declining trend.

The key question is whether recent policy announcements will convince the RBI about government’s commitment to addressing supply-side bottlenecks. On present trends, capital formation could remain anaemic until the Budget. Credit offtake by corporate houses remains well below previous levels and GDP growth seems stuck firmly around 5%. The FM must, therefore, be hoping that Raghuram Rajan will oblige and help him restart the ‘invite investment’ cycle.

Back-End on Backburner

But Rajan will be well within his mandate to argue that steps taken so far do not constitute real reforms. Coal continues to be a public sector monopoly with a weak regulatory framework. Domestic gas remains underpriced and may not suffice to attract additional investment. While diesel has admittedly been decontrolled, the administered price mechanism for oil products itself hasn’t been formally dismantled. Labour markets remain as rigid as ever with recent steps just tinkering at the margin.

Land acquisition processes are still as time-consuming and expensive, and goods and services tax (GST) legislation is not yet assured of its passage through Parliament. So, Rajan can argue that the supply-side response capability hasn’t really improved to warrant a monetary policy relaxation. There is no visible hike in the rate of growth of potential output. So, any cut in interest rates would only stoke inflationary pressures and rekindle inflationary expectations.

Inflation-in-Waiting

Rajan can also rightly argue that the current decline in both wholesale price index (WPI) and consumer price index (CPI) is a mere statistical illusion reflecting the high base of the previous year. The fear is that with the onset of the busy season and the lower base after December, inflation, if not tightly restrained, will begin its upward march.

One of the real causes of concern on the inflationary front will be the threat of rising food prices. The double-digit food inflation over the last seven years has been the principal driver of retail inflation in India. So, controlling inflation boils down to increasing supplies of food, especially fruit and vegetables, in the face of rising demand that’s unlikely to subside even with higher interest rates. To redress the supply-demand imbalance in food products, the administrative approach for inflation control should be jettisoned.

Food is a tradeable item. In the short term, its supplies can be raised through higher imports. These can provide the intermediate solution while measures to raise agriculture yields and productivity are put in place.

Lowering the relatively high import tariffs on food products and eliminating non-tariff barriers (NTBs) on agro-imports offer a viable way out. This could be sufficiently robust to assure the RBI.

At present, fruits attract a wide range of import tariffs ranging from 25% for grapefruits to 50% for apples, 70% for coconut inners and 105% for dried grapes. The majority of fruit varieties and nearly all vegetables, however, attract an import tariff of 30%, with vegetable imports from preferred destinations charged at 20%. All these can be immediately brought down to a flat 10%.

Say No to NTBs

NTBs that plague food imports also need to be eliminated. These affect the entire range of food products from Lindt chocolates to ginger from Nepal.

NTBs are applied in the form of long procedural delays, arbitrary and frequent changes in regulations; distant locations of food-testing labs; long delays in preparation of testing reports; and the prevalence of ‘speed payment’’across the board.

It is high time these NTBs are removed. That will pose a credible competitive threat to hoarders and also augment supplies to dampen inflation. Objections against liberalisation of food imports will range from ‘compromising self-sufficiency’ to having ‘a huge negative impact on farmers’ incomes’ and the widening of the current account deficit (CAD).

These objections are spurious. Farmers receive only a fraction of the final price with the large chunk being appropriated by intermediaries who hardly add any value. India’s CAD will also not be much affected because food imports are presently at very low levels. Fruit and vegetable imports in 2013-14 were merely Rs 4,000 crore ($650 million).

So, even if these imports increased by 30% annually as a result of liberalisation, they will amount to only $2.5 billion after five years. By this time, domestic supply response will kick in. Which is why on all counts, the finance minister will do well to liberalise food, especially fruit and vegetable imports, as a principal tool to fight food inflation. This could convince the RBI governor of the government’s commitment towards supplyside reforms to restrain inflation.

Author is a Senior Fellow at the Centre for Policy Research and Founder Director of Pahle India Foundation. The most recent book is Exploding Aspirations.

Arun Jaitley should set a real reforms roadmap

Arun Jaitley should set a real reforms roadmap for Raghuram Rajan to consider interest-rate cut.

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