How to hedge India from world economic problems?

The government may have to freeze the diesel subsidy at the current level to protect the budget numbers at some point in time, said Chief Economic Advisor to the Finance Minister, Raghuram Rajan, while flagging concerns over the widening current account deficit.

"At some point, we should think about freezing the subsidy on diesel at the current levels until it reaches the level of world prices so that the budget is not exposed to the risks of an increase in global oil price," Rajan told the convocation of the RBI-run National Institute of Bank Management here today.

Also read: Current account deficit biggest concern: Rajan

Terming the widening current account deficit, which had run up to a historic high of 5.4 per cent of GDP in Q2 of the fiscal, as the "biggest concern now," the noted economist said, "CAD is our biggest concern right now because as you finance from outside, you are dependent on the interest of foreign investors. They've been supporting us so far due to the search for yields. But can we continue to rely on that forbearance?"

Finance Minister P Chidambaram, during his customary post-budget interaction with the industry chambers yesterday, had said that CAD is the biggest worry for him now as he could successfully meet the fiscal deficit target at 10 bps better at 5.2 per cent and said the final numbers would be lowest than this too.

As a short-term way out, Rajan said, "In the near-term, we have to focus more on financing CAD through foreign inflows, because reducing it will take time. The best way is to increase exports relative to imports. The problem is that it is also dependent on growth of foreign countries."

Rajan also said there is a need to cut fertiliser subsidies, but did not give a timeline for the same. "Two of the fertiliser subsidies have already been capped. Its urea that we have to think about and see what we have to do. There is no timeline, though," he said.

Rajan also said cautioned the government against "distortionary" spending which is consumption-led in nature and suggested a cut in the plan expenditure to achieve this. "There is not much room to cut non-plan spending. The weight of these cuts have to come from Plan spending. Lots of plan spending are also about consumption. Cutting plan spending, if done carefully and judiciously, is not a sacrifice for long-term growth," Rajan argued.

On growth, he said the GDP expansion will reach the 8 per cent mark in the next two-three years. However, he hinted that in the current fiscal growth will be higher than what has been estimated recently. "The underlying growth, as we see over time, will prove stronger than the current data suggests," Rajan told reporters after the speech. "Some of the signs suggest that
growth has bottomed out, but you can't be sure."

On inflation, he said while the overall inflation was under control, RBI will find it difficult to arrest food inflation and called up on the government to take steps on the supply side to rein in inflation.

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