ET Now: S&P has mentioned India's external position has deteriorated but remains resilient. However, it also mentions that there is one out of three chances of a ratings downgrade if the external position deteriorates further. What are the challenges on the external sector? What is your future outlook on how the economy would shape up? Rakesh Mohan: As I mentioned earlier, we have a current account deficit that was in excess of 4% in the last quarter, the September to December quarter, for which we have data. That was 4.3%, just about the highest that we have had for a very long time. Second, there has been some slowdown in capital flows from abroad and so that does put significant pressure on the Indian external situation. Now because of these pressures, the Indian rupee exchange rate is moving somewhat downwards and to my mind that is, in fact, good for the economy so that the industry does become somewhat more competitive and imports do come down. Now, of course, that does mean that if our exchange rate moves further downwards and there is inelastic demand for commodities like oil, it would put further fiscal pressures domestically and also some price pressures. But on the other hand, it would certainly be good for the external sector that pressure on imports be reduced. Also, a greater incentive for exporters. So, I would hope that as a consequence of some of the current pressures, our exchange rate does adjust to what I would call a more competitive and realistic rate, which would make Indian industry more competitive. Also, it would make the IT companies more competitive as well as more profitable. So, I do think that would make a difference and that the external sector can indeed improve from where we are today. ET Now: S&P has blamed slow policy making for this while the onus for this completely rests on the government, should the Opposition also not shoulder some part of the blame game? Rakesh Mohan: As far as the fiscal deficit is concerned, to achieve the 5.1% deficit target presented in Parliament by the finance minister, he said he will contain subsidies to 2% of GDP and he further said more recently that they will take action on petroleum prices, etc.. So, assuming that he means what he says and the government does take action on some of these issues to do with subsidies and some other measures, then there is a possibility that we might achieve the 5.1% fiscal deficit target. On the other hand, if these actions are not taken then it will be difficult for us to achieve that kind of target. And then of course there would be fiscal slippage.

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