With private consumption and capital investment yet to pick up, India’s economic growth is now “extremely fragile” and needs all the support it can get, RBI Monetary Policy Committee (MPC) member Jayanth R Varma said today.
Jayanth R Varma further said that among the four engines of economic growth, exports and government spending supported the Indian economy during the pandemic, but other engines now need to take over the baton.
” I like to think in terms of the four engines of economic growth: exports, government spending, capital investment and private consumption. While exports cannot be the main driver of growth due to the global slowdown, government spending is necessarily constrained by fiscal constraints ,” he told PTI.
Jayanth R Varma, observing that experts have been waiting for years for private investment to fill the void, said concerns about future growth prospects appear to be holding back capital investment.
“The key question is whether the fourth engine of private consumption will remain active after pent-up demand dissipates in the coming months. I am therefore concerned that growth is now extremely fragile and needs all the support it can get,” he said.
Earlier this month, the RBI raised its growth forecast for FY23 to 6.8% from 7% previously, while the World Bank raised its GDP growth forecast to 6.9%, saying the economy showed greater resilience to global shocks .
However, Jayanth R Varma, a professor at the Indian Institute of Management (Ahmedabad), asserts that India does not face the threat of a recession like many other countries in the world.
“In fact, the Indian economy is doing better than most other large economies in the world today,” he said, adding that the problem is that expectations are also higher in India, especially after losing two years to the pandemic.
Jayanth R Varma pointed out that India is enjoying the benefits of a demographic dividend and therefore needs high growth to provide employment opportunities for young people joining the workforce.
“I am not concerned that India will grow at a slower rate than the rest of the world. I am concerned that our growth rate may be slower than our own desires and needs,” he said.
In response to a question on inflation, Jayanth R Varma said his personal view is that one of the reasons why the RBI failed to keep inflation within its tolerance range for 10 months was that the Monetary Policy Committee (MPC) during the pandemic Consciously prioritize economic recovery over inflation.
“Given its dual mandate of keeping prices stable while keeping growth targets in mind, I think it’s the right response to a once-in-a-century pandemic,” he argued.
According to Jayanth R Varma, by mid-2021, the COVID-19 pandemic is no longer an economic disaster but a health tragedy, and now is the right time to start normalizing monetary policy.
“Secondly, we’re holding on to this for longer than we should, in my view … Given the lag in monetary policy action, much of what we’re seeing in 2022 is the result of inaction over that period, ’ he said emphatically.
However, Jayanth R Varma added that even this delay alone would not be enough to cause an inflationary event this year.
The Reserve Bank is expected to raise its benchmark lending rate by 35 basis points (bps) this month, the fifth hike since May.
The RBI hiked the key short-term lending rate by 190 basis points four times before the repo rate hike in December.
The third key reason, he said, was an unexpected inflation shock from supply disruptions caused by the war in Ukraine that hit India before the MPC normalized monetary policy.
Inflation was below 6% in November, the first time in 10 months that it was within tolerance. The RBI had earlier written to the government outlining the reasons for missing the 6% inflation target for three consecutive quarters.
The central bank has been tasked by the government to ensure that retail inflation remains within a range of 2% to 6%.
Asked whether India could control its widening trade deficit, Jayanth R Varma said monetary tightening measures to reduce inflation would have the effect of dampening demand and would indirectly curb imports.
Currency depreciation this year will also tend to reduce the current account deficit with a lag, he noted, “Ultimately, the level of the deficit is manageable and I don’t think that’s cause for concern.” India’s November exports rose 0.59% flat to $31.99 billion, although the trade deficit widened to $23.89 billion for the month.
Asked whether the government should cut petrol and diesel taxes amid falling global crude oil prices, he said the drop in global crude oil prices is definitely good news for India and will help bring down inflation.
Jayanth R Varma said that it is well known that there is a lag in the two-way transmission of global energy prices to domestic prices, but monetary policy looks 3-4 quarters ahead.
“During this time frame, I do expect a significant pass-through of global crude oil prices to retail prices,” he said.
(Aside from the title, this story is unedited by NDTV staff and published via a syndicated feed.)
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