RBI Monetary Policy Committee Member Jayanth R Varma


Economic growth in India

Jayanth R Varma said that India needs substantial growth to provide employment opportunities. (File)

New Delhi:

India’s economic growth is “very fragile” now and needs all the support it can get as private consumption and capital investment are yet to recover, RBI Monetary Policy Committee (MPC) member Jayanth R Varma said.

Jayanth R Varma further said that of the four engines of economic growth, exports and government spending had supported the Indian economy through the pandemic, but other engines now need to take over.

“I like to think in terms of 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.

With experts waiting for many years for private investment to pick up the slack, Jayanth R Varma said concerns about future growth prospects seem to be hampering capital investment.

“The critical question is whether the fourth engine of private consumption will remain strong in the coming months after pent-up demand dissipates. That’s why I fear economic growth is now very fragile and needs all the support it can get.” he said

Earlier this month, the RBI revised its growth estimate for FY23 to 6.8% from 7% previously, while the World Bank revised its GDP growth forecast to 6.9%, saying the economy was showing greater resilience to global shocks.

Jayanth R Varma, a professor at the Indian Institute of Management (Ahmedabad), however, asserted that India is not facing the threat of recession unlike many other countries in the world.

“In fact, India’s economy is doing better than most other major economies in the world today,” he said, adding that the problem is that India’s level of ambition is also higher, especially after two years lost to the pandemic.

As Jayanth R Varma points out, India is enjoying the benefits of a demographic dividend, and therefore needs significant growth to provide employment opportunities to young people entering the workforce.

“I am not afraid that India will grow slower than the rest of the world. I am afraid that we may grow slower than our wants and our needs,” he said.

Responding to a question on inflation, Jayanth R Varma said in his personal opinion that one of the reasons why the RBI could not keep inflation in its tolerance band for 10 months was because the MPC consciously prioritized economic recovery over inflation during the pandemic.

“Given the growth objective given its dual mandate to maintain price stability, I think that was the face of a once-in-a-century pandemic,” he said.

According to Jayanth R Varma, by mid-2021, the COVID-19 pandemic had ceased to be an economic disaster while remaining a health tragedy, and the time was right to begin monetary policy normalization.

“Secondly, in my opinion, we lasted longer than we should have… Considering that monetary policy plays with lag, a large part of what we are seeing in 2022 is the result of the absence in that period,” he emphasized.

Jayanth R Varma, however, added that even this delay by itself would not be enough to cause the inflation event this year.

This month the Reserve Bank raised its benchmark lending rate by 35 basis points (bps), the fifth hike since May.

Ahead of the December hike in the repo rate, the RBI had raised the short-term lending rate by 190 bps in four installments.

A third critical reason, he said, was that supply disruptions from the war in Ukraine created an unexpected inflationary shock, which hit India before the MPC normalized monetary policy.

November inflation fell below 6 percent, within the tolerance band, for the first time in 10 months. The RBI had earlier written a letter to the government explaining the reasons for not meeting the inflation target of 6 percent for three consecutive quarters.

The central bank has been mandated by the government to ensure that retail inflation remains in the 2-6 percent range.

When asked whether India can bring its widening trade deficit under control, Jayanth R Varma said that monetary tightening to bring down inflation will have the effect of dampening demand and indirectly reducing imports.

He pointed out that the depreciation of the currency this year will tend to reduce the deficit of the current account with a delay, “in the end, the level of this deficit is within the manageable limit, and I do not see it as a cause for concern. ” India’s exports registered a flat 0.59 percent growth in November to $31.99 billion, even as the trade deficit widened to $23.89 billion during the month.

When asked if the government should reduce taxes on petrol and diesel as crude oil prices have fallen, he said the fall in global crude oil prices is very good news for India and will help bring down inflation.

Jayanth R Varma said it is well understood that there are lags in the transmission of global energy prices to domestic prices in both directions, but monetary policy looks 3-4 quarters ahead.

“During this time, I expect global crude prices to pass through to retail prices,” he said.

(Except for the headline, this story has not been edited by NDTV staff and has been published from a syndicated feed.)

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