Mumbai: Olivier Jean Blanchard, chief economist of the International Monetary Fund (IMF), is optimistic that the global economic scenario will turn around sometime in the second half of the year with an improvement in credit availability and increased spending. Blanchard says India is in a better position to tackle the crisis compared with the rest of the world because it has been exposed to shocks that are not of its own making. India is exposed to export, capital flow and credit shocks, but these shocks are of a lighter magnitude than those faced by some other economies because India’s export sector as well as dependence on foreign capital are much smaller, according to Blanchard.
Managing crisis: Blanchard says the worst is yet to come. Abhijit Bhatlekar / Mint
In an exclusive interview with Mint, his first to any Indian newspaper since he took over his current assignment in September, the 60-year-old Blanchard admitted that India has much less fiscal space than other countries, but said it can do more, particularly moving forward infrastructure projects. A higher fiscal deficit, he said, is acceptable at this stage if it clearly is going to be reduced in the future. With inflation dropping very quickly and economic growth slowing, Blanchard sees room for more interest rate cuts by the Reserve Bank of India (RBI). During his four-day familiarization trip to India, his first, Blanchard met officials of the Indian government and the central bank, made a presentation to the Planning Commission and had lunch with business leaders in Mumbai on Saturday. Edited excerpts:
Is the world economy in a recession or depression?
I think it’s a deep recession. I would like to use the word depression for something which is there for very long. My sense is that the situation is deep but hopefully not too long. There is still hope that next year there will be growth in advanced countries. If our estimate is correct, there are a lot of uncertainties and we may see a year-and-half of negative growth, depending on the country. That’s a deep recession—not a depression.
Listen to Tamal Bandyopadhyay’s conversation with IMF chief economist Olivier Jean Blanchard
Listen Now
How real is the threat of deflation at least in some part of the world?
In many countries, there’s going to be negative inflation for some time, but we think that’s not going to last. It becomes a danger when people start building it in their expectation of inflation. Frankly, when people start expecting deflation, it’s much harder to get rid of and it becomes a very big issue. We have seen this in Japan. We think there is going to be negative inflation for a while. Then, we are going to go back to some positive numbers, but prolonged deflation is something we want to avoid.
Do you see any sign of recovery? Is the worst over?