In a few weeks from now, Arvind Virmani will be leaving his job as the chief economic adviser and taking over as executive director on the board of the International Monetary Fund. Ahead of his departure, he took time to speak to Mint on a range of issues, including the improving state of the economy and the growing threat of inflationary pressures. Edited excerpts:
What is your sense of the current state of the Indian economy?
Growth outlook: Virmani says the economy should do 8%-plus next year and the year after it should be back on the high growth path, between 8.5% and 9%. Harikrishna Katragadda / Mint
It is good and it is as per the forecasts that I have been making. If you look from March basically, I had made a conditional forecast saying that if the the US economy and world economy, in particular, bottoms out and we don’t have any negative surprises, then we would see a U-shaped recovery in terms of quarters and the average growth would be similar to the previous year, which is around 7% adjusted for agricultural growth.
Soon after that the global financial institutions came out with all kinds of even worse negative predictions and then the opposite happened, which is that more and more people thought that there will be a global recovery. In the Economic Survey we were confident and, in fact, we put out a forecast for the first time though we kept it slightly on a broader band because of the global uncertainty, which was 7%, plus-minus 0.75%. So the developments since then described the bad monsoon, which happened after that. One is reasonably confident of that forecast.
So now with current sense about the economy, the outlook for next fiscal will presumably be better?
Well, as far as next fiscal is concerned, you have to take it as my personal view as there will be a new chief economic adviser. As far as I am concerned, personally I can make a forecast for next two years, which is we should do 8%-plus next year and the year after we should be back on the high growth path between 8.5% and 9%.
Inflation is emerging as a macroeconomic concern. Will it be so severe that it will require a policy response like an interest rate hike?
WPI (Wholesale Price Index) inflation was expected to rise, perhaps it has risen a little faster than one would have anticipated six months ago. But one thing always remains: the trade-off between growth and inflation. But there is one negative factor that has disappeared, which is global stabilization of financial markets and one negative factor that has appeared is the monsoon and the supply-side issues. In some ways monetary policy can affect demand and can impact (inflationary) expectations. So clearly when there are supply-side issues, you can’t say it’s (a) demand problem. But the (inflationary) expectation issue remains. So those are the kind of decisions the central bank needs to take.
So it is the way inflation shapes up that would determine to a large degree the monetary policy stance